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Adani Agri Fresh Ltd. v. Mahaboob Shariff
Factual and Procedural Background
The plaintiff filed O.S. No. 991/2011 in the trial court alleging that the third defendant supplied eight loads of apples (Farm-Pik and Kashmeer varieties) during March and April 2010, the total value being Rs. 62,32,323/-. The first and second defendants (banks) had issued bank guarantees for different periods and amounts: Bank Guarantee 3/2010-11 (24.12.2010 to 23.12.2011) for Rs. 15,00,000/-; Bank Guarantee 4/2010-11 (10.02.2011 to 09.02.2012) for Rs. 15,00,000/-; and Bank Guarantee 5/2010-11 (09.02.2011 to 08.02.2012) for Rs. 40,00,000/-. The plaintiff alleged that the apples were decayed and destroyed due to improper transportation (not sent in AC functioning lorries) and that he could not sell even one quarter of the consignment, causing large loss. The plaintiff sought, among other reliefs, a permanent injunction restraining the banks from paying the guaranteed amounts to the third defendant and alternatively restraining the third defendant from receiving the amounts, and filed an application under Order 39 Rules 1 and 2 read with Section 151 CPC for an ad-interim ex parte temporary injunction.
The trial court (Principal I Civil Judge, Mysore) on 10.08.2011 passed an interim order restraining the first and second defendant banks from making payment of the scheduled amounts to the third defendant until disposal of the suit, subject to conditions including that the plaintiff extend the bank guarantees every six months until disposal and that, if the plaintiff loses the suit, he shall compensate the third defendant by paying interest at 18% per annum on the total value of the goods from the date of suit until disposal.
The third defendant appealed to the lower appellate court in M.A. No. 68/2011. The lower appellate court (II Additional Senior Civil Judge, Mysore) confirmed the trial court's order and dismissed the appeal; the opinion contains two references to the appellate order's date (17.12.2011 in the opening paragraphs and 17.12.2013 later). The third defendant then filed the present writ petition challenging the concurrent orders of the courts below. The High Court heard senior counsel for the petitioner and counsel for the respondent and dismissed the writ petition, directing expeditious disposal of the underlying suit by the trial court within nine months.
Legal Issues Presented
- Whether a bank is bound to honor a bank guarantee on presentation notwithstanding an underlying dispute between the beneficiary and the applicant, and whether a court may restrain a bank from honoring such guarantee.
- Whether exceptions to the duty to honor a bank guarantee (notably fraud and cases causing injustice) apply so as to justify interim injunctions restraining payment under a bank guarantee.
- Whether the interlocutory order passed by the trial court (and confirmed by the lower appellate court) restraining banks from honoring guarantees was illegal or perverse in the circumstances of this case.
Arguments of the Parties
Petitioner's (Third Defendant's) Arguments
- Once a bank guarantee is issued, the bank is duty bound to respect and honor it when bills are presented by the beneficiary; the bank cannot withhold payment on the ground of a dispute between the beneficiary and the applicant.
- If there is any dispute between the beneficiary and the principal on whose behalf the bank makes payment, the remedy lies against that principal and not by refusing to honor the bank guarantee.
- The bank cannot resile from its obligation to pay under a bank guarantee that was issued for consideration; restraining a bank from honoring guarantees after transactions have been effected is contrary to established commercial law.
- The petitioner relied on the following authorities in support of this position: (2007) 6 SCC 470 Mahatma Gandhi Sahakara Sakkare Karkhane v. National Heavy Engg. Coop. Ltd.; (2011) 8 SCC 249 Ramrameshwari Devi v. Nirmala Devi; AIR 2007 SC 2798 Himadri Chemicals Industries Ltd. v. Coal Tar Refining Co.
Respondent's (Plaintiff's) Arguments
- While bank guarantees are normally to be honored on presentation, there are two recognised exceptions: fraud and instances where honoring the guarantee would cause injustice to a party.
- The plaintiff contends that the apples supplied were decayed and destroyed due to negligent transportation by the third defendant; photographs were produced before the trial court and representatives of the third defendant verified the condition on arrival, and the objection was raised immediately.
- Honoring the bank guarantee would amount to making payment to the third defendant and would cause injustice to the plaintiff; the trial court's order protects the interests of the plaintiff while also safeguarding the third defendant by directing compensation (interest) should the plaintiff fail in the suit.
