D.K. Kapur, C.J.
(1) This appeal is directed against the order passed on the application of the plaintiff-appellant praying for an injunction to restrain the State Trading Corporation of India and another from enchasing a Performance Bond/Bank Guarantee dated 1st May. 1985. for the sum of Rs. ll,70,000.00 . This Bank Guarantee was issued by the Punjab and Sind Bank in further once of a contract between the plaintiff and the State Trading Corporation. There was a contract to supply 7,500 M.T of Grade ''B'' Indian Basmati Rice between the State Trading Corporation and the Abu Dhabi Municipality. The contract between the plaintiff and the State Trading Corporation was to supply 3,000 M.T. to the foreign buyer, apparently in furtherance of the original contract. The Bank Guarantee was invoked by the plaintiff on 15th June. 1985. In order to prevent the encashment of the Guarantee, the present Suit was instituted along with was filed an application under Order 39, Rules 1 and 2 of the CPC praying for an ad-interim injunction.
(2) The ad-interim injunction was initially granted by the learned Single Judge (Wadbwa J.), but at the final hearing, the injunction was discharged by M.K. Chawla J.
(3) It is the case of the appellant that the contract was frustrated as a result of the notification dated 15th May, 1985. and thus became impossible of performance. It is also claimed that the State Trading Corporation did not suffer any loss due to non-performance and thus the Bank Guarantee cannot to encashed.
(4) The contract contained an arbitration clause allowing for disputes to be referred to arbitration. According to the plaintiff, the contract was frustrated because the Government of India issued a notification dated 15th May, 1985, increasing the minimum export price of Basmati Rice under O.G.L.-3 for Rs. 6,500.00 to Rs. 7,500.00 , and Therefore, the contract which was at a lower price could not be carried into effect. The claim, Therefore, is that the State Trading Corporation cannot enforce the indemnity bond and reliance was placed on a judgment of the Supreme Court reported as
(5) The next question is whether the State Trading Corporation can encash the Bank Guarantee when they have suffered no loss and there is no claim by the Abu Dhabi Municipality based on the original contract. The learned Single Judge referred to the clause for Bank Guarantee in the original contract and the terms of the Bank Guarantee and came to the conclusion that there were two conditions required for encashing the Bank Guarantee-(a) the plaintiff should have committed a default in the performance of the contract and secondly, the Corporation should submit a certificate to the Bank which would be final and conclusive and binding on the Bank. The learned Single Judge referred to two judgments-
(6) We are of the view that this matter cannot be viewed in this manner. No doubt, the Bank guarantee to, is enforceable when the circumstances so demand the Court will injunct or restrain the encashment thereof. But, each case has to be adjudged on its own circumstances.
(7) Learned counsel for the respondent has placed strong emphasis on the judgment of this Court in Premier Tyre Ltd. v. State Trading Corporation 1981 R L R 138, where it was held that a Bank Guarantee was equal to an irrevocable letter of credit. According, to that judgment, a Bank Guarantee is an independent contract. It was held as follows :
"Now the law, Therefore, is that whether bank guarantee can be enforced or not by the beneficiary will depend upon the terms of the performance guarantee. The contract between the bank and the respondent Stc is an independent autonomous one. The efficacy of this contract is not controlled by another independent contract between the appellant and the respondent. The encashment of the bank guarantee has nothing to do with the alleged dispute between the appellant and the respondent which must be decided independently on the basis of the terms of that contract, without involving the contract of bank guarantee."
Learned Additional Solicitor General relies heavily on this passage and urges that irrespective of the fact whether the State Trading Corporation has suffered a loss independently of the fact whether there is any claim made by the Abu Dhabi Municipality on the basis of the original contract, the Bank Guarantee can be encased and the State Trading Corporation has absolute right to encash the same. We do not think that judgment in Premier Tyre Ltd. v. State Trading Corporation (supra) can be read as a judgment supporting this extreme position. In order to appreciate the judgment of the Division Bench, it would be useful to refer to the facts giving rise to the claim in that case. M/s Premier Tyre Ltd., was a manufacturer of tyres. The Bank Guarantee was given for the purpose of importing natural rubber which was finalised through the State Trading Corporation. The Bank Guarantee was given with a view to obtaining the supply of natural rubber which M/S Premier Tyre Ltd., required. There was a term in the contract that on the allotment of the goods the payment, for the same would be made and the delivery of the same would be taken within the time prescribed by the State Trading Corporation and in either case the State Trading Corporation would be free to forfeit the earnest money or invoke the Bank Guarantee. Thus, the Bank Guarantee in that case was given in quite different circumstances from the present case. Under the terms of the contract, 360 Mt were allotted to M/S Premier Tyre Ltd., and they had to make payment by 25th May, 1979, which was extended to 24th June, 1979. As the company had not made payment for the balance 160 Mt the Bank Guarantee was invoked, which was the dispute between the parties as to who was at fault and for what reason and these circumstances the appellant applied for an injunction to restrain the encashment of the Bank Guarantee.
