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Dai-ichi Karkaria Private Ltd., Bombay Vs. Oil and Natural Gas
Commission Bombay and Another

LegalCrystal Citation : legalcrystal.com/332830

Court : Mumbai

Decided On : Jan-29-1991

Reported in : AIR1992Bom309; 1991(4)BomCR631;

(1991)93BOMLR183

Judge : D.R. Dhanuka, J.

Acts : Specific Relief Act, 1963 - Sections 38; Code of Civil Procedure
(CPC), 1908 - Sections 94 and 151 - Order 6, Rule 4 and Order 39,
Rules 1 and 2; Indian Contract Act, 1872 - Sections 15 and 17;
Companies Act, 1956; Customs Act, 1962 - Sections 25; Indian Penal
Code (IPC), 1860

Appeal No. : Notice of Motion No. 3270 of 1989 in Suit No. 3891 of
1989

Appellant : Dai-ichi Karkaria Private Ltd., Bombay

Respondent : Oil and Natural Gas Commission Bombay and Another

Advocate for Def. : M.S. Sanghavi and;Kirit Modi, Advs., i/b;M/s.

Ambubhai Diwanji

Advocate for Pet/Ap. : K.S. Cooper,;G. Vahanvati and;P.M. Modi,

Advs., i/b;M/s. Mulla and;Mulla and;Craigie Blunt and;Caroe, Advs.

Judgement :

ORDER

1. The plaintiff is a company incorporated under the provisions of the

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Companies Act, 1954 carrying on business, inter alia, of manufacture of
speciality chemicals. The 1st defendant is a statutory Corporation
constituted under the provisions of the Oil and Natural Gas Commission
Act, 1959. The 2nd defendant is a nationalised Bank.

2. The plaintiff supplies Pour Point Depressant (PPD)/ Flow Improver to

defendantNo. 1, which, according to the defendant No, 1, is a critical
material successfully developed by the plaintiff to meet the
requirement of defendant No. 1 as an import substitution. At all
material times, Customs duty was payable on the raw material
imported by the plaintiff which was required to be used in manufacture
of the said goods for supplying the same to defendant No. 1.

3. On 4th May 1984, the defendant No. 2 furnished a Bank Guarantee

in favour of the defendant No. 1 at the instance of the plaintiff in a sum
of Rs. 1,50,00,000/-, a copy whereof is annexed as Exhibit `T' to the
plaint in this suit. The said bank guarantee recites that the defendant
No. 1 purchaser had placed a supply order dated 12th December 1983
with the plaintiff for supply of Four Point Depressant/Flow Improver,
Daitro-lity-MNF-1206, hereinafter referred to as 'the said goods'. It was
recited in the said bank guarantee that the plaintiff had requested the
defendant No. 1 to give an ad hoc payment up to an amount not
exceeding Rs. 1,50,00,000/-in that behalf. Prior to the execution of the
said Bank guarantee, it was contemplated by the parties, rightly or
wrongly, that the Government of India might perhaps be persuaded to
refund the amount of Customs duty paid by the plaintiff on the raw
material used by the plaintiff in manufacture of goods to be supplied to
defendant No. 1 under the said order. In this context, it was recited in
the said order that the defendant No. 1 had agreed to make ad hoc
payment to the plaintiff not exceeding Rs. 1,50,00,000/-, provided the
plaintiff undertook to refund the said amount to defendant No. 1 within
10 days from the date of receipt of 'refund of the customs duty on the
imported raw material' from the concerned authorities or within six
months from the date of the guarantee, whichever was earlier, and the
plaintiff agreed to furnish to defendant No. 1 a bank guarantee for a
sum of Rs. 1,50,00,000/- in that behalf. It was recited in the said bank
guarantee that defendant No. 2 irrevocably and unconditionally
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guaranteed as a prime obliger to repay the amount which may be
received by the plaintiff as ad hoc payments, the maximum liability
being to the extent of Rs. 1,50,00,000/-. The defendant No. 2 agreed to
pay the said amount without anydemur merely on a demand from
defendant No. I staling that the plaintiff had failed to repay the said
amount Rs. 1,50,00,000/- or part thereof or that the amount claimed
was for any loss or damage caused, to be suffered or would be caused
or suffered due to nonpayment to the defendant No. I of the amounts
so received. It was also recited in the said bank guarantee that any
such demand made on the bank by defendant No. 1 shall be
conclusive. It is not necessary to state anything more about the
contents of the said bank guarantee at this stage. It is the case of the
defendant No. 1 that relying upon the said bank guarantee furnished
by the 2nd defendant, the defendant No. 1 paid three different sums of
Rs.25 lacs. Rs. 95 lacs and Rs. 28 lacs, aggregating to Rs. 1,48,00,000/-
, to the plaintiff on 26th May 1984 and 6th July 1984 respectively, as a
loan to be returned by the plaintiff to defendant No. 1 in the manner
set out in the bank guarantee. By its letter dated 16th December 1989,
the defendant No. I invoked the said bank guarantee and called upon
the 2nd defendant to pay the said amount. The defendant No. 1
addressed several letters also to defendant No. 2 invoking said bank
guarantee. The said bank guarantee has been extended by the plaintiff
from time to time and is operative up to 28th February 1991.

