MP_State_Cooperative_Oilseed_Growers_Federation_Bank guaruntee well settled law

MANU/MP/0547/1998
Equivalent/Neutral Citation: 1999(1)MPJR242
IN THE HIGH COURT OF MADHYA PRADESH

M.A. No. 1009 of 1998 (J)
Decided On: 07.09.1998
M.P. State Cooperative Oilseed Growers' Federation, Ltd. Vs. Pepsi Co. India Holdings
Limited and Ors.
Hon'ble Judges/Coram:
S.C. Pandey, J.
Counsels:
For Appellant/Petitioner/Plaintiff: Mr. Ravindra Shrivastava, Advocate
For Respondents/Defendant: Mr. A.K. Chitley, Sr. Advocate for Respondent 1, Mr. V.K.
Tankha and Mr. R.K. Virmani, Advocates
Case Note:
Contract - Temporary Injunction - Entitlement of - Section 9 (ii) (d) of
Arbitration and Conciliation Act, 1996; Sections 2 (h), 2 (g) and 128 of Indian
Contract Act, 1872 (Contract Act) - Appeal against order passed by Seventh
Additional district Judge, where by he disposed of Application filed by
Appellant - Whether Court below rightly refused to grant injunction under
Section 9 (ii) (d) of Act 1996 - Held, Bank guarantee was a contract of
guarantee - Contract of guarantee was a tri-partite agreement governed by all
provisions of Contract Act - A contract of guarantee must be a "Contract" - A
contract was an agreement enforceable by law under Section 2 (h) of
Contract Act - Liability of surety was co-extensive with that of principal
debtor under Section 128 of Contract Act - A surety could not be compelled to
perform a promise or discharge a liability which would not be legal or which
would be void within meaning of Section 2 (g) of Contract Act or had once
become void within meaning of Section 2 (f) of Contract Act - In present case,
bank guarantees were securing amounts mentioned in them, through and
unconditional and irrevocable bank guarantees - Underlying agreement could
be looked into for considering if guarantor or surety was liable to perform any
legal promise or discharging any legal default of principal-debtor -Thus, a
bank guarantee could not be said to be totally independent of underlying
agreement - Validity of two agreements was not in question - Therefore,
question of considering procurement and processing agreements for
determining liability of Appellant did not arise - Banks gave bank guarantees
under legal and valid agreements - Self-serving letter of Appellant could not
be relied on by it for establishing that Respondent No. 1 had provided terms of
bank guarantee - Two bank guarantees were given by Appellant in an open-
eyed manner after weighing pros and cons of matter - Two bank guarantees
were not part and parcel of either procurement agreement or processing
agreement - No fraud was played by Respondent No. 1 in obtaining bank
guarantee of two Banks from Appellant - Underlying agreements could not be
referred to generally for interpreting terms of two bank guarantees given in
favour of Respondent No. 1 at instance of Appellant - Guarantees were given
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by way of security for performance of obligations under both agreements -
There was a default clause and default clause made statement of Respondent
No. 1 itself conclusive - Banks could not demur - Relief of temporary
injunction was an equitable relief - Courts had wide discretion in granting
relief of temporary injunction or refusing it - A temporary injunction was not
a claim as of right - Court might recognize 'any usage or custom of trade'
which might not be consistent with Contract Act - Legislature had used a
disjunctive or between usage and custom - Courts were entitled to recognize
a custom of Banking trade even if it be inconsistent with provisions of
Contract Act - A custom of a trade, which was part of law of land, could be
collected from discussions of legal precedents and analogies - Documents of
credit in international trade like letter of credit and that of internal trade
within country could not be divorced from Banking custom and practice
operating Banking trade universally - Therefore, if Courts took notice of a
Banking custom established by precedents in England and if they be
inconsistent with Contract Act, they could be implemented - It was part of
Banking custom to honour credit documents according to their terms -
Supreme Court had ruled out that bank guarantees would be independent of
underlying agreements - Initial ground on which Application was filed, was
based on fraudulent invocation of bank guarantees without notice - This
ground could not be raised because terms of two bank guarantees did not
require Respondent No. 1 to inform that there was likelihood of invocation of
bank guarantees - Court should be slow to grant temporary injunction - Only
in case of a fraud of egregious nature, Court could grant temporary injunction
- Existence of such a fraud should be known to Bank and this fraud should be
established from record - Merely because, there was dispute between parties
which was liable to be decided in an appropriate forum, a fraud could not be
inferred - Demand of Respondent No. 1 was strictly according to terms of bank
guarantees, in question - Appellant did not refer to in its Application that
provisional accounts were settled and signed by parties - It gave only partial
picture to Court - There was default of suppression of facts - Thus, Appellant
was not entitled to equitable relief of temporary injunction - Appeal dismissed
ORDER
S.C. Pandey, J.
This is an appeal against the order dated 1.2.1998 passed by Seventh Additional district
Judge, Bhopal, in Arbitration Case No. 1 of 1998, where by he has disposed of the
application filed by the appellant under the Arbitration and Conciliation Act, 1996
(hence-forth 'the Act'). Section 37 (1) of the Act specifically provides that the Court
competent in law to hear appeals from the original decree of the Court, passing the
order, inter alia, under Section 9 of the Act shall hear the appeal. Thus Court is
competent to hear this appeal.
The facts of this case giving rise this appeal may be briefly stated. The applicant is a
State-level Co-operative Society, registered under the MP, Co-operative Societies Act
1960, having its head office at Bhopal. It carries on the business of extraction of oil and
produces deoiled cakes from Soyabean. Apart from marketing Soyabean oil, the
appellant also exports de-oiled cakes to various countries as Soyameal for making
different items of food of high protein content.
The appellant entered into two agreements dated 22.10.1997 with the respondent No. 1,

which is a public company registered under the Companies Act 1956. Its name is
PepsiCo India Holdings Ltd. (PIH, for short). It appears that the two agreements were of
complementary in nature. The respondent No. 1 required the appellant to procure
Soyabean seeds of a given quality for purchasing them and delivering them at the
processing unit of the appellant at Banapura or Ujjain. The respondent No. 1 agreed to
pay price which would be at par with that in open market or even better. It would be
obvious that the purpose of respondent No. 1 in entering into agreement was to employ
the services of the appellant for collecting the Soyabean seeds and reaching them to its
own processing plants instead of buying them from open market or employing some
other agency in line of business for procuring the Soyabean seeds for the respondent
No. 1 with a condition that they reach the plants of the appellant at Ujjain or Banapura.
The respondent No. 1 further entered into another agreement on 22.10.1997 which
required the appellant to extract oil from Soyabean seeds supplied by the respondent
No. 1 at the processing plant of the appellant at Ujjain or Banapura. After subjecting to
certain processes the appellant obtained clean seed. Thereafter moisture from the seeds
had to be recovered for obtaining dry clean seed. After that the Oil content in the seeds
was removed for extracting oil to obtain dry clean de-oiled cakes. The extracted oil is a
bye-product of processing. However, the clean de-oiled cakes are further treated with
oil on clean seed basis to obtain Net Dry De-oiled cakes. The Net Dry De-oiled cleaned
cakes could be subject to further processing by adding moisture, and silica for making a
cake marketable as Soyameal cake. In this process of making a Soyameal cake the
initial oil extracted on seed basis is reduced by the content present in the Soyameal. It
appears that the respondent No. 1 required the cakes so prepared for its international
market. It chose to sell the extracted oil to the appellant itself.
It would not be out of place now to reproduce in "extermo" some of the important
clauses of the agreement for PROCUREMENT of Soyabean seeds.
PROCUREMENT AGREEMENT
This Agreement is made and entered on this 22nd day of October 1997 between
PepsiCo India Holdings Ltd., a Company registered under the Companies Act
1956 and having its Head Office at 38, DLF Corporate Park, S Block, Qutab
Enclave, Phase III, Gurgaon, Haryana 122 002, hereinafter called the
'PURCHASER' which term shall unless repugnant to the context or contrary to its
meaning thereof include its successors executors and assignees of the first part
and M/s. M.P. State Cooperative Oilseed Growers Federation Ltd, 1 Arera Hills,
Bhopal (Unit Ujjain or Banapura at the option of PIH) hereinafter calls
PROCURER which term unless repugnant to the context or countrary to the
meanings thereof includes its successors and executors of the second part.
WHEREAS PROCURER has represented to the PURCHASER that they have a well
established system for procurement of Soyabean seeds within the State of
Madhya Pradesh and also that the prices at which they can deliver Soyabean
seeds of the quality as required by the PURCHASER to the PURCHASER at
PROCURER'S processing unit at UJJAIN or BANAPURA M.P. (hereinafter referred
to as the 'Plant') will be at par or better than the price of Soyabean seed bought
in the open market and delivered similarly to the plant.
In consideration to the above now the PURCHASER as well as PROCURER hereby
agree to the terms and conditions of Soyabean seed procurement indicated
hereunder: -

PERIOD
This Agreement is for the period 15th October 1997 to 30th June 1998 and shall
expire if not extended by mutual agreement in writing. Procurement will start
from 15 the October or the date of signing the Agreement whichever is later.
QUNTITY AND PRICE
(a) PURCHASER has requested the PROCURER to purchase and supply 60,000
(+/-5%) MT Soyabean seed to the plant.
(b) The PURCHASER shall each month indicate, to PROCURER as monthly
procurement forecast. It is agreed that such forecasts will be only indicative
and shall not in any way be construed as indents by the PURCHASER or be
binding upon the PURCHASER.
(c) The procurement of Soyabean seed by PROCURER shall be carried out as per
weekly procurement plan given by the PURCHASER. The procurement plan will
indicate the quantity and the price range at which the procurement needs to be
done.
(d) The PURCHASER reserves the right to stop/suspend procurement of
Soyabean seed by PROCURER at 24 hrs. notice communicated in writing.
However if the procurement is suspended during the currency of the Agreement
then the procurement commitment on the part of PROCURER goes down pro-
rata for the period when the procurement is suspended. PROCURER by way of a
written communication will indicate to the PURCHASER the quantity and price of
Soyabean seed production on each day and the information shall be provided
by the next day as far as possible.
QUALITY
The quality of Soyabean seed delivered by PROCURER to PURCHASER will
conform to the following specifications
S. No. PARTICULARS FAQ GRADE-I GRADE-II
1. Foreign 1% 2% 3%
Matter
2. Moisture 12% 12% to 12% to
14% 14%
Soyabeans beyond the above specifications would not be acceptable unless

cleared in writing by the PURCHASER.
The PROCURER will give pro-rata rebates on moisture beyond 12% and upto
14% @ 1% on value for 1% excess moisture (To clarify if moisture is 13% then
the rebate will be 1 % value of Soyabean) Similarly, PROCURER will give pro-
rata rebates on Foreign matter beyond 1 % and upto 3% @ 1 % on value for 1
% excess. FOREIGN MATTER, e.g. if foreign matter is 3% then the price rebate
would be 2%.
Both rebates shall apply independent of each other and simultaneously.
Clauses 4, 5, 6 and 7 are not relevant.
8. ADVANCE AND BANK GUARANTEE

The PURCHASER has agreed to advance Rs. 5.00 crores to PROCURER.
PROCURER agrees and undertakes that as a condition precedent to the advance
of Rs. 5.00 crores to be paid to it by the PURCHASER under this Agreement
PRODUCER shall provide one or more irrevocable Bank Guarantees for a period
of nine months starting 15th October 1997 (hereinafter referred to as Bank
Guarantee) for an amount of Rs. 5.00 crores in the format annexed hereto as
Annexure A securing the amount advanced by the PURCHASER from time to
time till the due performance of all the obligations of PROCURER under this
Agreement. The PURCHASER shall be at liberty to invoke the Bank Guarantee if
PROCURER fails to fulfil any or all the obligations under this Agreement.
Clauses 9 and 10 are not relevant.
ASSIGNMENT
Neither party hereto shall have the right to assign any of its rights or
obligations hereunder without the prior written consent of the other.
Clauses 12, 13 and 14 are not relevant.
15. TERMINATION
The Agreement can be terminated by either party by giving to the other a
minimum of ninety days notice in writing to be delivered by a registered A/D
post to the other party at the addresses given above.
TERMINATION UNDER SPECIAL CIRCUMSTANCES
Notwithstanding anything contained in Clause (15) thereof this Agreement may
by notice in writing be terminated with immediate effect at the option of either
party hereto (hereafter the 'terminating party') in any of the following events
namely.
(a) If either party to this Agreement contravenes any provision of this
Agreement and does not cure or rectify the defect or contravention within 15
days of receipt of a written notice from the other party, pointing out the
contravention then the latter party has the right to terminate this Agreement
forthwith by giving the other notice in this behalf.
(b) If the other party hereto shall go into liquidation other than a voluntary
liquidation for the purpose of reconstruction or amalgamation or shall commit
an act of bankrupt or shall compound with its creditors generally, or if a
receiver or judicial manager shall be appointed over the whole or a substantial
part of the assets of the other party.
(c) If the other party hereto or the whole or a substantial part of its assets shall
pass under the control of any authorised person or Companion which the
terminating party shall have reasonable cause to disapporve.
CONSEQUENCES OF TERMINATION
PROCURER shall immediately pay on termination to the PURCHASER Rs. 5.00
crores taken as advance or alternatively provide Soyabean seeds of the quality
as required under Clause (3) of value of Rs. 5 Crores which amount will be
worked out as per Clause (7) of this Agreement. The PROCURER shall provide