- The respondent relied on several authorities, including (2002) 2 SCC 319 Oushph Mathar v. M. Abdul Khader; AIR 1991 SC 1494 Maninariman v. Firoz; AIR 1987 SC 117 Chandavarkar Sita Ratna Rao v. Ashalata S. Guram; (2000) 3 SCC 581 United India Insurance Co. Ltd. v. Rajendra Singh; and others listed in the record.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| (2007) 6 SCC 470 — Mahatma Gandhi Sahakara Sakkare Karkhane v. National Heavy Engg. Coop. Ltd. | Relied upon by petitioner to support the proposition that banks must honor bank guarantees and cannot withhold payment on presentation. | The opinion records this authority as relied upon by the petitioner's counsel. The court's written reasons do not specifically analyse this precedent point-by-point; instead the court considered the pleadings and materials and concluded the trial court's order was not illegal or perverse. |
| (2011) 8 SCC 249 — Ramrameshwari Devi v. Nirmala Devi | Cited by petitioner in support of the argument that bank guarantees should be enforced as issued. | Listed as relied on by petitioner. The judgment does not set out a detailed application of this case to the facts; the court based its decision on pleadings, materials, and the trial court's balancing of interests. |
| AIR 2007 SC 2798 — Himadri Chemicals Industries Ltd. v. Coal Tar Refining Co. | Relied upon by petitioner for the general principle of honoring bank guarantees. | Cited by petitioner; the High Court's order does not expressly engage with the specific holding of this precedent but affirms the trial court's interim order after reviewing the record. |
| (2002) 2 SCC 319 — Oushph Mathar v. M. Abdul Khader | Relied upon by respondent in support of exceptional circumstances permitting interference with bank guarantees (e.g., fraud/injustice). | Recorded as cited by respondent. The court's reasoning does not expressly analyse this authority, but the court accepted that exceptions (fraud/injustice) exist and found the trial court's order within legal bounds. |
| AIR 200 SC 3495 — Kaimji v. Primary High School | Cited by respondent (as supporting authorities on exceptions or procedural principles). | Cited by respondent; the court's order does not expressly apply this precedent in detailed analysis. |
| AIR 1991 SC 1494 — Maninariman v. Firoz | Cited by respondent among authorities on restraint and exceptional relief. | Cited by respondent; not specifically analysed by the High Court in its short-order reasoning. |
| AIR 1987 SC 117 — Chandavarkar Sita Ratna Rao v. Ashalata S. Guram | Cited by respondent; an authority relied upon in the respondent's submissions. | Cited by respondent; the High Court's reasons do not expressly parse or rely upon this case in isolation. |
| 1954 SCC 565 — Varinas and Amarnatha | Cited by respondent as part of the body of authorities relied upon. | Cited by respondent; no discrete application of this precedent is set out in the High Court's reasoning. |
| (2000) 3 SCC 581 — United India Insurance Co. Ltd. v. Rajendra Singh | Cited by respondent for principles relevant to interim relief and protection of parties' rights. | Cited by respondent; the court's order does not specifically discuss this authority but upholds the trial court's balancing of interests. |
| 1968 (1) Mys. LJ 553 — Rangamma v. Krishnappa | Cited by respondent (local precedent listed in the record). | Cited by respondent; the High Court's reasons do not detail how this specific authority influenced the decision. |
Court's Reasoning and Analysis
The court examined the plaint and materials on record, noting that the plaintiff had specifically alleged that approximately 75% of the apples could not be sold and that this fact was brought to the notice of representatives of the third defendant immediately upon arrival. The court observed that at the interlocutory stage it was not possible to conclusively determine whether the conduct of the third defendant amounted to fraud or negligence; such determinations require a full trial.
The High Court reviewed the trial court's interim order and concluded that it had been passed after considering the pleadings and relevant materials. The High Court found no illegality or perversity in the trial court's direction restraining the banks from honoring the guarantees. The court emphasised that the trial court had been cautious to safeguard the third defendant's interest by directing that, in the event the plaintiff failed, the plaintiff would have to pay the third defendant interest at 18% per annum on the total value of the goods from the date of the suit until disposal.
The High Court also reviewed the lower appellate court's order (which had confirmed the trial court) and found that the appellate court had carefully considered the materials and concluded that the trial court's order was in accordance with law and settled principles. On that basis, the High Court dismissed the writ petition for lack of merits.
Note: The opinion records authorities cited by both sides, but the High Court's short-order reasoning rests on assessment of pleadings and materials and a conclusion that the trial court's interim balancing of interests was lawful; it does not contain an extended point-by-point application of each cited precedent.
Holding and Implications
Holding: The writ petition is DISMISSED. The High Court upheld the concurrent interim order of the trial court (and the confirmation thereof by the lower appellate court) restraining the first and second defendant banks from honoring the bank guarantees in question until the disposal of the suit, subject to the conditions imposed by the trial court.
Implications:
- The direct effect is that the trial court's interim order (which restrains the banks from making payment under the guarantees but requires the plaintiff to extend the guarantees periodically and to pay interest to the third defendant should the plaintiff fail) stands upheld by the High Court.