4. On 27th December 1989., the plaintiff filed the present suit for a
declaration that the impugned demand made by defendant No. 1 on
the 2nd defendant to make payment under the said bank guarantee
was fraudulent, void, illegal and of no effect whatsoever. The plaintiff
has sought a permanent injunction against defendant No. 1 from
enforcing the said bank guarantee against defendant No. 2 from
making any payment on the said bank guarantee.

5. By this notice of motion, the plaintiff seeks to restrain the defendant

No. 1 from in any manner invoking the said bank guarantee and/or
receiving any amount from defendant No. 2 thereunder. By this notice
of motion, the plaintiff also seeks to restrain the defendant No. 2 from
making any payment to defendant No. 1 under the said
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bankguarantee. The plaintiff is not challenging the said bank guarantee
in its entirety. The said bank guarantee requires the plaintiff to pass on
the amount of refund of customs duty as and when received from the
Government of India within 10 days from the receipt thereof. The
plaintiff accepts this part of the bank guarantee as binding on it. The
plaintiff has not received refund of 'costoms duity' paid on imported
raw material used in manufacture of goods supplied to defendant No. I.
The plaintiff is impugning the later part of the bank guarantee in so far
as it requires the plaintiff to pay the amount in question to defendant
No. 1 irrespective of non-receipt of amount of refund of customs duty
from Government of India on expiry of six months from the date of the
guarantee and the invocation of bank guarantee by defendant No. 1 on
ground of duress, fraud and special equities arising from certain
situation. The above referred amount of Rs. l,48,00,000/-is described
by defendant NO. 1 in the correspondence as 'Advance'. The said
amount is described by defendant No. 1 as an 'ad hoc payment' in the
said bank guarantee. The said amount is now described by defendant
No. 1 as a loan in paragraph 7 of the affidavit in surrejoinder dated 5th
February 1990.

6. On or about 18th/ 19th April 1990, the defendants were served with
the writ of summons in this suit requiring them to file written
statement within the time specified therein. The said time has already
expired long back. The defendants have not filed any written
statement so far. The plaintiff has filed a compilation of documents.
Both the parties have filed written submissions in addition to making
exhaustive oral arguments through their learned counsel.

7. The plaintiff has sought an interim injunction restraining defendant

No. 1 from encashing the said bank guarantee inter alia on the ground
of economic duress amounting to coercion, fraud and special equities
of the situation.