all such documents as required by PURCHASER to substantiate that Soyabean
seeds given to the purchaser are valued at Rs. 5 Crores. The PURCHASER will
be at liberty to refuse acceptance of such Soyabean seed which is not as per the
quality specifications. However, for the Soyabean supplied by the PROCURER
for which payments have not been made by the PURCHASER the PURCHASER
shall adjust the amount by deducting the value of the Soyabean supplied from
the advance of Rs. 5 Crores. The bank guarantee shall also be invoked by the
PROCURER only for such balance amount unadjusted.
Clause 18 is not relevant.
19. ARBITRATION
Any dispute or difference in respect of this Agreement arising out of the
Agreement during the course of executing of the Agreement or after termination
of the Agreement between both the parties then the same shall be settled by
arbitration in accordance with the provisions of the Arbitration and Conciliation
Act 1996. Although before making any reference of any type of dispute to the
aforesaid Arbitrator both the parties shall try to settle the differences/disputes
amicably. Both parties hereto agree to jointly request the Arbitrator in writing
to pass a speaking arbitration award.
Similarly the important and relevant clauses of the Processing Agreement may
be reporduced as below : -
AGREEMENT
This Agreement is made and entered on this 22nd day of October 1997 between
Peps Co India Holdings Ltd., a Company registered under the Companies Act
1956 and having its Head Office at 38, DLF Corporate Park, S Block Qutab
Enclave, Phase III, Gurgaon, Haryana 122 001, hereinafter called as "PIH"
which term unless repugnant to the context or contrary to its meaning thereof
includes its successors, executors and assignees, on the first part and M/s. MP.
STATE COOPERATIVE OILSEED GROWERS FEDERATION LTD. 1-ARERA HILLS,
BHOPAL (UNIT UJJAIN OR BANAPURA, AS PER THE OPTION OF PIH) hereinafter
called the "PROCESSOR" which term unless repugnant to the context or contrary
to the meanings thereof includes its successors and executors on the second
part.
WHEREAS PIH has requested the Processor to undertake processing of
Soyabean supplied by PIH as per the terms and conditions mentioned in this
Agreement and whereas the Processor has agreed to undertake the processing
and to deliver to PIH products conforming to the quality and yields as specified
in this Agreement.
in consideration to the above now PIH as well as Processor hereby agree to he
terms and conditions of processing indicated hereunder -
QUANTITY
PIH agree to get processed into Soya meal and soya oil (herinafter referred to
as the said Product (s) minimum 60,000 MT (+/-2% at PIH option) Soyabean

starting 15th November 1997 to 30th June 1998 and will deliver this quantity of
Soyabean at M.P. OILFED UJJAIN OR BANAPURA UNIT (hereinafter referred to
as the "Processing Unit") PIH shall have the option to get processed between
8000-10000 MT of Soyabean per month.
Sub-clause (a) of this clause 1, is not relevant.
2. COMMENCEMENT OF PROCESSING (a) The Processor will undertake
processing work immediately after receipt of 2000 MT Soyabean seed from PIH.
This quantity will be made available by Nov. 15th 1997 and an equivalent
quantity maintained in stock to facilitate uninterrupted processing.
4. SOYA OIL PURCHASE
i. Soya oil produced under this Agreement would be sold by PIH to the
processor immediately on production by raising a sale invoice.
Sub-clause ii of this Clause 4 is not relevant.
iii. Processor would be given interest-free credit of 30 days from the day Soya
oil is produced and invoiced to it. If at the end of the above credit period the
Processor's selling price is lower than the market price of soya oil prevailing on
the date of such sale then the interest-free credit for the payment of soya oil
would be extended by a further 30 days.
iv. The processor would provide a bank guarantee for Rs. 4 crores against
purchase of soya oil to cover the oil credit for a period of 30 days. In case the
period of credit is extended by a further period of 30 days then a post-dated
cheque payable after 30 days of due date will be given to PIH on the date of
extension of the credit which in turn will be subject to receipt of such cheque.
The bank guarantee would state that it would also cover amount which may
become payable due to dishonouring of cheques also. In case the Processor
defaults in the payments resulting in encashment of the bank guarantee and or
dishonouring of the cheque. PIH has the right to sell the soya oil to any other
party. If the price recovered for each such sale is less than the Purchase Price
then the Processor will be liable to pay PIH the difference in the two prices.
v. In case the Processor defaults in the payments resulting in encashment of the
bank guarantee and or dishonouring of the cheque, PIH has the right to sell the
soya oil to any other party. If the price received for each such sale is less than
the Purchase Price then the Processor will be liable to pay PIH the difference in
the two prices.
Sub-clause vi of this clause is not relevant.
5. YIELDS
The Processor hereby agrees to process soyabean in such a manner that
maximum recovery of Products and by-products are achieved. The Total yield of
Products and by-products should in any case be not less than 99.8% on
moisture free basis and will be worked out as per format annexed herewith in
Annexure A (hereinafter referred to as Material Balancing Statement).

(a) Soya Oil - The minimum soya oil yield shall be 1% (one percent) less than
weighed average oil contained in the clean soyabean. That is if the weighed oil
in soyabean is 19% the yield of crude oil shall be 18% of seed weight leaving
1% maximum oil in the soya meal. Yield will be settled on total processing.
(b) Soya Meal - The yield of the soyameal shall be the difference between the
soyabean processed and of the soya oil produced and foreign matter (FM)
separated. The yields of soya meal shall be calculated on ex-factory despatched
delivered weight. The foreign matter will be taken into account on average total
quantity of soyabean supplied for processing.
Clauses 6, 7, 8, 9, 10, 11, 12 and 13 are not relevant.
14. QUALITY SPECIFICATION
The different products produced shall conform to the following specifications -
(a) Soya Meal
(i) Oil Note - exceeding 1 % (see) basis)
(ii) Sand & Silica - Not exceeding 2%
(iii) Moisture - Maximum 12% at the time of production
Minimum 11%
(iv) Urease Activity - Maximum 0.30 Unit on EEC method,
(v) Fibre - No to exceed 6% (this parameter depends on the
quality of the soyabean and therefore the question of addition
reduction of fibre value does not arise).
However, for purpose of settlement of yield in terms of clause
5 (b) the moisture at the time of despatch will be taken if
despatch is effected within 30 days otherwise, moisture as
analysed on 31 st day of the production shall be taken for
material balancing,
(b) Soya Oil
Quantity of oil produced shall conform to the following
specification -
MIV (Max) 0.50 Max
Colour 40 Units Max.
Sap Value 189-195
IV 120-141
FFA (Max) 1.5%
Unaponifiable matter (max) 1.5%
Flash point 110 Degree C Min.

Phosphatides 700 ppm Max
Subject to damaged seed not exceeding 2%.
However in case any quantity of oil is stored for more than 7
days from the date of production 0.3% of oil produced is
maximum acceptable as sludge for the purpose of calculation
of oil yields. Processor shall at all times, permit PIH's
representatives authorised in this behalf to visit and inspect the
Processing Unit premises for the purpose of inspecting the said
Products so as to ensure compliance with the specifications and
if so required shall produce to PIH all accounts, record and
other documents maintained by it in connection with the
processing
The said products so produced shall conform to the
specifications as set out and PIH will have the right to reject
such of the said products not meeting with the specifications
stipulated herein above after permissible rebate in practice.
Beyond such quality rejections the Processor shall replace the
rejected material within 21 days from the date of the
acceptance or rejection by the Processor.
Clauses 15, 16, 17, 18, 19, 20 and 21 are not very relevant.
22. TERMINATION
(a) This Agreement can be terminated by either party by giving to the other a
minimum of ninety days' notice in writing to be delivered by registered A/D
post to the other party. However, this notice period shall not absolve either
party of their obligations related to processing as per clause 1 and settlement of
accounts fully and finally.
(b) If either party to this Agreement contravenes any provision of this
Agreement and does not cure or rectify the defect of contravention within 15
days of receipt of a written notice from the other party pointing out the
contravention, then the latter party has the right to terminate this Agreement
forthwith by giving the other notice in this behalf,
(c) In the event of termination under this clause the party in default shall be
liable to pay to the other liquidated damages as per provisions of clause 16.
24. (a) Arbitration - Any dispute or difference in respect of this Agreement
arising out of the Agreement during the course of execution of the Agreement
or after termination of the Agreement between both the parties then the same
shall finalised by a negotiation between the two parties and finally settled by
arbitration in accordance with the provisions of the Arbitration and Conciliation
Act 1996. Although before making any reference of any type of dispute to the
aforesaid Arbitrator both the parties shall try to settle the difference/disputes
amicably.
(b) Jurisdiction - This contract shall be subject to the jurisdiction of Courts of

Bhopal only.
(c) This agreement shall be deemed a business transactions or related to the
business of M.P. STATE COOPERATIVE OILSEED GROWERS FEDERATION LTD.
and therefore any dispute shall be referred to the court of Bhopal under M.P.
Cooperative Societies Act 1960 only.
The two agreements dated 22.10.1997 for procurement and processing of soyabean
seeds are linked with each other and, therefore, it would be appropriate to give in a nut
shell, a bird's eye view of the aforesaid relevant clauses. The agreement for
procurement of soyabean seeds has the following salient features: -
(i) The appellant represented to respondent No. 1 that it had a well established
system for procurement of soyabean seeds within the State of Madhya Pradesh
and was in a position to supply soyabean seeds to the respondent No. 1 for
delivery at their oil extraction plants situate at Ujjain or Banapura. The quality
of the seeds would be as per requirement of the respondent No. 1 and at prices
thereof would at par or better than the soyabean seeds bought in the open
market and delivered similarly,
(ii) The agreement was made for the period between 15th of October,
1997 to 30th of June, 1998.
(iii) The quality and the price was fixed as per clause 2. However, the
respondent No. 1 reserved the right of suspension of procurement after
giving 24 hrs. notice in writing. Consequently, the appellant's liability
to supply soyabean seeds during the currency of agreement stood
reduced Pro-rata for the period of suspension.
(iv) The quality required by the respondent No. 1 was in respect of
three categories of seeds of soyabean. The first category called FAQ
was to contain 1% foreign matter and moisture upto 2%. The category
i.e. Grade I would be acceptable if contained foreign matter upto 2%
and moisture to the tune of 12% to 14%. The third category of Grade-
II could contain foreign matter upto 3% and moisture between 12% to
14%. It appears that the respondent No. 1 was very particular about
the quality specifications mentioned above. It laid a condition that
soyabean beyond the above specification shall not be acceptable unless
cleared in writing). In the latter case, the respondent No. 1 was entitled
to Pro rata rebate on existence of moisture or foreign matter beyond
the percentage mentioned in the agreement of procurement. The rebate
was chargeable exclusively on one count or simultaneously on both the
counts according to circumstances of the case.
(v) The appellant and the respondent No. 1 provided in clause 8 of the
agreement that - (a) the respondent No. 1 had agreed to provide
Rupees 5 Crores by way of advance, (b) Consequently, the appellant
agreed to and undertook to furnish irrevocable bank guarantees for an
amount of Rs. 5 Crores for a period of nine months, starting from 15th
of October, 1997. (c) The format of agreement shall be Annexure-A.
(d) The bank guarantee shall secure the amounts advanced by the
respondent No. 1 from time to time till the due performance of all the
obligations of the respondent No. 1. (e) The respondent No. 1 was
given liberty to invoke the guarantee, if the appellant failed to fulfil all

or any of its obligations under the agreement.
(vi) The clause 11 of the agreement prohibited assignment of any of
the right or obligation of a party to any other person without a prior
written consent,
(vii) The clause 15 of the agreement provided for 90 days' notice for
termination of the agreement in normal circumstances,
(viii) The parties to the agreement reserved the right of termination of
the agreement under special circumstances as an exception to clause
15. It gave an option to either party to terminate the agreement with
immediate effect on the happening of the following events :
(a) In the event of either party committing a breach of any
term of the agreement and not rectifying the defect within 15
days of the receipt of a notice in writing from the other party,
the aggrieved party had a right to terminate after due notice.
(b) On either of the party going in liquidation the other party
had a right of immediate termination.
(c) On transfer of its whole or substantial assets to a company
or another person by either party not approved by the other
party on reasonable grounds. The termination of the agreement
with immediate effect was to made in writing as per clause 16
of the agreement.
(ix) The clause 17 provides for consequences of termination : -
(a) On termination of agreement the appellant was to refund
Rs. 5 Crores taken by way of advance immediately.
(b) Alternatively, the appellant was required to provide
soyabean seed of equal value of the quality as per clause - 3 of
the agreement. The value of the soyabean seeds was
determined as per clause - 7 of the agreement and for this
purpose, the appellant was required to provide all such
documents as were necessary to substantiate its claim to the
satisfaction of the respondent No. 1. The respondent No. 1 was
at liberty to refuse the offer of soyabean seeds in lieu of Rs. 5
Crores which were not supplied as per quality specifications.
(c) The respondent No. 1 was required to adjust the value of
soyabean seeds supplied by the appellant to the extent the
appellant had received payment for the supply already made
from the bank guarantee of Rs. 5 Crores. It was further
provided that the respondent No. 1 (wrongly mentioned as
procurer in clause - 17 due to mis-typing) shall invoke the
bank guarantee only for such balance of amount.
(x) There is a provision of resolving the dispute or difference arising
out of the agreement during the course of its execution or after
termination by an arbitrator as per provisions of the Act. It has been

provided in Clause 19 that before going in for arbitration the parties
shall try to settle their disputes amicably failing which the parties shall
jointly request the arbitrator to pass a speaking award.
These are some of the important features of the procurement agreement.
Now, salient features of the Agreement of Processing of the soyabean purchased by the
respondent No. 1 from the appellant as per procurement agreement may be considered
:
(i) The period for processing was to start between 15th November, 1997 to
30th June 1998 for which the respondent No. 1 was to get processed soyabean,
weighing at least 6000 M.T. (+/-2% at PIH option).
(ii) For the above purpose the respondent No. 1 had an option to get the
soyabean processed between 6000 to 10000 M.T. in two plants of the appellant,
at Ujjain and Banapura. However, there was option to increase the monthly
processing of the soyabean subject to availability of soyabean and the capacity
of the two plants of the appellant. The respondent No. 1 further stipulated that
2000 M.T. of soyabean shall be made available to the appellant by November
15, 1997 and the appellant shall start the work of processing immediately.
(iii) The parties agreed that soyabean oil produced by the appellant in its two
plants shall be sold by the respondent No. 1, immediately on production by
raising a sale-invoice. The market-price of soya-oil was determined as per sub-
price of soya-oil was determined as per sub-clause (ii) of clause 4 of the
agreement. It was further agreed that the appellant shall be given interest-free
credit of 30 days from the day soya-oil was produced and invoiced to it. At the
end of 30 days the aforesaid facility of interest-free credit was to be extended
for further 30 days, provided the appellant sold soya-oil at a rate which was
less than prevailing market-price.
(iv) It was also stipulated that the appellant shall be required to furnish a bank
guarantee of Rs. 4. Crores against the purchase of soya-oil to cover the oil
credit for 30 days. It was further provided in sub-clause (iv) of clause 4 of the
agreement that on extension of 30 days credit the appellant required to issue a
post-dated cheques payable after 30 days of due date shall be issued by the
appellant in favour of the respondent No. 1. The extension of interest-free
credit shall be subject to receipt of the post dated cheques. It was further
provided that the bank guarantee shall stipulate that it shall cover the amount
payable to the respondent No. 1 in case the post-dated cheque was
dishonoured.
(v) It was also agreed that in case, the appellant defaulted in payments and
consequently, the bank guarantee was required to be encashed or the cheque
was dishonoured then the respondent No. 1 had right to sell the soya-oil to any
other party. In case of such a sale the appellant was required to pay difference
between the agreed purchase price and the price of the sale, if any.
(vi) The quality specification for soyabean and soya-oil were detailed as per
clause 14 of the agreement.
(vii) The quality rebates were to be given as per clause 15 of the agreement.