- The High Court found no illegality or perversity in the interim order and therefore declined to exercise writ jurisdiction to interfere with the concurrent orders below.
- The court directed the trial court to expedite trial of the suit and dispose of it within an outer limit of nine months from the date of the High Court's order.
- The opinion indicates that the decision was made by applying settled principles and the particular facts on record; the High Court's order does not purport to create new law or a novel precedent beyond affirming that, in appropriate cases, courts may restrain banks from honoring guarantees where interlocutory considerations of fraud or injustice are reasonably pleaded and supported by materials.
ORDER
This writ petition is filed seeking to set aside the order dated 10.08.2011 passed by the Principal I Civil Judge, Mysore, (herein after referred as trial Court) in IA No. 1 in O.S No. 991/2011 and the order dated 17.12.2011 passed by the II Additional Senior Civil Judge, Mysore, (hereinafter called as Lower Appellate Court) in M.A No. 68/2011.
2. The parties are referred to as per their ranking before the trial court. The petitioner herein is the defendant No. 3 and the first respondent is the plaintiff in O.S No. 991/2011.
3. The plaintiff has filed a suit before the trial court alleging that the third defendant has supplied 8 loads of apples to the plaintiff and in respect of the cost of the said apples, bank guarantees were issued by the first and second defendants for different periods. Bank Guarantee 3/2010-11 was given for the period from 24.12.2010 to 23.12.2011 for a sum of Rs. 15,00,000/-. Bank Guarantee No. 4/2010-11 was covering for the period from 10.02.2011 to 09.02.2012 for a sum of Rs. 15,00,000/- and Bank Guarantee No. 5/2010-11 was for a period of 09.02.2011 to 08.02.2012 for a sum of Rs. 40,00,000/-.
4. The aforesaid eight loads of apples, namely, Farm-Pik and Kashmeer apples in boxes were supplied by the third defendant to the plaintiff during March and April 2010, the total value of which was Rs. 62,32,323-/-. Since the first and second defendant banks had issued bank guarantees, the said defendants were obliged to pay the cost of the apples to the third defendant. However, it is the case of the plaintiff that the eight loads of the apples supplied by the third defendant were found decayed and destroyed due to improper maintenance in transportation as they had not sent the same in AC functioning Lorries. It is the case of the plaintiff that due to the said negligent act of the third defendant, he could not sell the apples even for 1/4th amount of the value of the said goods and therefore he has lost huge amount in the transaction. Therefore it is the case of the plaintiff that bank guarantees were not required to be entertained by the banks. Hence he has filed a suit praying for grant of permanent injunction restraining the first and second defendant banks from paying guaranteed amount to the third defendant until and unless the claim of the plaintiff and the third defendant is settled amicably or through the court of law. The plaintiff had prayed for an alternative relief restraining the third defendant from receiving the said amount from the first and second defendant banks until and unless the matter is settled amicably or through the court with proper costs and other reliefs. Along with the suit the plaintiff had filed an application under Order 39 Rule 1 and 2 read with Section 151 of CPC praying for an ad-interim ex-parte temporary injunction against first and second defendant banks thereby prohibiting them from making payment of amount to the third defendant in any manner or vice-versa till the disposal of the suit between the plaintiff and the third defendant.
5. The trial court after hearing the respondent had passed the interim order on 10.08.2011 restraining first and second defendant banks from making payment of schedule amount to the third defendant till the disposal of the suit either amicably or judiciously between the plaintiff and third defendant subject to the conditions that the plaintiff shall extend the bank guarantee executed through first and second defendant banks in favour of the third defendant for every six months, till the disposal of the suit; after expiry of the period under the bank guarantee No. 5/2010-11 for the period commencing from 10.02.2011 to 09.02.2012 The trial court has also further directed that in case, the plaintiff files in the suit, the plaintiff shall compensate third defendant by paying interest at the rate of 18% per annum on the total value of the goods to the third defendant from the date of suit till the disposal of the suit.
6. The third defendant being aggrieved by the order passed by the trial court filed an appeal in M.A No. 68/2011 before the second Additional Senior Judge, Mysore. The said lower appellate court after hearing both the parties passed an order dated 17.12.2013 confirming the order passed by the trial court and thus dismissing the miscellaneous appeal filed by the third defendant. Hence the third defendant is before this court challenging the concurrent findings of the courts below.
7. Heard Sri. Jayakumar S. Patil, learned senior counsel for the petitioner and Sri. H.R Hegde Hudlamane, learned counsel for the first respondent.
8. Learned counsel for the petitioner submits that once bank guarantee is issued, the bank is duty bound to respect the bank guarantee issued by it and that once bills are presented by the person in whose favour the bank guarantee is issued, the bank cannot withhold the payment. If there is any dispute, it is for the beneficiary of such bank guaranty to proceed against such person on whose behalf the bank makes the payment.