8. It is well-settled that Court of law are not entitled to interfere with

the irrevocable obligations undertaken by the bank under an
irrevocable letter of credit or an unconditional bank guarantee except
in cases where fraud is proved to the satisfaction of the Courtor some

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other recognised ground of exceptionavailable in law or in equity is
clearly made out. In large number of decisions delivered by the highest
Court of our country it had been held repeatedly that the contract of
bank guarantee is an independent autonomous Contract between the
bank and the beneficiary and its autonomy is ordinarily not affected by
the main contract between the supplier and the purchaser of the goods
or the disputes which may arise between them in respect of their rights
and obligations under such contract. It has also been held in some
casesthat this principle of bank guarantee being an independent or
autonomous contract cannotbe extended to protect the unscrupulous
beneficiary. The defendant No. 1 has denied every single allegation
made against it by the plaintiff in respect of the alleged facts on the
basis of which the plaintiff has pleaded economic duress, fraud and
special equities. The defendant No. 1 has contended that the plaint
does not disclose material particulars in support of the so-called plea of
duress or fraud as required under Order VI, Rule 4 of the Code of Civil
Procedure. According to defendant No. 1, the plaint discloses no cause
of action. It has been contended on behalf of defendant No. 1 by its
learned counsel that clear proof of fraud and irretrievable injustice are
the only two exceptions available to the party seeking injunction in a
matter of this nature and grounds like economic duress or special
equities from the situations are not recognised by judicial decisions as
valid grounds for seeking relief in support of plea for an injunction
restraining encashment of bank guarantee. It has been contended by
the learned counsel for defendant No. 1 that the ground of special
equity arising from the situation recognised in one of the earlier
Calcutta cases i.e. Texmaco Ltd. v. State Bank of India, : AIR1979Cal44
is no 'longer available to the party seeking injunction in view of the
observations made to the contrary by the Supreme Court in its latest
judgment in the case of U.P. Co-operative Federation Ltd. v. Singh
Consultants and Engineers' (P) Ltd.reported in (1988) SCC 174. The
learnedcounsel for the plaintiff submits that economic duress
amounting to corcion, special-equities arising from a particular
situation,fraud, irretrievable injustice are some of the recognised
exceptions available to the plaintiff seeking injunction and the
proposition oflaw formulated by the learned counsel fordefendant No. 1

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in this behalf is too narrowand is incorrect.

9. The facts and circumstances leading to the filing of the suit are
peculiar and stand by themselves. I am conscious of the well-settled
proposition of law that as a general rule, no interim injunction can be
granted in a matter of this nature in view of the bank guarantee being
irrevocable, unconditional and the bank having undertaken its
obligation to pay the amount payable on demand without any demur
and in view of the fact that the bank has undertaken to treat the
demand of defendant No. 1 for repayment of the said amount as
conclusive. With this preface and caution, 1 shall have still to consider
whether the plaintiff has really made out a strong prima facie case to
warrant grant of an interim injunction as the above referred general
rule is subject to recognised exceptions there to. Before 1 discuss the
authorities cited by the learned counsel on either side and the
passages from standard law books, it shall be necessary to set out the
material facts in proper sequence.

10. Before I proceed to set out the facts, I must state at the outset that
the facts, circumstances and the events will have to be classified in
three different parts. It shall have to be separately considered as to
what was the commitment of defendant No. 1 prior to 12th December
1983. It shall have to be considered as to whether the defendant No. 1
induced the plaintiff to believe that the defendant No. I was agreeable
to pay the price for the goods supplied and to be supplied at the
domestic rate and even a binding contract was arrived at between the
parties on that footing by 31st October 1983. It shall have to be
considered as to whether prior to 12th December 1983, the defendant
No. 1 induced the plaintiff to import more and more raw material and
pay customs duty thereon and manufacturefurther goods with speed in
view of their urgent requirement, so as to place the plaintiff in a
situation of financial and economic crisis in case the defendant No. 1
later on backed out of the commitment alleged to have been made to-
the plaintiff by defendant No. 1 as aforesaid. It must be borne in mind
that before even placing the order of 12th December 1983, the plaintiff
had already supplied part of the goods to defendant No. 1 in the month
of November 1983 and had submitted its invoices which were all
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accepted by defendant No. 1 without any demur. In other words, I must
ask myself the question as to what was the situation in which the
plaintiff was placed on the day on which formal written order dated
12th December 1983 was placed by defendant No. 1 with the plaintiff.
The second chapter of relevant events will have to be considered
together in respect of the period commencing from 17th December
1983 when the plaintiff received the formal written order dated 12th
December 1983 and 4th May 1984 when the said bank guarantee was
furnished by the plaintiff. Lastly I will have to consider the facts and
events pertaining to the period after the execution of the said bank
guarantee until the filing of the suit. By and large, 1 see no difficulty in
making prima facie assessment of the facts of this case at this stage,
though no oral evidence is led, as most of these facts are borne out by
correspondence, invoices and other documents. Subject to the rights of
the parties to lead oral and documentary evidence at the trial of the
suit and rebut my strong prima facie view of the matter on facts as
now recorded hereinafter, I shall proceed to narrate the facts in so far
as the same are germane for the disposal of this notice of motion. The
material facts are as under:

(a) In or about April 1983, the defendant No. 1 floated a tender for its
requirement of 7,500 M.T. of the said goods described by the parties in
their correspondence as 'PPD'. The plaintiff submitted its quotation to
defendant No. 1 in that behalf on 29th June 1983 offering to supply
3,600 M.T. of the said goods.

(b) By a notification No. 210/82 dated 10th September 1982, issued

under sub-section (1)Central Government exempted raw materials and
components required for the manufacture of goods to be supplied to
'International Development Association , or international Bank for
Reconstructions and Development of Bilateral or Multilateral aided
projects when imported into India' from Customs duty payable under
the Customs Tariff Act, 1975 and the whole of the additional duly
livable thereon. On 2oth July 1983, the Government of India issued
Notification Not GSR-571(E) in exercise of the powers conferred on it
by sub-section (1) of S. 25 of the Customs Act, 1962 amending the
above referred notification dated 10th September 1982 so as to bring
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within its sweep importation raw materials and components required
for manufacture of goods to be supplied to Oil and Natural Gas
Commission. Thus the party intending to import raw materials and
components to be used in manufacture of goods to be supplied to
defendant No. 1 became entitled to obtain import licence and import
raw materials and components thereunder duty free, subject to the
importer satisfying the conditions which may be prescribed. This
notification did not make any provision for refund of amount of
customs duty. I am given to understand by the learned counsel arguing
this case that the necessary procedure for availing of these benefits
was prescribed by the Government for the first time on or about 7th
February 1984.

(c) On 5th September 1983, the Government of India issued a circular

bearing No. 1(15)/83-EAC, stating therein that supplies of certain
category of goods by the supplier to defendant No. 1 will be treated as
'deemed exports' and various incentives will be available to the
plaintiff in case all the conditions of the said circular were complied
with. It is common ground that the Government of India is not prepared
to treat the supplies under the suit contract as 'deemed export'.
Perhaps only supplies are to be treated as 'deemed export' where the
duty free raw material is imported under a special import licence for
specific purpose of manufacturing the goods with help of such duty
free materials and such finished goods aresupplied to defendant No. 1.
It is common ground that the suit supplies were made by manufacture
of goods from the duty paid raw material already in stock and also raw
material obtained during pendency of con-(ract on payment of customs
duty.

(d) The learned counsel for the plaintiff has repeatedly stated with
some solemnity at the bar that the defendant No. 1 is a monopoly
buyer of the said goods and the plaintiff 'manufacture these goods for
particular project of defendant No. 1 so as to meet the requirement of
defendant No. 1 and that the supplies of such goods cannot be diverted
to any other customer.