(viii) The respondent No. 1 was given light to assign part of its obligation to a
sister company of Pepsi Co Group but liability for any breach of the agreement
was of the respondent No. 1.
(ix) In normal course the agreement could be [sic] fundamental by giving a
notice of ninety days in writing by registered A/D by either party. However, it
was provided that the period of notice shall not absolve either party to fulfil the
obligations related to processing as per clause 1 and settlement of accounts
fully and finally.
(x) On contravention of any of the provisions of the agreement by any of the
party, the other party could give a notice to rectify the defect or when there was
further contravention after 15 days of receipt of notice from the other party the
latter was given an additional right to terminate the agreement forthwith as an
exception to right of termination of agreement by giving ninety days' notice.
(xi) In the event of termination of agreement by either party under the
aforesaid special right, the defaulting party was liable to the other party for
liquidated damages as per clause 16 of the agreement.
(xii) The clause 24 of the agreement provided for arbitration in respect of
difference or dispute in respect of the agreement between the parties to the
agreement during the course of execution of the agreement or after termination
thereof and the matter shall be decided by arbitration under the Act. However,
the parties were required to finalise the difference or dispute by a negotiation.
These are thus, some of the salient features of the processing agreement.
It may be made clear that selective reproduction of the clauses of the two agreements
and a subsequent version of these clauses is by no means exhaustive. It is merely
indicative of the nature of the two agreements under decision. The Court shall, if
necessary, discuss the implications of other clauses not mentioned in paragraphs 4 to 7.
In clause 8 of the procurement agreement it was stated that the bank guarantee was to
be provided by the appellant in the format of Annexure-A to the agreement. During the
course of the argument both the learned counsel for the parties did not dispute before
me that there was no such format attached to the procurement agreement. The natural
inference drawn from the above agreed statement of the fact would be that the terms of
the agreement did not incorporate the terms of the bank guarantee and the bank
guarantee of Rs. 5 Crores was independent of the agreement in the sense that terms of
bank guarantee could not be treated as a part of the agreement of procurement on
account of the omission whether deliberate or accidental.
It is not in dispute that two bank guarantees were given at the instance of the appellant
pursuant to the aforesaid two agreements -(i) the agreement for procurement and (ii)
the agreement for processing. The initial term of both the bank gurantees was from
1.12.98 to 30.4.98, entitling the respondent No. 1 to make a claim within one month
i.e. by 31st May, 1998. At the request of the appellant, both the bank gurantees were
extended upto 31.7.98 extending the claim period upto 31.8.98.
The terms of the frank guarantee dated 1.12.97 for Rs. 6 Crores, given by the Bank of
Baroda, are as follows : -
HBG/BG/97/19
Dated 01.12.97

M/s PepsiCo India Holdings Ltd.
NEW DELHI.
Dear Sirs,
We, Bank of Baroda (hereinafter called Guarantor) hereby issue this irrevocable
and unconditional Bank Guarantee, in your favour. Whereas M/s. M.P. State
Cooperative Oilseed Growers' Fed. Ltd. of the address 1, Arera Hills, Bhopal
(herein after called OILFED), have agreed to secure through an unconditional
and irrevocable bank Gurantee, the advance of Rs. 6,00,00,000/- (Rupees Six
Crores only) by PepsiCo India Holdings Ltd. of the address 38, DLF Corporate
Part, S-Block, Qutab Enclave, Phase III, Gurgaon, Haryana - 122 002
(hereinafter called PIH) as per the agreement dated 22nd October 1997 signed
between OILFED and PIH (hereinafter referred to as the Agreement).
In consideration of PIH accepting the Guarantor's obligation contained herein in
discharge of OlLFED obligation to provide a Bank Guarantee as stated above the
Guarantor inevocably and unconditionally establishes its irrevocable guarantee
in favour of PIH and for the account of OILFED for an amount not exceeding Rs.
6,00,00,000/- (Rupees Six Crores Only) available immediately, and undertake
to pay PIH an amount not exceeding Rs. 6,00,00,000/- (Rupees Six Crores
Only) upon demand being made by PIH as under.
Upon receipt of a written demand from PIH at any time, stating that, OILFED
has failed to fulfill any of the conditions specified in the Processing Agreement
dated 22nd October 1997 and the Procurement Agreement dated 22nd October
1997 signed between PIH and OILFED, which demand shall be without the need
for PIH to take legal action against or to obtain the consent of OILFED, and
notwithstanding any conditions, and without any right to set off or counter
claim we will subject only to paragraph 5 above, forthwith pay to PIH the
amount specified in such demand. The payment shall be made by transfer to
such account at such bank in such place as PIH may direct.
We, Bank of Baroda, do hereby undertake to pay the amount due and payable
under this guarantee without any demur merely on a demand from PIH. Any
such demand made on the bank shall be conclusive as regards the amount due
and payable by the bank under this guarantee. However, our liability under this
guarantee shall be restricted to an amount not exceeding Rs. 6,00,00,000/-
(Rupees Six Crores only).
Our maximum aggregate liability hereunder shall not exceed Rs. 6,00,00,000/-
(Rupees Six Crores Only).
Our obligation hereunder shall not be affected by any act, omission, matter or
thing (whether or not known to us or PIH), so as to operate to release or
otherwise exonerate us from such obligations in whole or in part including
without information. We, Bank of Baroda, further agree that the guarantee
herein contained shall remain in full force and effect during the period that
would be taken for performance of the Agreement and it shall continue to be
enforceable till all dues of PIH or by virtue of the said Agreement have been
fully paid and its claims satisfied or discharged or till 31st May 1998.
All amounts payable under the Guarantee shall be made in full without any

deduction for or on account of any present or future taxes, charges, fees,
deductions, counterclaims or withholdings of any nature whatsoever and by
whomsoever imposed.
If any provision of this Guarantee becomes invalid, illegal or unenforceable in
any respect under any law, the validity, legality and enforceability of the
remaining provision shall not in any way be affected or impaired.
Any demand on, or other communication to us, under the Guarantee shall be in
writing and shall be sent by post, telex or fascimile transmission to the address
set out herebelow.
The guarantee shall be governed by and constructed in accordance with the
laws of India. We submit to the jurisdiction of the Courts of Bhopal (M.P.).
The guarantee shall be valid for its full value (unless reduced in accordance
with Clause 5 above) upto the close of business on 30th April 1998 and unless
a claim is made upon us, within one month thereafter, i.e. before 31st May
1998, all your rights under this guarantee shall be extinguished and we shall be
relieved and discharged from all liabilities under this guarantee.
for Bank of Baroda, Branch Habibgani, Bhopal
Accountant Manager
Sd/-illegible
Sd/-illegible
Dated 01.12.97
No. HBG/14/ADV-458
Dated 29.04.98
The Managing Director,
M/s. PepsiCo India Holdings Ltd.
Gurgaon
GURGAON
Dear Sir,
Ref. - Our Bank Guarantee No. 97/19 for Rs. 600 lacs in your favour at
the request of MP. State Cooperative Oilseed Growers' Federation Ltd.
At the request of M/s. MP. State Cooperative Oilseed Growers'
Federation Limited, 1, Arera Hills, Bhopal, the captioned guarantee has
been extended upto 31.7.98 with a claim period of one month i.e. upto
31.8.98. The other terms and conditions of the guarantee remain
unchanged. This letter will form an intergral part of the original
guarantee bond.
Yours faithfully,
For Bank of Baroda,
Sd/- Illegible
Sr. Br. Manager,
Habibganj Branch,

Bhopal
The terms of the Bank Guarantee dated 1.12.97 given by the Bank of Maharashtra are as
follows : -
M/s Pepsico India Holdings Ltd.,
NEW DELHI
(7/97-98 1.12.98)
Dear Sirs,
We, Bank of Maharashtra (hereinafter called Guarantor) hereby issue this
irrevocable and unconditional Bank Guarantee, in your favour.
Whereas M/s. M.P. State Cooperative Oilseed Growers' Fed. Ltd. of the address
1, Arera Hills, Bhopal (herein after called OILFED), have agreed to secure
through an unconditional and irrevocable Bank Guarantee, the advance of Rs.
3,00,00,000/- (Rupees Three Crores Only) by PepsiCo India Holding Ltd. of the
address 38 DLF Corporate Park, S-Block Qutab Enclave, Phase III, Gurgaon,
Haryana 122 002 (hereinafter called PIH) as per the agreement dated 22nd
October 1997 signed between OILFED and PIH (hereinafter referred to as the
agreement)
In consideration of PIH accepting the Guarantor's obligation contained herein
discharge of OILFED obligation to provide a Bank Guarantee as stated above
the Guarantor irrevocably and unconditionally establishes its irrevocable
guarantee in favour of PIH and for the account of OILFED for amount not
exceeding Rs. 3,00,00,000/- (Rupees Three Crores Only) available immediately,
and undertake to pay to PIH an amount not exceeding Rs. 3,00,00,000/-
(Rupees Three Crores Only) available immediately, and undertake to pay to PIH
an amount not exceeding Rs. 3,00,00,000/- (Rupees Three Crores Only) upon
demand being made by PIH as under.
Upon receipt of a written demand from PIH at any time, stating that OILFED has
failed to fulfill any of the conditions specified in the Processing Agreement
dated 22nd October 1997 and the Procurement Agreement dated 22nd October
1997 signed between PIH and the OILFED, which demand shall be against or to
obtain the consent of OILFED, and notwithstanding any conditions, and without
any right to set off or counterclaim we will, subject only to paragraph 5 below,
forthwith pay to PIH the amount specified in such demand. The payment shall
be made by transfer to such account at such bank in such place as PIH may
direct.
We, Bank of Maharashtra, do hereby undertake to pay the amount due and
payable under this guarantee without any demur merely on a demand from PIH.
Any such demand made on the bank shall be conclusive as regards the amount
due and payable by the bank under this guarantee. However, our liability under
this guarantee shall be restricted to an amount not exceeding Rs. 3,00,00,000/-
(Rupees Three Crores Only).
Our maximum aggregate liability hereunder shall not exceed Rs. 3,00,00,000/-
(Rupees Three Crores Only).

Our obligation hereunder shall not be affected by any act, omission, manner or
thing (whether or not known to us or PIH), so as to operate to release or
otherwise exonerate us from such obligation in whole or in part including
without intimation. We, Bank of Maharashtra, further agree that the guarantee
herein contained shall remain in full force and effect during the period that
would be taken for performance of the Agreement and if shall continue to be
enforceable till all dues of PIH or by virtue of the said Agreement have been
fully paid and its claim satisfied or discharged or till 31st May 1998.
All amounts payable under this Guarantee shall be made in full without any
deduction for or on account of any present or future taxes, duties, charges, fees
deductions, counterclaims or with holdings of any nature whatsoever and by
whomsoever imposed.
If any provision of the Guarantee becomes invalid, illegal or unenforceable in
any respect under any law, the validity, legality and enforceability of the
remaining provision shall not in any way be affected or impaired.
Any demand on, or other communication to us under the Guarantee shall be in
writing and shall be sent by post, telex or fascimile transmission to the address
set out here below.
This Guarantee shall be governed by and constructed in accordance with the
laws of India. We submit to the jurisdiction of the courts of Bhopal (M.P.).
The guarantee shall be valid for its full value (unless reduced in accordance
with Clause 5 above) upto the close of business on 30th April 1998 and unless
a claim is made upon us, within one month thereafter, i.e. before 31st May
1998, all your rights under this guarantee shall be extinguished and we shall be
relieved of and discharged from all liabilities under this guarantee.
Dated (Seal)
7/97-98
12.97
Sd/- llegible
For Bank of Maharashtra,
Branch TT Nagar, Bhopal
Now the stages has arisen for stating the case of the appellant before the court-below.
In this application under Section 9 of the Act the appellant stated initially that it
supplied in all 934376 M.T. of soyabean seeds from time to time. The respondent No. 1
accepted the factual position and remitted cost of procurement of the soyabean seeds
from time to time. It was stated in paragraph 5 of the application that the appellant
received Rs. 5,00,00,000/-
(Rupees Five Crores) as an advance and Rs. 9.07,14,809/- (Rupees Nine Crore
Seven Lacs Fourteen Thousand Eight Hundred and Nine) towards the seeds
supply. The appellant gave details of total payments by the respondent No. 1
according to the following chart:
S. Cheque/DD No. Date Amount (Rs. )
No.
1. 337100 3/12/97 5,00,00,000.00