9. Sri. Jayakumar S. Patil, learned senior counsel vehemently argued that on no ground the bank can resile from an obligation of a bank guarantee since the bank guarantee has been issued for consideration by the bank and that all the commercial transactions have been carried on by issuing bank guarantees and the order passed by the trial Court restraining the bank from honoring the bank guarantees after the transactions have been effected is against the settled principles of law. Therefore he submits that both the courts below have not considered this aspect of the case in the right perspective and hence he prays that this writ petition may be allowed and the orders passed by the trial court as well as the lower appellate court may be set aside. Learned senior counsel also relied on the following rulings in support of his contention:
1. (2007) 6 SCC 470 in the case of Mahatma Gandhi Sahakara Sakkare Karkhane v. National Heavy Engg. Coop. Ltd.
2. (2011) 8 SCC 249 in the case of Ramrameshwari Devi v. Nirmala Devi
3. AIR 2007 SC 2798 in the case of Himadri Chemicals Industries Ltd. v. Coal Tar Refining Co.., leaned counsel for the first respondent on the other hand submits that normally the bank guarantee has to be honored when the bills are presented to it by the beneficiary of the bank guarantee. However there are two exceptions to the said proposition one being fraud and second one injustice to the party. It is also further submitted by him that it is the case of the plaintiff that the apples supplied by the third defendant were decayed and destroyed and to substantiate the same learned counsel has produced certain photographs which were presented before the trial court also indicating therein that the transportation of the apples were not done as expected and that if the bank guarantee is honored plaintiff would suffer injustice. It is also his submission that this objection of the plaintiff has been raised immediately after receipt of the apples supplied by the third defendant and the representatives of the third defendant have in fact verified the condition of the apples immediately after their arrival to Mysore. It is his submission that the said act of the third defendant is not only negligent it also causes injustice to the plaintiff. If once the bank guarantee is honored, it is nothing but the payment being made to the third defendant. On the other hand it is his submission that the trial court has taken caution to see that no injustice is done to the third defendant. The trial Court has held that if the plaintiff fails in the suit he has to pay to the defendant No 3. the entire cost along with an interest at the rate of 18% per annum and thus he submits that the interest of the third defendant has also been safeguarded.
10. Learned counsel for the first respondent has also cited the following rulings in support of his case.
1. (2002) 2 SCC 319 (p) in the case of Oushph Mathar v. M. Abdul Khader
2. AIR 200 SC 3495 (p) in the case of Kaimji v. Primary High School
3. AIR 1991 S.C 1494 (p) in the case of Maninariman v. Firoz
4. AIR 1987 SC 117 (p) in the case of Chandavarkar Sita Ratna Rao v. Ashalata S. Guram
5. 1954 SCC 565 (p) in the case of Varinas and Amarnatha
6. (2000) 3 SCC 581 (p) in the case of United India Insurance Co. Ltd. v. Rajendra Singh
7. 1968 (1) Mys. LJ 553 in the case of Rangamma v. Krishnappa
11. I have carefully gone through the materials placed on record, more particularly, the plaint averments in which the plaintiff has categorically stated that the fruits supplied by the defendants have been decayed and were not at all suitable for sale by the plaintiff. The suit has been filed on 04.06.2011 and in the suit itself he has taken a contention that nearly 75% of the apples supplied to him could not be sold and this fact has been brought to the notice of the representatives of third defendant also. Under these circumstances, the stand taken by the plaintiff in his suit appears to be reasonable though at this stage, no opinion can be recorded as to whether the action of the third defendant amounts to fraud or negligence. It can only be decided during the full pledged trial.
12. However, on a careful consideration of the order passed by the trial court it is seen that the said order has been passed after considering the pleadings of the parties and also the relevant materials on record. I do not find any illegality or perversity in the order passed by the trial court in directing the second and third defendant banks not to honor the guarantees' executed in favour the third defendant. The trial court is also cautious enough to see that in the event of failure of the plaintiff, he is directed to compensate the third defendant by paying interest at the rate of 18% per annum, which, I am of the opinion, is to safeguard the interest of the third defendant. Hence I do not see any ground to interfere with the well considered order passed by the trial Court by exercising the writ jurisdiction of this court.
13. I have also gone through the order passed by the lower appellate court confirming the order of the trial court. The lower appellate court after carefully considering the materials again, has come to the conclusion that the order passed by the trial court is in accordance with law and in accordance with the settled principles of law.
Under these circumstances, I am of the opinion that the writ petition has no merits and therefore the same is dismissed.
In view of the fact that huge amount of the petitioner is at stake, the trial court is directed to expedite the matter and dispose of the same as early as possible within an outer limit of nine months from the today.
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