(8) As would clearly appear from the facts, the Bank Guarantee in that case was encashable on account of the default to make the payment within the stipulated time or to take delivery of 360 Mt of the natural rubber. There being a breach of an obvious obligation, the mere fact that there was dispute regarding the reasons for that breach, would not enable the court to issue an injunction to restrain the encashment of the Bank Guarantee.
(9) It cannot be said from this case that in every case or whatever the terms, the Bank Guarantee can be encased notwithstanding that nothing is due against the same.
(10) What are the fact in the present case ? There is a clause in the main agreement requiring the furnishing of a Bank Guarantee. The sum of the Bank Guarantee is Rs. 11,70,000.00 , which is five per cent of the contract amount. If there is a default on behalf on the supplier to perform all the obligations under the back to back contract, or export contract the State Trading Corporation would have the right to claim damages and would be entitled to invoke the Bank Guarantee and forfeit the amount realised under the supplier''s liability.
(11) Obviously the purpose of the Bank Guarantee is to meet the liability which result from a breach of the contract by the supplier, i.e., the present appellant. As it is the case of the State Trading Corporation itself that there is no loss and there is no claim under the back to back contract, by the Abu Dhabu Municipality, we fail to see how the Bank Guarantee can be encased in the present case.
(12) A number of cases have been cited at the Bar by learned counsel to suggest that the Bank Guarantee can be encased in almost any circumstances, for example, the judgments in R.D. Harbottle (Mercantile) Ltd. & Am. v. National Westminster Bank Ltd & Ors.. (1977)2 All. E.R. 862 and Edward Owen Engineering Ltd. v. Barclays Bank International Ltd. (1978 I All. E.R. 976. But, an analysis of those case and other cases would show that the Bank Guarantee in those cases were encased in quite different circumstances. It was held that it was only in exceptional cases that the courts would interfere with the machinary of irrevocable obligations assumed by Banks. The Bank in this case had undoubtedly given a guarantee which could be encased by the State Trading Corporation, but the question we have to answer is whether the State Trading Corporation is entitled to encash the Bank Guarantee on some filmsy grounds when it itself admits that nothing is claimed by the Abu Dhabu Municipality and nothing has been lost by the State Trading Corporation. Surely, the Bank Guarantee is not to be a source of unjust enrichment. The amount covered by the Bank Guarantee must surely be the amount that is legally recoverable from the appellant.
(13) If the appellant is right in claiming that the contract has been frustrated due to the notification making it illegal the export of Basmati rice below the value of Rs. 7,500.00 per M.T., then surely the contract not be carried out, in which case no obligation would exist. As the matter has yet to be tried by the Court or by the arbitrator, if the matter is referred to arbitration, we fail to understand how it can be determined at this stage that any amount is payable to the State Trading Corporation. Rather, it would appear that no amount is payable to the Stale Trading Corporation but this is only a prima fade view based on the present set of circumstances. This would make it obligatory for the Court to issue a restraint order against the encashment of the Bank Guarantee.
(14) It can be stated at once that a Bank Guarantee its in the nature of an irrevocable letter of credit to pay in certain circumstances. But those circumstances must exist in fact as well as in law before the payment can be physically made. As pointed out by the learned Single Judge, there are two conditions for the encashment of the guarantee-(a) non-performance by the contractor and (b) a demand by the State Trading Corporation based on that non-performance. If the non-performance is the result of frustration then it is not a case of non-performance, but a case in which performance is excused by law. In such circumstances, the Bank Guarantee cannot be invoked. Again, even if there is non-performance, there may be cases in which the nonperformance does not lead to any right to claim damages for breach. Even in such a case, it is difficult to see how the Bank Guarantee can be encashed.
(15) In this type of contract, there are really two contracts. There is a contract between the State Trading Corporation and the purchaser, i.e., the Abu Dhabi Municipality, and there is a contract between the State Trading Corporation and the seller, namely, the plaintiff-appellant. The State Trading Corporation is, Therefore, an intermediary in the contract. There is no direct contract between the plaintiff and the Abu Dhabi Municipality, but there are two contracts. If the Abu Dhabi Municipality does not claim anything for breach of contract, we fail to understand how the State Trading Corporation can claim any amount because it is merely an intermediary between two parties.
(16) On the other hand, if the Abu Dhabi Municipality made a claim however ill-founded, then the appellant would per force have to pay the Bank Guarantee amount without demur. We would like to confine this case to the special facts of the case.
(17) It clearly appears to us that as there h no loss to the State Trading Corporation and no claim by the Abu Dhabi Municipality the Bank Guarantee cannot be invoked. Of course, we would grant the interim injunction only on the condition that the Bank Guarantee is kept alive during the pendency of the Suit. We do not know what the result in suit may be. But, it may be that the Court may eventually hold that the amount is due from the plaintiff-appellant. We allow the appeal and issue the injunction restraining the State Trading Corporation from enforcing the Bank Guarantee. In the circumstances of the case, the appellant will get its costs.