2. 021675 11/12/97 3,00,00,000.00
3. 021688 16/12/97 40,58,263.00
4. 021827 31/12/97 70,77, 464.00
5. 021828 31/12/97 8.06,292.00
6. 021829 31/12/97 68,33,649.00
7. 612141 7/1/98 57,84,056.00
8. 612142 7/1/98 3,60,95,462.00
9. TDS Deduction 59,623,.00
Total 14,07.14,809.00
It was stated by the appellant that two bank guarantees of Rs. 9 Crores were given in
favour of the respondent No. 1. The respondent No. 1 abruptly sent intimation of
suspension of purchase of soyabean seeds by letters dated 8.1.98 and 9.1.98. By that
time, the appellant had purchased 9343.765 M.T. of soyabean seeds on account of the
respondent No. 1 and had processed them as per agreement for processing the
soyabean seeds for and on behalf of the respondent No. 1. The respondent No. 1 had
received the delivery of de-oiled cakes and exported them. It was stated thereafter the
parties settled the account but despite that fact respondent No. 1 jumped into
conclusion against the appellant and did not pay any heed to the letter dated 24/27-4-
98 or the oral requests of the appellant. The appellant averred due to sudden demand
for cancellation of the activities of procurement the appellant's advance arrangement for
collection of soyabean seeds and deals of sale of soyabean oil likely to be extracted
went haywire". The appellant suffered huge losses for which it would lay claim before
the Arbitrator. It was stated that the appellant had already incurred a loss of Rs. 120
Crores and thus this act of respondent No. 1 fatal. It was claimed that thereafter the
respondent No. 1 invoked the two bank guarantees on 15.6.98 from Bank of Baroda and
from Bank of Maharashtra demanding Rs. 6 Crores and Rs. 3 Crores respectively in
writing. This invocation of the bank guarantees aforesaid was done without notice to the
appellant. Such invocation of the bank guarantees was illegal as a fundamental breach
was committed by the respondent No. 1 amounting to fraud. The last words added in
the printed application in pen almost as a matter of an afterthought. It was claimed that
the respondent No. 1 had breached the specific terms of the agreement wherein it was
specifically agreed that there was legal obligation upon the respondent No. 1 to settle
the dispute before the involvement of the terms of bank guarantee. The appellant gave
in paragraph 13 of its application under Section 9 of the Act, the account position of
procurement of soyabean seeds as follows : -
13. As per the accounts of the applicant, the account position of soyabean
procurement is as under:-
Particulars Amount
Advance received from non-
applicant
No. 1 against Bank Guarantee. 5,00,00,000.00
Amount received against 9,07,14,809,00
soyabean supply
Total: 14,07,14,809.00
less: -
Cost of soyabean 9,90,50,812.61
Service charges Amount paid 14,12,915.46 71,043.00
Total: 10,05,34,771.07
Quality rebate Transportation 15,68,463.13 3,49,702.82
charges
Total: 19,18,165.95
NET AMOUNT Less: NET AMOUNT 9,86,16,605.12
9.86,16,605.12

NET BALANCE 4,20,98,203.88
It was averred that it was clear that the liability of the appellant was limited to Rs.
4,20,98,203.68 against the advance of Rs. 5 Crores made by the respondent No. 1. That
too shall accrue if and when the accounts were settled and disputes regarding the
payments of liquidated damages were settled by the arbitrator. It was claimed that the
appellant was already in the process of approaching the High Court under the Act and,
therefore, the appellant claimed that it was entitled to interim order of injunction
restraining the respondent Nos. 2 and 3 from paying to the respondent No. 1 the
amount of two bank guarantees till the disposal of final award. The application filed by
the appellant was supported by an affidavit filed on behalf of the appellant by Shri
Satish Gupta, Deputy Manager of the appellant.
It appears that the appellant realised that in the original application it had hardly made
any pleading regarding the alleged fraud committed by the respondent No. 1. Therefore,
it was asserted by way of amendment in the original application by adding paragraph
14-A that the respondent No. 1 not only raised a fraudulent demand but also procured
fraudulent bank guarantees for itself. It was claimed that the bank guarantee under the
procurement agreement was intendedly limited to cover Rs. Five Crores for advance
made by the respondent No. 1. The bank guarantee under the processing agreement
was intended to cover the credit on oil-sale, and was also to cover the amount which
became due for dihonouring the cheque for 30 days. It was stated that the bank
guarantee under the procurement agreement could not be invoked for dues under the
processing agreement. It was further said that the bank guarantee under the
procurement agreement was not in accordance with Proforma A. The bank guarantee
aforesaid exceeds the purpose the contractual obligation and authority under the
principal agreement. It was stated that on termination of the agreement for procurement
of soyabean seeds the respondent No. 1 could encash the bank guarantee for
unadjusted advance amount and nothing more as per Clause 17 thereof. In paragraph
14-B it was stated that in view of paragraphs 2 and 10 of letter of bank guarantee read
alongwith other terms, it could be concluded that the bank guarantee is not absolute as
it appears to be on the face of it. It was asserted that the Clause 5 of the bank
guarantee showed that it was made for securing the advance of the amount made by the
respondent No. 1 to the appellant or its reduced value. The aforesaid clause was
consistent (sic inconsistent ?) with Clause 17 (ibid). According to appellant in absence
of any provision for reduced value it should be inferred that there was fraud played by
the respondent No. 1. In paragraph 14(C) of it was alleged that the demand making the
bank guarantee for nine Crores was under the misapprehension of facts. The claim
could not be for nine Crores. It was also claimed that they have indulged in forging of
records. It was claimed that the outstanding account of dispute in regard to interest.
The disputed notice dated 11.6.98 does not state at all that appellant failed to fulfill any
of the conditions specified in both the agreements, yet a fraud was committed by
misrepresentation to the bank. In paragraph 14 (D) it was stated that it was utter false-
hood on the part of respondent No. 1 to state to the bank that the appellant failed to
perform its part of the agreement. It was the respondent No. 1 which suspended the
agreement for its own selfish business interest. The letter dated 8.1.98 suspending the
procurement agreement was for alleged market conditions and this was an instance of
fraud. In paragraph 14 (E) of the amended reply it was stated that there were
circumstances which gave rise to special equities in favour of the appellant to make this
case of irretrivable injunction and injury to the appellant. In paragraph 14 (F) it was
stated that the appellant is a Co-operative Federation engaging in common course for
the welfare of the poor. It was working under financial constraint, and therefore, if
illegal demand of the respondent be permitted, the entire structure of the appellant

would shake. Consequently, the above co-operative projects based on the projects of
the appellant shall fail affecting the welfare of farmers and growers in the State of M.P.
The paragraph 14 (G) says that under the facts and circumstances of the case the
question of right to seek encashment of the bank guarantee would be covered by
arbitral dispute. This right cannot be rendered infructuous by the respondent No. 1 by
encashing the bank guarantee.
The respondent No. 1 filed a reply to initial application saying that the appellant had
made bald allegations of fraud. It was asserted that in view of number of decisions of
the Supreme Court the disputes under the underlying agreement could not be
considered for issuance of an injunction. Only ground for granting injunction would be,
if it be proved that one of parties had committed fraud, which must be established to
the satisfaction of the Court granting injunction and, further that bank must have notice
of that fraud. The nature of fraud should be of an egregious nature so that the Court
may safely say that the entire underlying transaction stood vitiated. The respondent No.
1 took the stand that even if be assumed, though not admitted by it, that the amount
recoverable from by the respondent No. 1 against its claims from the appellant were
limited to those set out by the appellant in his application under Section 9, the Court
was not entitled to consider them for turning down the right of demand of respondent
No. 1 from respondents No. 2 and 3 invoking the bank guarantee. It was the case of the
respondent No. 1 that two bank guarantees in question, were complete and independent
contracts, wholesome in themselves, and the Court may not look into the underlying
contract for interpreting the contract of bank guarantee.
The banks were duty bound to fulfil the terms of the guarantees in question, on the
demand of the respondent No. 1 and, therefore, the Court could not look into the
underlying agreements for determining if the appellant was entitled to an injunction.
These were the preliminary objections of the respondent No. 1. It also gave parawise
reply. The main thrust of the reply was that the agreement for procurement of soyabean
seeds and the processing agreement were intimately and inextricably connected with
each other. They reflected a single transaction. The appellant failed to procure soyabean
seeds according to specifications as per procurement agreement. On 5.1.98 the
respondent No. 1 asked the appellant to suspend the agreement. Then on 8.1.98, the
respondent No. 1 reiterated that the soyabean seeds collected on 6th, 7th and 8th of
January, 1998 could not be billed to it. According to the respondent No. 1, the appellant
was supplying damaged seeds and the moisture content of those seeds was at variance
with agreed specifications. Further, it was stated that the appellant had granted rebate
to it on account of defect in quality as also because it had supplied damaged seeds. The
fact was duly reflected in provisional statement of account dated 22.4.98. It further
defaulted in payment of oil sale value. The appellant was paid and credited more than it
was its due. A sum of Rs. 9,41,07,834.00 was due. Besides the respondent No. 1 was
entitled to claim damages, it was stated specifically that even the appellant was not
denying that it had received in far excess of the amount towards procurement of
soyabean seeds as per paragraph 5 read with paragraph 13 of the application. However,
this statement did not give clear picture. This statement did not include the amounts
payable to the respondent No. 1 due under the processing agreement towards the oil
purchased by the appellant from the respondent No. 1. It was claimed that respondent
No. 1 was required to pay more than Rs. 9 Crores as already stated. It was legally
obliged to pay interest at the rate of 18% per annum on that amount. Apart from that,
the respondent No. 1 was also entitled to claim damages from the appellant as well as
from respondent Nos. 2 and 3. It was claimed that bank guarantees under Clause 8 of
the procurement agreement was made not only for advance of Rs. 5 Crores but also for
securing the amount advanced to the appellant from time to time by the respondent No.

1. It was claimed that Clauses 3 and 4 of the processing agreement show that the bank
guarantee of Rs. 4 Crores was required to be furnished to cover the credit for 30 days.
It was further agreed that this credit facility could be extended for thirty days and this
agreement tried to secure the amount by requiring the appellant to issue a post-dated
cheque and it was provided that the bank guarantee shall include a term that it could be
invoked on dishonouring of the cheque. The respondent No 1 denied that it had no right
to suspend the agreement. The letters dated 5.1.98 and 8.1.98 were in accordance with
the terms of agreement. The appellant had taken the money in advance but was unable
to pay its dues. The appellant breached the agreement and committed default. It was
further stated that in reality, who breached the agreement could be decided by
arbitrator. It was denied that the appellant supplied 9343765 M.T. of soyabean seeds.
The value of the oil was not paid. The ultimate product after extraction of oil i.e. De-
oiled cake was of poor quality and a large part of it could not be shipped. It was
claimed that Rs. 9 Crores would be only a part of the amount due. This was much more
to it as the respondent No. 1 was entitled to claim damages inter alia or less of profit
over and above the amount of Rs. 9,41,07,834.00 as given in the Annexure-A to the
reply. It was stated that the appellant had with held from the eyes of the Court that it
was unable to procure and supply soyabean seeds as per specifications. It was denied
that the appellant had suffered a loss of Rs. 120 Crores. The appellant was informed
that on non-payment of dues under the agreement the respondent No. 1 shall invoke
the bank guarantee. There was no law which required the respondent No. 1 to give
notice or send the copy of invocation letter to the appellant. On the other hand, the
respondent Nos. 2 and 3 acted mala fide contrary to banking practice, when they
clandestinely made it known to the appellant that they had received the letter of
invocation in respect of the bank guarantees. There was no fundamental breach of
agreement. The appellant did not approach the Court with clean-hands because it
suppressed material facts regarding the credit due to respondent No. 1 in respect of the
value of the oil. The purported settlement of Account showed that the appellant owed to
the respondent No. 1 more than Rs. 9 Crores as the things stood then but the appellant
gave a partial picture by referring to due under the procurement agreement. The
respondent No. 1, thus controverted the initial injunction application under Section 9 of
the Act.
The respondent No. 1, however, did not amend its reply in order to counter the
amendments by way of consequential amendment. The Court-below has held in
paragraph 31 of its order that the provisions of Order 8 Rule 5 of the Code of Civil
Procedure would not apply for the reason that this Court in rules framed under Section
82 of the Act, known as MP. Arbitration Rules had omitted to apply Order 8 of the Code
of Civil Procedure. The Rule 9 (11) of the aforesaid rules does not mention that Order 8
would be applicable. This conclusion of the Court-below was not assailed during the
course of the arguments. However, even if those provisions were applicable, the Court
was not powerless to demand strict proof of the allegations under the application under
Section 9 of the Act. However, the learned counsel for the appellant did not argue the
matter on the foundation of deemed admission and, therefore, this Court shall proceed
to decide the case as if omission to make consequential amendment was of no
consequence.
The Court-below has refused to grant injunction to the appellant but has safe-guarded
the interest of the appellant by providing : -
(i) that the respondent No. 1 shall give an inrrevocable bank guarantee of Rs. 7
Crores in favour of the appellant to the effect that in case, the Arbitral Tribunal

passes an award against the respondent No. 1, the appellant shall be able to
recover the amount from the respondent No. 1 by invoking the bank guarantee.
(ii) The respondents No. 2 and 3 were directed to release the amounts of their
bank guarantees on production of the original bank guarantees in favour of
respondent No. 1 and the certified copy of the bank guarantee was to be issued
by the bank in favour of the appellant amounting to Rs. 7 Crores.
(iii) It was further directed that for release of the amount of both bank
guarantees, the respondent No. 1 shall deposit Rs. 1,20,84,175.00 in F.D.R.
This amount shall remain in Fixed Deposit as a security and the entitlement to
get the amount shall be determined by the Arbitral Award. Such directions
could be given by the Court under Section 9 (ii) (b) of the Act. Section 9 (ii)
(d) of the Act specifically deals with grant of injunction or appointment of
receiver. The respondent No. 1 has not challenged the aforesaid direction and
in case the appeal is allowed this Court is of the opinion now there would be no
occasion to maintain the aforesaid directions as they are the direct consequence
of dismissal application for injunction. The Court below has tried to secure the
amount for the arbitral award. If the dismissal is maintained these directions
are in favour of the appellant. The counsel for the appellant did not argue that
he was not satisfied with the conditions imposed upon the respondent No. 1 in
case the injunction claimed was not granted. The aforesaid facts, therefore, do
not call for an exercise in interpretation of various clauses of Section 9 (ii) of
the Act. This appeal is merely confirmed to the question if the Court-below
rightly refused to grant injunction under Section 9 (ii) (d) of the Act. This was
the only question hotly debated by the counsel for the parties.
The learned counsel for the appellant argued that the order of the Court-below was
liable to be reversed on the ground of fraud perpetrated by the respondent No. 1 upon
the appellant. Firstly it was submitted that the respondent No. 1 was responsible for
furnishing the terms of the two bank guarantees. The terms of the two bank guarantees
were obtained by fraud. The terms of the bank guarantees were not as envisaged by the
two agreements, in question. The learned counsel for the appellant further argued that
the fraud contemplated as condition for grant of injunction was not limited to the
formation of underlying agreements or the bank guarantees. Any fraud or
misrepresentation amounting to fraud would also be considered for granting a
temporary injunction upto the decision of Arbitration proceedings. As to the question of
fraud committed by respondent No. 1, in obtaining the two bank guarantees, the
learned counsel for the appellant argued that it was clear from clause 8 of the
procurement agreement that a bank guarantee or bank guarantees were required to be
furnished by the appellant to the tune of Rs. 5 Crores, for a period of nine months. This
was a bank guarantee to secure the advance of Rs. 5 Crores made by the respondent
No. 1 in favour of the appellant. The learned counsel for the appellant argued that
format of the bank guarantees should have been as per Annexure-A to the agreement.
The learned counsel urged that the bank guarantees in question, were not in accordance
with the format. At this stage the learned counsel was asked to show to the Court if
there was any format (Annexure-A) attached to the procurement agreement. Both the
counsel stated that there was none. Therefore, the argument of learned counsel that the
respondent No. 1 did not adhere to format (Annexure-A) is rejected at this stage and it
shall not be considered any further. However, the learned counsel for the appellant
further argued that the bank guarantees were obtained by fraud on its own terms shall
be dealt with during the course of discussion, The learned counsel for the appellant
argued that in case that appellant was able to establish that while invoking the bank

guarantees in question, the respondent No. 1, having committed breach of the two
underlying agreements had misrepresented to the banks, that appellant had breached
the terms of agreement and thereby committed fraud. The learned counsel for the
appellant argued that the bank guarantees in question, could not be said to be
independent contracts in themselves. They should be held to be incorporated in the
original agreements as per intention of the parties. For this reason, the learned counsel
sought liberty from the Court to show that not only the respondent obtained the
aforesaid bank guarantees fraudulently but also committed breach of agreements and
misrepresented to the banks in question that the appellant was guilty of this breach.
During the course of the argument the learned counsel pointed out that it was not
disputed before the Court-below that so far as procurement agreement is concerned the
appellant was liable to pay Rs. 4,20,98,203.00 to respondent No. 1. Therefore, to that
extent appellant may be entitled to invoke the bank guarantee as per Clause 17 of the
agreement. It was also sought to be argued that the letters invoking the bank
guarantees were contrary to two agreements.
The respondent No. 1 could invoke the bank guarantees for breach of all or any of the
conditions. The statement made to the banks that the appellant had failed to fulfil any
of the conditions of the procurement agreement and the processing agreement dated
22nd of October, 1997 was contrary to terms of the two bank guarantees. It was gross
misrepresentation of the fact that the appellant had breached all the conditions of the
agreements. According to learned counsel the use of the word any of the conditions
implied that the appellant had breached all the conditions. This was a total
misrepresentation of facts amounting to fraud and the Court was entitled to consider the
misrepresentation on the part of the respondent No. 1 to hold in favour of the appellant.
The learned counsel pointed out to the fax message issued on behalf of the respondent
No. 1 dated 9.1.1998 and highlighted the message of the respondent No. 1 to the effect
that it confirmed the fact that it had asked the appellant to stop purchasing of soyabean
with effect from 5.1.1998 on its account due to desperate market conditions. It was
initially submitted that though the appellant denied that it received the message dated
5.1.1998, it raised on this document relied when the Court pointed out to the learned
counsel for the appellant that he cannot rely on the uncommunicated document because
this document would be valueless, if not communicated. Therefore, the learned counsel
for the appellant elected to say that he would rely on this document and the Court may
take it that this message was received by the appellant. It was argued that special
equities were created in favour of the appellant under the facts and circumstances of the
case and, therefore, the Court should issue temporary injunction. It was also submitted
that the question of invocation of bank guarantees cannot be decided in isolation. It was
part and parcel of the agreement of procurement and the processing agreements and,
therefore, the right of the appellant and respondents can be determined by the arbitral
tribunal. The respondent No. 1 was not entitled to invoke the bank guarantee. During
the course of the arguments, the learned counsel for the appellant relied upon the
following authorities: -
(i) M/s. Synthetic Foams Ltd. v. Simplex Concrete Piles, (India) Pvt. Ltd.,
MANU/DE/0214/1987 : AIR 1988 Delhi 207.
(ii) M/s. R.C. Thakkar v. The Bombay Housing Board (by its successors) now
The Gujrat Housing Board, AIR 1973 Gujt 34.
(iii) Hindustan Paper Corporation Limited v. Keneil-House Angami, 1990 (68)
Comp. Cases 361.

(iv) Taj Trade and Transport Co. Ltd. V. Oil and Natural Gas Commission and
another, 1994 (80) Comp. Cases 740.
(v) Shiv Ispat Udyog P. Ltd. v. Indus Valley, 1986 (60) Comp. Cases 405.
(vi) Nangla Construction India (P) Ltd. v. Natural Buildings Construction
Corporation Ltd. and Others, MANU/DE/0348/1990 : 41 (1990) DLT 359,
(vii) Hindustan Steel Works Construction Ltd. v. Tarapore & Co. And another
MANU/SC/0606/1996 : (1996) 5 SCC 54.
(viii) Larsen & Toubro Ltd. v. Maharastra State Electricity Board & Others,
MANU/SC/0086/1996 : (1995) 6 SCC 68.
The learned counsel for the appellant further submitted that apart from fraud of the
respondent No. 1, the Court should grant temporary injunction to the appellant
restraining the respondent No. 1 to recover the amount of Rs. 9 Crores from the
appellant by invoking the bank guarantee on the appellant who shall, otherwise, suffer
immensely. The appellant had suffered a loss upto Rs. 120 Crores by the end of March,
1997. The fractional financial structure shall suffer a death-blow to it. This blow in turn
shall paralyse the co-operative projects of the appellant. Consequently, the farmers and
growers shall also suffer. The Court must look to the welfare aspect of the activities of
the appellant and hold that there are special equities in its favour to save it from
irretrivable injustice or damage.
The learned counsel for the respondent No. 1 argued that it was well established that
the underlying agreements cannot be looked into for granting or refusing injunction. A
bank guarantee was an independent contract and the Banks could not look into the
original underlying agreements for withholding the amount payable to the beneficiary.
The Banks have to obey the terms of the bank guarantee. For this reason, the Courts are
chary of looking the original underlying agreement. It was submitted further that there
are numerous decisions of the Supreme Court and the High Courts laying down the law
to the effect that Court may grant temporary injunction in case of an unconditional and
irrevocable bank guarantee on account of an egregious fraud committed by the
beneficiary in relation to the transaction in question. The Court must be satisfied that
the fraud was established by the opposite party. As to the decree of fraud, the learned
counsel submitted that it should be such which would vitiate the agreement on which
the bank guarantee was founded.
The subsequent dispute in performance of contract did not give rise to cause for issuing
injunction restraining a party from enforcing the bank guarantee. The matter regarding
the breach of contract by the either party the agreement has to be settled by the
appropriate tribunal, be it a Civil Court or an arbitral tribunal, depending upon the terms
of the agreement. It was further submitted that the Courts have evolved another
category where interference with the invocation of a bank guarantee could be made. It
came under the heading of irretrievable injustice or damage. It was forcefully argued
that irretrievable injustice could be inferred only in those cases where re-imbursement
to appellant was impossible. There was no such allegation in the application. The Court
cannot take into consideration the hardship to the appellant for which the respondent
No. 1 was not directly responsible. The respondent No. 1 was a sound Company as
would be borne out by the fact that it promised and advanced initially Rs. 5 Crores to
the appellant at the time of entering into procurement agreement or soon thereafter. It
further paid Rs. 9,07,14,809 to the appellant for procuring the soyabean seeds. It was
further submitted that the Court-below has safe guarded the bank guarantee of Rs. 7

Crores, asking it to deposit Rs. 1,20,84,175/- in fixed deposits as a security. Both these
accounts shall ensure to the benefit of the appellant till the arbitral tribunal gives its
award. It was submitted that the Court should reject the contention of the appellant
regarding irretrievable injury. It was further submitted that the appellant had no prima
facie case in its favour. The balance of convenience lay in allowing the banking
transaction to go on. It was pointed out that the initial application under Section 9 of
the Act did not state any material particulars of fraud committed by the appellant. The
application under Section 9 of the Act was filed because the respondent No. 1 had
invoked the bank guarantees in question without giving a notice to the appellant. It
appears that the word fraud' was added in pen at the time of filing of the application.
The allegations of fraud were brought in as an after thought by way of the amendment.
It was submitted even that amendment did not spell out a fraud of the nature that
entitled the Court to pass an order of injunction. This category should be limited to a
fraud in connection with (i) the formation of the agreements and (ii) the bank
guarantees. It was also argued that there was no established fraud as the facts were in
dispute.
The learned counsel for the respondent No. 1 urged further that the fraud must be such
as could be recognized by a Banker before refusing to honour a bank guarantee. It
should not depend upon facts alleged by one party and disputed by the other. The Bank
cannot adjudicate and it cannot take sides. Otherwise, the whole banking system would
be paralysed and the honour of the Bank in dealing with the customers shall be shaken.
It is an egregious fraud known to Bank that shall stop it from honouring the bank
guarantee. The undconditional bank guarantees made payable on demand without
demur must be paid without any hesitation. The Court should, therefore, refuse to grant
injunction as payment could not be postponed till the dispute regarding breach of
contract is decided by the arbitral tribunal. A bank guarantee being an independent
contract, it was not necessary to quantify the money payable as per agreements in
question. There was no question of unjust enrichment in this case and even it be so it
could not be a ground for granting an injunction. The learned counsel drew the
attention of this court to observations of Jagannatha Shetty, J. in the case of U.P.
Cooperative Federation Ltd. v. Singh Consultants and Engineers (P) Ltd.
MANU/SC/0021/1987 : (1988) 1 SCC 174, at page 192-193, paragraph 43, wherein the
learned Judge agreeing with the conclusions of Sabyasachi Mukherjee, J., observed that
the question of examining prima facie case or balance of convenience would not arise, if
the Court cannot interfere with the unconditional bank guarantees, in question.
Nevertheless, the learned counsel submitted in the alternative that the appellant had no
prima facie case in its favour. The respondent No. 1 had not breached any terms of the
two guarantees and it has invoked them as per terms of the bank guarantees, in
question. The learned counsel argued that the balance of convenience is always in
favour of allowing the smooth running of banking transactions. The learned counsel for
the respondent No. 1 pointed out that the respondent No. 2, the Bank of Baroda and the
respondent No. 3, the Bank of Maharashtra, instead of honouring the unconditional bank
guarantee given by them in favour of the respondent No. 1 without demur, wrote letters
dated 16.6.98 and 17.6.98 respectively demanding the amount covered by the bank
guarantees from the appellant. The respondent No. 1 was not concerned under what
circumstances the respondent No. 2 and 3 were persuaded by the appellant to agree to
issue the guarantees in its favour without securing their interest. However, by their
letters they indicated to the appellant that now the bank guarantees are invoked and it
may enter into litigation. This attitude of the Banks was seriously criticised and reliance
was placed on the observation of B.N. Kripal, J. in the case of Dwarikesh Sugar
Industries Ltd. v. Prem Heavy Engg. Works (P) Ltd., reported in MANU/SC/0639/1997 :
(1997) 6 SCC 450 at page 463, paragraph 32. In this case, His Lordship stated in no

uncertain terms that it is legal and moral duty of the Banks to honour their
commitments. The action of the Bank in that case was not appreciated when it dragged
its feet in order to allow the respondent No. 1 in that case to seek favourable injunction.
The learned counsel for the respondent No. 1 submitted that in the case in hand, the
respondents No. 2 and 3 also showed partisan attitude and behaved in a manner which
does not behove the Banks. The learned counsel for respondent No. 1 refuted the
arguments of the counsel for the appellants on facts and stated that two agreements i.e.
the procurement agreement and the processing agreement formed part of a single
transaction. The parties did not annex terms of Bank guarantee under procurement
agreement to an advance of Rs. 5 Crores. The parties must have given up the idea of
having one or more bank guarantees of Rs. 5 Crores under the procurement agreement
and one or more guarantees of Rs. 4 Crores under the processing agreement as initially
agreed. Instead the two bank guarantees of Rs. 6 Crores and Rs. 3 Crores respectively,
were given. The amount of guarantees of the Bank of Baroda amounting to Rs. 6 Crores
could not be exclusively confined to advance of Rs. 5 Crores.
Therefore, it would be misnomer to call it a bank guarantee securing the advance of Rs.
5 Crores. The additional Rs. 1 Crore out of Rs. 6 Crores must be referable to the
processing agreement because under the processing agreement the appellant was
required to give a guarantee of Rs. 4 Crores, whereas a bank guarantee of Rs. 3 Crores
was given by the Bank of Maharashtra. It was argued that the parties did not adhere to
the two agreements at the time the bank guarantees were given on the terms mentioned
in them. This was a subsequent modification because the appellant insisted that Rs. 5
Crores be paid to it. It was argued that there was no merit in the argument of the
appellant that the respondent No. 1 was guilty of committing fraud in supplying the
terms of the bank guarantees. The proposed terms of the two bank guarantees were
sent by the appellant itself to respective Banks. It was an open eyed transaction on the
part of the appellant. It was emphasized that the appellant supported the fact in its
application under Section 9 of the Act by stating that only Rs. 4,20,98,203.68 were due
to the respondent. It omitted to mention in its application the amount due under the
processing agreement. The total amount was Rs. 9,41,07,834.00. It was stated that the
provisional statement of accounts between the parties dated 22.4.98 showed that
provisionally Rs. 7,79,15,825.58 were due. This statement dated 22.4.98 was signed by
the parties. However, this statement too was incomplete as interest was not finalized.
The letter dated 11th June, 1998 referes to that aspect of the matter. The aforesaid
suppression of facts on the part of the appellant was in itself sufficient for refusal of
equitable relief of injunction. As to the breach of agreement on the part of respondent
No. 1, it was argued that it was clearly from the correspondence between parties on
record that the respondent No. 1 was guilty of the breach of She agreements. It was
unable to supply soyabean seeds as per quality specifications mentioned in the
procurement agreement.
The learned counsel stated that it would be apparent from the fact that as per
provisional statement of account signed jointly by both the parties on 22.4.98. The
quality rebate was assessed at Rs. 14,50,187.13 and the damaged seed at Rs.
1,18,276.00 within a very short period. The respondent No. 1 was worried about the
quality of seeds supplied and therefore, it exercised its right of suspension of
procurement as per agreement from 5th of January, 1998. On 8.1.1998, Shri Atindra
Sen wrote a letter to the effect that the Board of directors had modified the quality of
seeds on account of heavy rains. They unilaterally relexed the specifications without
consulting the appellant the extent of moisture to 15% and total damage to 15%. The
respondent No. 1 was warning the officers of the appellant regarding the quality of
soyameal and de-oiled cakes by saying that they were not upto the mark. On 1st of

December, 1997 a letter was sent to the General Manager of the appellant at Banapura
regarding the moisture and oil-content in soyameal. It was stated that oil should not
exceed more than 1% and moisture should be maximum 12% at the production time.
In the letter dated 4th December, 1997 again written to the General Manager of the
appellant it was mentioned that the de-oiled cake contained more than 12% moisture at
the time of Production. Both those letters gave examples of moisture content in
soyameal and de-oiled cake respectively on previous days. Again on 8th of December,
1997 a letter was sent to the General Manager regarding the fact that the moisture
content was more than 12%. Then letters dated 11th December, 1997, 12th December,
1997, 14th December 1997, and 15th December 1997 showed that de-oiled cake
contained more than 12% of moisture on previous dates at the time of production. It
was also pointed out in the letters of dated 12th December, 1397 and 15th December,
1997 that the muffle furnace was out of order and needed repair so that sand and silica
contents did not exceed more than 2%. It was urged that no response was made by the
appellant towards the quality control. On 19th of December, 1997 a letter was sent to
Mr. Atindra Sen by the Vice President after the letter visited the office of respondent No.
1. It was a detailed letter regarding the processing plant at Banapura. It was pointed
out that the moisture content in the de-oiled cakes was more than maximum 12% and
sand, silica content was 1%. It was pointed out that silica level was less because of
non-addition since 5.12.1997. The result was that margin of profit was eroded because
the cargo was unacceptable to buyers in the international market necessitating the
withholding of cargo. It was urged that under these circumstances the respondent No. 1
through Abiram Seth advised Shri Atindra Sen, the General Manager of the appellant, to
suspend purchase of Soyabean seeds. As already stated, instead of improving the
quality of product, the appellant through its Directors, reduced the quality of product
and wrote a letter dated 8.1.1998. A fax message was sent by respondent No. 1 on
8.1.1998 not to take delivery of soyabean seeds in its account from 6th of January,
1998. The learned counsel for the respondent No. 1 submitted that confirmation
message dated 9th January, 1998 not to purchase soyabean towards the account of the
appellant, no doubt, was desperate market conditions but these words cannot be used
to imply that respondent No. 1 breached the agreement because it was loosing ground
in the international market due to topsyturvy condition of the market.
The out come was on account of non-supply of quality goods by the appellant. It was
asserted that the argument of the learned counsel for the appellant is belied by the
conduct of respondent No. 1 and the appellant. However, that was not end of road. The
confirmation message dated 9.1.98 also stated "please do not purchase any beans on
our account till you hear from us in writing". It was submitted that negotiations
between the parties continued. On 17.3.98 the respondent No. 1 demanded Rs. 4.25
Crores on account of oil seed invoices. The amount due for the month of December
1997 and January 1998. It was submitted that the letter dated 25.3.98 gave detailed
reasons for suspension of operation at' Banapura. It pointed out what went wrong with
procurement operations and sales and unfair soyabean purchased from the Mandi by the
appellant on behalf of respondent No. 1. It appeared from this letter that the Vice
President, Commercial called Shri Atinder Sen for discussion. On 3rd April, 1998 a
demand of Rs. 5 Crores was made. Thereafter, naturally agreed provisional statement of
account was signed. It was found that the appellant was liable to pay Rupees
7,79,15,825.58. This amount had included the claims of the appellant for Rs.
3,49,702.82 and also a debit note for oil production of Rs. 2,39, 434.48. It was so
stated in the foot-note. However, it was made clear that there were other issues which
were still pending finalization. Thereafter, as per earlier discussion between the parties
the appellant extended the two bank guarantees till 31.7.1998 with a claim for a period

of one month on the same terms and Banks, accordingly, extended the time. The
learned counsel argued that it was at the instance of the appellant, the Bank guarantees
were extended. Since the respondent No. 1 did not receive any amount towards the
balance, the Commercial President of the Company, wrote to the appellant to the effect
that accounts settled and signed were almost completed as per discussion between the
parties in May, 1998. The bottle neck was on what amount the interest had to be
charged. It was stated that the appellant should send an account of final calculation of
interest and the details be given when the balance of amount shall be cleared, failing
which it was stated that the respondent shall encash the bank guarantees in question.
Thereafter on 15th of June 1998 two similar letters were sent to Bank of Baroda stating
that the appellant failed to comply with the condition of the bank guarantees. In these
letters the Bank Account of the respondent No. 1 in which the amount was to be
credited, was given. It was further stated that the bank Guarantees will be delivered on
remittance of the amount. The learned counsel for the respondent No. 1 argued that it
was impossible to infer any fraud on the part of the respondent No. 1 much less an
egregious fraud. The appellant was unable to supply the quality seed and therefore, the
procurement operation had to be suspended from 6th of January, 1998. The appellant
was forewarned but Instead It tried to Impose upon the respondent No. 1 its own
specifications. Thereafter the parties negotiated and when the discussions showed that
appellant was unable to supply quality seeds there was time for parting of ways. The
appellant did not pay the balance of amount and did not calculate the interest. The
appellant was forewarned as to the consequences. The learned counsel for the
respondent No. 1 argued that his client was entitled to invoke the bank guarantees in
question. There was no breach of any terms of the bank guarantees, themselves. There
was no merit in the argument that the appellant was not aware that the respondent No.
1 shall invoke the bank guarantees. The letters invoking the bank guarantees could not
be held to be fraudulent because the respondent No. 1 had used the words any of the
terms of the bank guarantees. During the course of the arguments the learned counsel
for the respondent No. 1 referred to a number of decisions of Supreme Court and the
High Courts. They are as follows : -
(1) I.T.C. Limited v. Debts Recovery Appellate Tribunal MANU/SC/0968/1998 :
(1998) 2 SCC 70.
(2) Dwarikesh Sugar Industries Ltd. v. Prem Heavy Engineering Works (P) Ltd.
and another MANU/SC/0639/1997 : (1997) 6 SCC 450.
(3) U.P. State Sugar Corporation v. Sumac international Ltd.
MANU/SC/0380/1997 : (1997) 1 SCC 568.
(4) Ansal Engineering Project Ltd. v. Tehri Hydro Development Corporation and
another MANU/SC/1199/1996 : (1996) 5 SCC 450.
(5) State of Maharashtra v. National Construction Company Ltd.
MANU/SC/0597/1996 : (1996) 1 SCC 735.
(6) Larsen & Tourbo v. Maharashtra State Electricity Board
MANU/SC/0086/1996 : (1995) 6 SCC 68.
(7) Hindustan Steel Workers Construction Ltd. v. G.S. Atwal & Co. Engs. Pvt.
Ltd. MANU/SC/0030/1996 : (1995) 6 SCC 76.
(8) Hindustan Steel Works Construction Ltd. v. Tarapore & Co. and another

MANU/SC/0582/1996 : (1996) 5 SCC 34.
(9) Murarka Cables & Conductors Ltd. v. Zomet Trading Co. Ltd. : (1995) Supp.
(4) SCC 585.
(10) National Thermal Power Corporation Ltd. v. Flowmore (P) Ltd. (1995) 4
SCC 514.
(11) State Trading Corporation of India Ltd. v. Jainsons Clothing' Corporation
MANU/SC/0548/1994 : (1994) 6 SCC 597 (602 to 605).
(12) Svenska v. Indian Chargo Chrome MANU/SC/0138/1994 : (1994) 1 SCC
502 (530).
(13) General Electric Vs. Punj Sons (P) Ltd. MANU/SC/0442/1991 : (1991) 4
SCC 230.
(14) U.P. Cooperative Federation Ltd. v. Singh Consultants & Engineers Pvt Ltd.
(1988) 1 SCC 17.
(15) CENTAX (India) Ltd. v. Vinmar Impex Inc. & others MANU/SC/0003/1986 :
AIR 1986 SC 1924 :1986 (4) SCC 136.
(16) United Commercial Bank v. Bank of India & others, MANU/SC/0003/1981 :
1981 (2) SCC 766 : AIR 1981 SC 1426.
(17) Tarapore & Company v. V.O. Tractors Export, MANU/SC/0215/1968 : AIR
1970 SC 891 : 1969(1) SCC 233. '
(18) Ramnarayan Bhujbal Singh v. Purshottam Puran Shankar 1983 MPW 485.
(19) Shri Krishan v. Kurukshetra University MANU/SC/0061/1975 : (1976) 1
SCC 311.
(20) Bishnudeo Narayan v. Seogeni Rai & others, MANU/SC/0059/1951 : AIR
1951 SC 280.
(21) A.L.N. Narayan v. Official Assignee, High Court A. ILR 1941 P.C. 93.
(22) S.P. Chengalvaraya Naidu v. Jagannath MANU/SC/0192/1994 : (1994) 1
SCC 1.
(23) Tom Bocavey Barrett v. African Product Ltd. AIR 1928 P.C. 261.
The question involved in this case is if the Court should interfere with the order passed
by the Court-below. It has been sought to be shown by the appellant that as a matter of
law the bank guarantees should be deemed to be incorporated in the original underlying
agreements or that the invocation of bank guarantees should according to terms of the
original agreements. In other words a bank guarantee would not be an independent
contract if there be an agreement between the parties to give a bank guarantee. Now it
is obvious that Section 126 of the Contract Act would cover a bank guarantee too
because it would be a contract to perform the promise or discharge the liability of a
third person in case of his default. The person on whose behalf the Bank undertakes to
pay, would be the principal-debtor. The guarantee holder would be the creditor. The
Bank would stand surety to creditor for the liabilities of the principal debtor. It is a

contract of guarantee. It can not be disputed that in India such contractors are governed
by the Contract Act. The contract of guarantee is thus a tri-partite agreement governed
by all the provisions of the Contract Act which are made specifically to such contracts
from Section 126 to Section 147 of the Contract. That does not mean that other
provisions of the Contract Act would not apply to such a case. A contract of guarantee
must be a "Contract". A contract is an agreement enforceable by law under Section 2
(h) of the Contract Act. Now, a surety under a contract of guarantees is to perform the
promise or discharge the liability of third person. However, a surety cannot be asked to
perform any promise or discharge any liability unless those are in themselves
enforceable in law. In other words, the 'contract of guarantee' would be governed by
the principal agreement between the principal-debtor and the creditor for at least,
judging if the surety or the guarantor could be compelled to perform his part of
contract. Since the liability of the surety is co-extensive with that of the principal debtor
under Section 128 of the Contract Act it would not be impermissible to look into the
underlying agreement to find out if the liability of surety survives. Therefore, it would
not be appropriate to hold that the underlying agreement is utterly irrelevant for
determining the liability of the surety. A surety cannot be compelled to perform a
promise or discharge a liability which would not be legal or which would be void within
the meaning of Section 2 (g) of the Contract Act or has once become void within the
meaning of Section 2 (f) of the Contract Act. Even in a case of voidable contract when
the principal debtor or the creditor, as the case may be, exercises his option of not
enforcing the underlying contract the liability of the surety would be discharged. This
result shall follow because the underlying contract on which a guarantee is based, is so
tainted that it gives a statutory right to make that an agreement void by exercise of an
option. There can be no contract to perform the promise to discharage the liability of a
third person when the contract becomes void by exercise of statutory option to avoid it.
In other words, the surety is liable to perform a 'contract of guarantee' for default of a
third person in respect of an underlying contract of agreement which could be enforced.
The result of the aforesaid discussion is that this Court comes to the conclusion that to
speaking generally it would not be a correct proposition of law to say that a contract of
guarantee can be wholly divorced from the underlying agreement. 22. However, this
Court is called upon to consider the case of two bank guarantees which would contracts
of guarantees within the meaning of Section 126 of the Contract Act. The two bank
guarantees are reproduced in this order in paragraphs 11 and 12. Both these bank
guarantees in the case of the Bank of Baroda is Rs. Six Crores and that in the case of
Bank of Maharashtra is Rs. Three Crores and that in the case that these two Bank
guarantees are accessory contracts whereby the two Banks gave an undertaking in
writing as guarantors, with the terms incorporated in the two bank guarantees. The
preamble of the guarantees aforesaid show that they are securing the amounts
mentioned in them, through and unconditional and irrevocable bank guarantees. The
clause 1 of the two bank guarantees says that in consideration of acceptable of the
obligation of the guarantor by respondent No. 1 in discharge of the obligation of the
appellant to provide a bank guarantee upon the demand of respondent subject to
condition mentioned in subsequent clauses. The clause 2 of the two bank guarantees
requires the respondent No. 1 to state that the appellant had failed to fulfil any of the
conditions specified in two agreements in question and then the Banks obligation is to
pay forthwith on demand the amount specified in demand by transferring the amount to
such account in such place as the respondent No. 1 may direct. It was made clear in
this clause 2 that the respondent No. 1 shall not be required to seek consent of the
appellant to take legal action against it before invoking the two bank guarantees. This
obligation of the Banks would be notwithstanding "any conditions and without any right
to set off or counter-claim." The only limitation is that the clause 2 shall be subject to

clause 5. Here there is slight difference in the two bank guarantees. The clause 5 of the
Bank Guarantee of the Bank of Baroda says that the Amount of Bank guarantee shall be
payable without any deductions of any nature whatsoever and by whomsoever imposed.
It is numbered as clause 6 in the bank guarantee issued by the Bank of Maharashtra.
The clause 5 of the guarantee of the Bank of Maharashtra is similar to a clause which
appears to be incorporated in clause 4 of the Bank of Baroda (because it is not
numbered as clause 5) is in two part, being (i) the obligation to pay shall not be
affected by any act, omission or matter or thing to operate as release or otherwise
exonerate the obligations of the Bank in whole or in part (whether or not known to the
Bank or the respondent No. 1), (ii) This part has definite relation to clause 2. It relates
to duration of the bank guarantee in question. It says that guarantee shall remain in full
force effect that will be taken for performance of the agreements and it shall remain in
force and effect till all the dues of the respondent No 1 are paid in full and the claim of
respondent is fully satisfied or discharged or till 31st of May, 1996. In other words
liability mentioned in clause 2 shall be operative till respondent No. 1 obtained full
discharge under the agreement or till 31st May, 1995.
The clause 3 of both the bank guarantees incorporates an important condition. Both the
Banks agreed to pay the amount of the Bank guarantees to the extent of maximum
without any demur and merely on the demand of the respondent No. 1. The demand so
made by respondent No. 1 was conclusive as "regards the amount due and payable" by
the Banks under the guarantees. There is another clause, numbered as clause 7 in the
Bank Guarantee of Bank of Maharashtra (No. 6 in that of Bank of Baroda) fixing the
mode of demand i.e. by post, telex or fascimile transmission. There is one clause in
both the agreements that even if a part of the bank guarantee becomes invalid it shall
not affect the other part. The guarantees shall be construed in accordance with the laws
of India and jurisdiction shall be Bhopal. The last clause fixes the maximum period for
invoking the bank guarantee as 31st May, 1998. However, both the bank guarantees
have been extended till 31st of August, 1998 and there is no dispute on this count.
The question that has to be decided by this Court is whether this Court can interpret the
aforesaid bank guarantees dehors the two agreements of procurement and processing or
treat them as part and parcel of the two agreements. It has already been held that
underlying agreement could be looked into for considering if the guarantor or surety is
liable to perform any legal promise or discharging any legal default of the principal-
debtor. In the sense a bank guarantee cannot be said to be totally independent of the
underlying agreement. However, it is not the claim of the appellant that either of the
agreements was void or was declared void subsequently. The validity of two agreements
is not in question. Nor, it is said that these agreements were obtained by fraud.
Therefore, the question of considering the procurement and processing agreements for
determining the liability of the appellant does not arise. The Banks gave the bank
guarantees under legal and valid agreements.
The question raised by the learned counsel for the appellant is that the Court is entitled
to look into original agreements for holding whether the respondent No. 1 is entitled to
invoke the two bank guarantees. In the opinion of this Court the interpretation
suggested during the arguments could be adopted only in these cases whether either by
the terms of the underlying agreement itself the bank guarantee is incorporated in the
original agreement and that the guarantor - Bank accepts the liability. The other way to
get the terms of the agreement enforced would be to incorporate in the bank guarantee
itself the necessary terms of the original agreement. It was not disputed that there was
no annexure to the original agreement for procurement. Nor did the parties incorporate
in any of the two bank guarantees clause 8 and clause 17 of the procurement

agreement. It appears that subsequently, both the parties did not adhere to secure the
liability of the appellant as envisaged in the two agreements. Initially, the idea was that
the Banks shall give one or more bank guarantees for Rs. 5 Crores securing the advance
of Rs. 5 Crores or any other amount advanced by the respondent No. 1 to the appellant
from time to time.
The other bank guarantees for Rs. 4 Crores was to be given to secure the purchase of
soya oil by the appellant on credit for a period of 30 days. However, the original idea
behind the two agreements was given up and two bank guarantees were obtained of Rs.
Five Crores from the Bank of Baroda and Rs. 3 Crores from the Bank of Maharashtra,
covering both the agreements. For this reason, there is no merit in the argument of the
learned counsel for the appellant that one of the guarantees was an advance guarantee.
It is difficult to categorise the guarantee given by Bank of Baroda as an advance
guarantee because it refers to both the agreements. The same argument would be
applicable to the guarantee given by the Bank of Maharashtra. Realising his difficulties
the learned counsel for the appellant argued that the bank guarantees in question, were
obtained by the respondent No. 1 by fraud because the draft of terms of the Bank of
guarantees was supplied by the respondent No. 1. It may be so. The appellant was not
bound to accept these terms and should have refused to accept the suggested terms of
the bank guarantees. It appears that the appellant had placed on record a proforma of
the proposed bank guarantee and alleged that it was respondent No. 1 which had
proposed the terms of the bank guarantees. This allegation was supported by an
affidavit of Satish Kumar Gupta Deputy Manager (Finance) of the appellant and a
proforma marked as Annexure A-13 alongwith that affidavit dated 22nd July, 1998.
Alongwith a letter dated 25.10.98 marked as Annexure A-14, written by Shri Atindra
Sen to Shri K.K. Sahu Chief General Manager of Apex Bank, T.T. Nagar, Bhopal. It was
suggested that the appellant had made a request for extension of bank guarantee in
terms of Clause 8 of the procurement agreement and in terms of Clause 4 of the
processing agreement. Paragraph 3 says that the respondent No. 1 shall advance Rs. 5
Crores free of interest and the appellant shall provide usual bank guarantee to avail the
advance.
The paragraph 5 of the letter says that the respondent No. 1 will provide an advance of
Rs, 5 Crores for procurement and it will give interest free credit for 30 days' oil
production. The appellant will provide a bank guarantee for the amount of Rs. 9 Crores
to cover both the agreements. The format of bank guarantees is also enclosed herewith.
Copies of this letter were also supplied to Bank of Maharashtra and Bank of Baroda.
There was no reason for the appellant not to file the proposed format sent to the Chief
General Manager. It formed part of letter dated 25th October 1997. It must be with the
appellant. Copies of this document must also be lying with the Banks. Moreover, it was
a self-serving statement. Nothing was sent by respondent No. 1. The respondent No. 1
on the other hand, had denied on oath by filing the affidavit of S. Venkatesh, Manager
(Exports) that the pro forma (Annexure A-13) was drafted in the office of the
respondent No. 1. It was stated that the bank guarantee was prepared by the appellant
and sent to the Banks, in question. After obtaining the bank guarantees from the Banks,
in question, they were forwarded to the respondent No. 1, through personal messenger
as per letter dated 1.12.1997, marked as Annexure R-1. It appears to this Court that
since the appellant has not produced the proposed format attached to the letter of Shri
Atindra Sen to Shri K.R. Sahu, it is not possible to infer that he had proposed the terms
of the bank guarantees in a different form to Shri Sahu. Even otherwise, what was
proposed to Shri Sahu was not the concern of the respondent No. 1. The wordings of
the proposed bank guarantees alleged to be given by the respondent No. 1, could also
be related to paragraph 45 of the letter written by Shri Atindra Sen on 25.10.97. If this

be so then the officers of the appellant have tried to mislead the Court. This Court relies
on the affidavit on behalf of the respondent No. 1 and holds that the terms of the bank
guarantees, in question, were not supplied by the respondent No. 1. In any case, this
self-serving letter of the appellant could not be relied on by it for establishing that the
respondent No. 1 had provided the terms of bank guarantee. Even if the respondent No.
1 had provided the terms as per Annexure P-13, the appellant was not bound to accept
them.
It had ample time and opportunity to vary them. In fact, the appellant had changed
duration of the bank guarantees to 31st May, 1998 instead of 31st June, 1998 as given
in the proposed guarantees. This Court is of the view that the two bank guarantees were
given by the appellant in an open-eyed manner after weighing the pros and cons of the
matter. It did not insist that the bank guarantee for Rs. 5 Crores should be in
accordance with Clause 8 and Clause 17 of the procurement agreement and the bank
guarantee for Rs. 4 Crores should be in terms of Clause 4 (iv) of the processing
agreement. Thus, as a matter of fact, these two bank guarantees were not part and
parcel of either the procurement agreement or the processing agreement. There was no
Annexure-A to the procurement agreement and the agreement was signed as such. No
fraud was played by the respondent No. 1 in obtaining the bank guarantee of the two
Banks from the appellant. The underlying agreements cannot be referred to generally
for interpreting the terms of the two bank guarantees given in favour of the respondent
No. 1 at the instance of the appellant. It is clear from the preamble of the guarantees, in
question, that the guarantees were given by way of security for performance of the
obligations under both the agreements. The Clause 1 makes them unconditional and
irrevocable and payable on demand in writing by the respondent No. 1. The demand
letter should contain a statement as per Clause 2 that the appellant has failed to fulfil
any of the conditions in the two agreements without requiring the respondent No. 1 to
take recourse to legal proceedings. The Clause 3 makes it clear that Banks shall pay the
amount without demur merely on a demand and so far as the Banks are concerned, the
demand shall be treated as conclusive. The bank guarantees also postulate that no act
or omission shall operate as the release of the guarantees. The duration is also
mentioned till the clauses are satisfied or till 31st May, 1998 (now extended upto 31st
August, 1998). It is obvious that there is a default clause and default clause makes the
statement of respondent No. 1 itself conclusive. The Banks cannot demur. In the face of
the terms of two bank guarantees it is difficult to see how could the Bank examine the
underlying agreements in question, before releasing the amount.
The relief of temporary injunction is an equitable relief. The Courts have wide discretion
in granting relief of temporary injunction or refusing it. A temporary injunction is not a
claim as of right. The Contract Act itself provides that: -
.... Nothing herein contained shall affect the provisions of any Statute, Act or
Regulation not hereby expressly repealed, nor any usage or custom of trade,
nor any incident of any contract not inconsistent with the provisions of this Act.
In the case of Irrawady Flotilla Company v. Bhagwandas. ILR 1891 Cal. 620 at page
627, Lord Macnaghten observed : -
The words' not consistent with the provisions of the Act' are not to be
connected with the clause 'nor usage or custom of trade'. Both the reason of the
thing and the grammatical construction of the sentence if such sentence is to be
tried by any rules of grammar, seem to require that application of these words
should be confined to the subject which immediately precedes them.

Therefore, the Court may recognize 'any usage or custom of trade' which may not be
consistent with the contract Act. Now, the Legislature has used a disjunctive or between
usage and custom. The Courts, therefore, are entitled to recognize a custom of Banking
trade even if it be inconsistent with the provisions of the Contract Act. It is well
established that a custom of a trade, which is part of law of the land, can be collected
from the discussions of legal precedents and analogies. The modern Banking came to
India with the onset of the British and it has now taken the shape of universal Banking
practice. The Banking custom and practice in India developed alongwith the pattern of
Banking practice of the common law countries. It is, therefore, natural to look for the
British Precedents. In the case of P. Cooperative Federation Ltd. v. Singh Consultants
(1988) 1 SCC 17 abyachi Mukerjee, J. followed the British precedents and that of the
Supreme Court regarding the bank guarantees and letters of credit. In Paragraph 29 at
page 189, after considering the case of Tarapore & Company, Madras v. V/o Tractors
Export, Moscow, MANU/SC/0215/1968 : (1969) 1 SCC 233, which postulated that letter
of credit was of great importance to international trade and any interference with that
mechanism was bound to have serious repurcussions on the international trade of this
country, stated in paragraph 30 that these observations equally apply to a bank
guarantee because the bank guarantee involves money of internal trade and transactions
in a country. Jagannath Shetty, J., after considering an article i.e. "Bank Solvency and
Guarantee Letters of Credit", by Paul R. Verkuil in Stanford Law Review, V. 25 1972-73,
at page 719, and other cases stated as follows :
51. It is true that both the decisions of this Court dealt with a contract to sell
specific commodities or a transaction of sale of goods with an irrevocable letter
of credit. But in modern commercial transactions, various devices are used to
ensure performance by the contracting parties. The traditional letter of credit
has taken a new meaning. In business circles, stand-by letters of credit are also
used. Performance bond and guarantee bond are also the devices increasingly
adopted in transactions. The Courts have treated such documents as analogous
to letter of credit.
The result of the aforesaid decision is that the documents of credit in international trade
like letter of credit and that of internal trade within the country cannot be divorced from
the Banking custom and practice operating the Banking trade universally. Therefore, if
Courts take notice of a Banking custom established by the precedents in England and if
they be inconsistent with the Contract Act, they can be implemented. In the case of
Nangia Constructions India (P) Ltd. v. National Buildings Construction Corporation Ltd.
& others MANU/DE/0348/1990 : 41 (1990) DLT 359, in paragraph 51, at page 373, the
learned single Judge did not notice this aspect of the matter in holding that in view of
Section 126 of Contract Act the pronouncements of the British Courts are not valid. In
the opinion of this Court, they are because they throw light on the question how far the
Court may go to Banking usage or custom. Most of the British and even American
precedents recognize the fact that. It is part of the Banking custom to honour the credit
documents according to their terms. It is fact of Banking trade that those Bankers who
do not honour the letters of credit issued to them or their own guarantees without any
sound reason, which is to be culled out from the document itself, suffer in reputation as
Bankers.
The Banking business shall be paralysed if the Bankers were authorised to go beyond
the terms of the credit-document. Court therefore, bears this fact in the mind while
considering the case of grant of temporary injunction and avoids to rush into the path
where the Bankers fear to tread. It is so in this sense that the Supreme Court has ruled
out that bank guarantees would be independent of the underlying agreements. This view

was taken by the Supreme Court in - Ansal Engineering Projects Ltd. v. Tehrl Hydro
Development Corporation and another, MANU/SC/1199/1996 : (1996) 5 SCC 450 in
paragraph 4 at page 454, State of Maharashtra v. National Construction Company Ltd.
MANU/SC/0597/1996 : (1996) 1 SCC 735, in paragraphs 13 and 14, at page 741, and
Hindustan Steel Workers Construction Ltd. v. Tarapore & Company and another,
MANU/SC/0582/1996 : (1996) 5 SCC 34, in paragraph 8, at page 41, Although, the
Court therein referred to the case of letter of credit but the principle is that the law
declared by Supreme Court is binding on this Court under Article 141 of the
Constitution. In the case of Nangla Construction India (P) Ltd. (supra), the learned
single Judge tried to say that the law declared by the Supreme Court is different from
the law made (paragraph 82, at page 390) and implies that law made is not binding.
However, it is difficult to understand, the distinction. Theoritically, speaking the Judges
decide a case. In that case, if some principle emerges, which is known as ratio
decidendi that principle is the law declared. In a wider sense, in the process of arriving
at the conclusion in a particular case certain new principles may be added. There may
be a paradigm-shift. In that sense the law is made. This law making is within the ken of
the expression of law declared under Article 141 of the Constitution. However, one
cannot dispute the proposition as stated by the learned single Judge that the bank
guarantee is or is not an independent contract which will depend upon its terms in
paragraph (91) but above noted Supreme Court decisions are the authorities for the
proposition that underlying agreement, not forming part of the bank guarantee, could
not be looked into for examining the bank guarantee. We have already examined the
agreements as well as the two bank guarantees to negative the plea that as a matter of
fact, the two agreements were parts of the bank guarantees.
The decision of the learned single Judge of Bombay High Court in Taj Trade and
Transport Co. Ltd. v. Oil and Natural Gas Commission and another, 1994 (80) Comp
Cases 740, does not support the contention of the appellant in the matters that relate to
temporary injunction. This Court has already held that as a matter of fact that those
bank guarantees were furnished for default of the appellant under the two agreements
but they were not part and parcel of the agreement. However, the question of invocation
of the bank guarantees, in no circumstance, could be considered, apart from the bank
guarantees furnished. Only as per terms of the two agreements are referable to
arbitration. The Division Bench case of Delhi High Court in the case of Shiv Ispat Udyog
(P) Ltd. V. Indus Valley, 1986 (60) Comp Cases 405, is distinguishable because in that
case, the guarantee-bond itself included terms of underlying agreements' as per
contract between the parties. The case of Larsen & Toubro v. Maharashtra State
Electricity Board. MANU/SC/0086/1996 : (1995) 6 SCC 68, does not support case of the
appellant. In that case the Supreme Court did not depart from established principles for
grant of temporary injunction, that is to say, the invocation of a bank guarantee can be
injuncted only in case of an established fraud or irretrievable injustice or damage. The
Supreme Court refused to grant temporary injunction in respect of a security against
advancement (Advance Guarantee). This bank guarantee was issued by Standard
Charter Bank in sum of Rs. 5,50,30,000/-. The bank guarantee was invoked for Rs. 8
Lakhs when the request for extension of the bank guarantee was refused. Looking to the
nature of dispute pending before the arbitrator, the Supreme Court declared to grant
injunction. The other bank guarantee in the sum of Rs. 2.72 Crores was issued by the
Citi Bank. It was security against the release of the retention money. It was to cover the
said payments till successful completion of trial operation. The Supreme Court found
that the guarantee was to ensure till successful completion of trial operation. The trial
operation, having been completed from 20.6.94, the right of the respondent
Maharashtra Electricity Board, to invoke the bank guarantee was refused in respect of
Rs. 2.72 Crores, issued by the Citi Bank. This case does not help the case of the

appellant.
The learned counsel for the appellant did not argue that the original two agreements
were obtained by fraud, by the respondent No. 1. He was unable to show that the
respondent No. 1 had committed any fraud. The initial ground on which the application
u/S. 9 of the Act was filed, was based on fraudulent invocation of bank guarantees
without notice. This ground cannot be raised as the terms of two bank guarantees did
not require the respondent No. 1 to inform that there was likelihood of invocation of
bank guarantees. Even so, the appellant cannot complain. On 11th June, 1998 itself the
appellant was informed that the respondent No. 1 may invoke the bank guarantees of
Rs. 9 Crores.
The learned counsel for the appellant was unable to dispute the proposition that
Supreme Court had reiterated time and again that Court should be slow to grant
temporary injunction. Only in the case of a fraud of egregious nature. The Court could
grant temporary injunction. The existence of such a fraud should be known to the Bank
and this fraud should be established from record. It would be unnecessary to burden
this order with long quotations from the aforesaid judgments of Supreme Court.
Suffice it to say that such view was taken in the cases of Dwarikesh Sugar Industries
Ltd. (supra), U.P. State Sugar Cooperation (supra), Ansal Engineering Project Ltd.
(supra), State of Maharashtra v. National Construction, Company Ltd. (supra) Larsen &
Toubro (supra), Hindustan Steel Workers Construction, Ltd. v. G.S. Atwal & Co. Engs.
Pvt Ltd. Tarapore & Co. and another, (supra); Murarka Cables & Conductors Ltd.
(supra); National Thermal Power Corporation Ltd. (supra), Svenska v. Indian Charge
Chrome (supra), and U.P. Cooperative Federation Ltd. (supra). The other ground that
entitles to interfere is irretrievable injury or damage. In the case of U.P. State Sugar
Corporation v. Sumac International Ltd. MANU/SC/0380/1997 : (1997) 1 SCC 568, at
page 574, Sujata v. Manohar, J., stated in paragraph 12 as follows : -
12. The law relating to invocation of such bank guarantees is by now well
settled. When in the course of commercial dealings an unconditional bank
guarantee is given or accepted, the beneficiary is entitled to realize such a bank
guarantee in terms thereof irrespective of any pending disputes. The bank
giving such a bank guarantee in terms thereof irrespective of any pending
disputes. The bank giving such a guarantee is bound to honour it as per its
terms irrespective of any dispute raised by its customer. The very purpose of
giving such a bank guarantee would otherwise be defeated. The Courts should,
therefore, be slow in granting an injunction to restrain the realization of such a
bank guarantee. The Courts have carved out only two exceptions. A fraud in
connection with such a bank guarantee would vitiate the very foundation of
such a bank guarantee. Hence, if there is such a fraud of which the beneficiary
seeks to take advantage, he can be restrained from doing so. The second
exception relates to cases where allowing the encashment of an unconditional
bank guarantee would result in irretrievable harm or injustice to one of the
parties concerned. Since in most cases payment of money under such a bank
guarantee would adversely affect the bank and its customer at whose instance
the guarantee is given, the harm or injustice contemplated under this head
must be of such an exceptional and irretrievable nature as would override the
terms of the guarantee and the adverse effect of such an injunction on
commercial dealings in the country.....
The learned counsel for the appellant was unable to show any fraud in formation of two

agreements and the two bank guarantees. The learned counsel tried to argue that the
respondent No. 1 committed fraud by misrepresentation, For this purpose the learned
counsel for the appellant drew the attention of this Court in the case of Hindustan Steel
Workers Construction Ltd. v. Tarapore & Co. and another MANU/SC/0582/1996 : (1996)
5 SCC 34, in paragraph 18 at page 45 of which, Nanawati, J., stated that: -
A demand by the beneficiary under the bank guarantee may become fraudulent
not because of any fraud committed by the beneficiary while executing the
underlying contract but it may become so because of subsequent events or
circumstances. We see no good reason why the courts should not restrain a
person making such a fraudulent demand from enforcing a bank guarantee.
It was sought to be argued on the basis of above statement of law that the respondent 1
misrepresented to the Banks, in question, that it was entitled to encash the bank
guarantees by misrepresenting that the appellant had not fulfilled any of the terms of
the bank guarantees. It demanded more than it could recover under the procurement
agreement. It may be noted herein that the finding of this Court is that the two bank
guarantees were given to secure the performance of the agreements. According to the
respondent No. 1, more than Rs. 9 Crores, besides claim of damages is due against the
appellant under both the agreements, the accounts of which is also not settled. The
appellant, on the other hand, disputes those allegations and says that it shall be entitled
to claim damages for the breach of the contracts. Now, this dispute cannot be decided
by the Court at the time of issuing injunction. It is well established by the various
decisions of Supreme Court that merely because there is dispute between the parties
which is liable to be decided in an appropriate forum a fraud cannot be inferred. The
demand of the respondent No. 1 was strictly according to terms of the bank guarantees,
in question. There is no merit in the argument that the term "any of the conditions" in
the two agreements mentioned in Clause 2 of the bank guarantees means "all the
conditions". If this argument is accepted, both the bank guarantees shall become
meaningless. These guarantees were to continue during the subsistence of agreement
till the full accounts were settled and liabilities of either parties were discharaged, or till
the duration for which the bank guarantees were given. They were issued to cover the
default of the appellant, if any. The interpretation suggested by the appellant shall
render the bank guarantees otiose.
This is not way to interpret a document. The interpreting authority is required to give it
the meaning intended by the parties unless it is palpably absurd. The decision rendered
by Gujrat High Court in the case of M/s. R.C. Thakkar v. Gujrat Housing Board.
MANU/GJ/0087/1973 : AIR 1973 Guj 34, does not advance the case of the appellant.
The appellant had failed to establish fraud. The decision of a learned single Judge of
Delhi High Court, in the case of M/s. Synthetic Foams Ltd. v. Simplex Concrete Piles
(India) Pvt. Ltd. MANU/DE/0214/1987 : AIR 1988 Delhi 207, is contrary to established
principles of law. The learned single Judge has gone to the extent of saying that when
there is term in the bank guarantee that it shall be encashable on breach of conditions
of the agreements, the duty of the person, availing the bank guarantee is to give in
letter of invocation all the bundle of facts which form the cause of action for a plaint.
However, the court came to the conclusion in favour of grant of injunction on the
ground that contract was cancelled by the defendants without any fault of the plaintiff
due to technical reason and certain funds were withheld by the defendants.
The learned counsel for the appellant tried to bring his case within the other category
under which the Courts grant temporary injunction. It was fervently appealed to this
Court that the appellant is heavily indebted and is almost in mori-bund state. The

livelihood of soyabean seed growers and the procurers etc. depends upon the
continuation of the appellant. Refusal to grant injunction would be the last straw that
would break the back of the camel.
There appears to be no merit in this argument. The case of irretrievable injury or harm
would not depend upon the financial condition of the appellant. It would depend upon a
circumstance when the appellant, in no circumstance, would be able to get restitution.
In the case of Svenska v. Indian Charge Crome. Fed. MANU/SC/0138/1994 : (1994) 1
SCC 502. It was pointed out that irretrievable injury should be like an injury as was
given in the case of Itik Corporation v. Forest National Bank of Boston, 566. Ed. (Supp.
1210. It is obvious that there is no situation in this case like the calamity that happened
in that case, when on account of revolution in Iran, the guarantors or the principal
debtors suffered. The Court-below has safe-quarded the interest of the appellant by
requiring the respondent No. 1 to give adequate security. In the case of U.P. Sugar
Corporation v. Sumac International Ltd. MANU/SC/0380/1997 : (1997) 1 SCC 568, in
paragraph 7, at page 577, it has been held that mere fact the person, invoking the bank
guarantee is a sick company, will also not give rise to irretrievable injury, in this case
too it was held that situation must be as was in the case of itik Corporation (supra), for
grant of temporary injunction.
The learned counsel for the respondent No. 1 argued that the appellant has not
established its case and it is not entitled to relief of temporary injunction because it has
suppressed factual material from the eyes of the Court. It did not disclose the certain
facts and stated only those facts which suited it. Even in the amendment it did not
choose to reveal the facts. There is substance in the argument of the learned counsel for
the respondent No. 1. The appellant did not refer to in its application that provisional
accounts were settled and signed by the parties. It gave only partial picture to the
Court. There was default of suppression of facts. The appellant is thus not entitled to
equitable relief of temporary injunction.
The learned counsel for the appellant stated that the appellant shall suffer because the
respondent No. 1 is going to encash the bank guarantees, in question, without
furnishing the bank guarantee till arbitration case is decided. Sri A.K. Chitaley, learned
counsel for the respondent No. 1, stated that such a bank guarantee for indefinite
period is not given by Banks. However, he gave an undertaking to the effect that
respondent No. 1 shall continue to renew the bank guarantee furnished till the dispute
between appellant and the respondent No. 1 is finally settled.
The result of the aforesaid discussion is that this appeal fails and is dismissed subject
to the observations made by this Court hereinabove, in paragraphs 31 and 32 of this
order. The stay order dated 6.8.1998, earlier passed by this Court, is hereby vacated.
The consequence would be that the respondent No. 1 shall be entitled to encash the
cheque dated 5.8.1998, issued by the respondent No. 2. The respondent No. 3, which
has stayed its hands of paying Rs. 3 Crores to the respondent No. 1, shall now pay it to
respondent No. 1 without any delay or hinderance for the reason, the order of this Court
dated 6.8.1998. Nor can the respondent No. 3 take advantage of its own earlier default
to the detriment of respondent No. 1. The appellant shall bear its own costs and pay
that of the respondent No. 1. Counsel fee as per schedule, if certified.
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MANU/MP/0547/1998

Equivalent/Neutral Citation: 1999(1)MPJR242

IN THE HIGH COURT OF MADHYA PRADESH

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Soyabeans beyond the above specifications would not be acceptable unless

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