(e) On or about 10th October, 1983, the plaintiff received a telex

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indent from the 1st defendant whereby the 1 st defendant required of
the plaintiff to supply urgently 1,500 M.T. of P.P.D. at the rate of Rs.
29,000/-per M.T. At this state itself, something will have to be stated to
explain the price mechanism germane for the purpose of grasping the
controversial contentions of the parties urged in this case. The plaintiff
quotes normal domestic price for supply of these goods in India after
taking into consideration all the duties paid thereon, like Customs duty,
Excise duty, etc. Since the plaintiff imports raw material on which duty
was payable at the material time, the quotation of the plaintiff for
normal domestic price will have to be viewed in this perspective. It is
common ground that the duty component is to the extent of about Rs.
9.95 per Kg. At all material times, the plaintiff quoted domestic price of
Rs.40.40 per Kg. for supply of the said goods to defendant No. 1 as the
said goods were manufactured and were liable to be manufactured
with duty paid raw material. The plaintiff could import duty free raw
material against import licence only after February, 1984 and thus the
finished goods to be manufactured from duty free raw material could
be made available by the plaintiff to defendant No. 1 much later and
not before 31st March, 1984, as desired by the defendant No. 1.
however as a matter of business practice the plaintiff also quoted
'export price' of Rs. 30.50 per Kg. to be charged to the purchaser only
if the plaintiff's supplierwas able to procure duty free raw material
against special import licence as in that event the plaintiff will not be
out of pocket to the extent of duty component. The. difference between
the domestic price of Rs. 40.40 per Kg. and the export price of Rs.
3.0.50 per Kg represents nothing but the duty component of about Rs.
9.50 per Kg. on the raw material used in manufacture of goods to be
supplied to defendant No. 1.

(f) Before receipt of the said telex indent, the enquiries made by the
plaintiff in the office of the Joint Chief Controller of Imports and Exports
and elsewhere had created a belief in the mind of the plaintiff that the
refund of customs duty paid on the raw material already imported to
be used in the manufacture of goods to be supplied to defendant No. 1
was not likely to be available to the plaintiff. The plaintiff was quite
sure at all material time (as obvious from the correspondence to be
referred to hereinafter) that the plaintiff would be heading for total
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crisis jeopardising its economic viability if the plaintiff were compelled
to bear the amount of customs duty paid by it and supply the goods to
defendant No. 1 for 'deemed export' price. The above referred
approach and decision of the plaintiff in this behalf is borne out by the
correspondence referred to hereinafter.

(g) On 11th October, 1983, the plaintiff addressed a letter to defendant

No. 1 making it clear that the plaintiff would accept the said order for
supply of 1,500 M.T. of PPD only at the domestic price of Rs. 40,40 per
Kg. and not at the export price of Rs. 29/- per Kg. as desired by
defendant No. 1. On 14th October, 1983, the plaintiff addressed one
more letter to defendant No. 1 reiterating its offer to supply the said
goods at the domestic price only. It is obvious that the defendant No. 1
represented to the plaintiff on some occasion that the plaintiff would
not suffer any loss if the plaintiff charged deemed export price to the
defendant No. 1 and got refund of customs duty etc. from the
Government of India. In case the plaintiff received the entire sum of Rs.
40.40 per Kg. for the said supply from the defendant No. 1, the plaintiff
would have no objection to pass on the amount ofrefund of customs
duty if and when received from the Government of India. In its letter
dated 14th October, 1983, the plaintiff stated that in case the plaintiff
received refund of the amount of duty paid on the raw material used in
manufacture of the goods to be supplied to defendant No. 1, the
plaintiff would certainty pass on the said amount to defendant No. 1.
On 17th October, 1983, the plaintiff once again addressed a letter to
defendant No. 1 repeating that the plaintiff had already paid customs
duty and all other taxes on the raw material running in lacs and lacs of
rupees. In this letter the plaintiff further stated as under :--

'We, therefore, request that the present order for 1,500 M.T. be placed
on us at our domestic rates only.' These letters leave no ambiguity and
make it amply clear that the defendant No. 1 shall have to pay the
price at the rate of Rs. 40.40 per Kg. i.e. the normal domestic price
where the price was loaded with the duties actually and already paid
on the raw material used in manufacture of the goods to be supplied to
defendant No. 1.

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Federations Ltd. v. Singh Consultants & Engineers (P) Ltd., reported in :
[1988]1SCR1124 , the Supreme Court once again surveyed the entire
law on the subject and laid down the following principles :--

'Commitments of bank must be honoured free from interference by the

Court. An irrevocable commitment either in the form of confirmed bank
guarantee or irrevocable letter of credit whether furnished during
course of internal trade or international must be honoured and must be
allowed to be honoured irrespective of disputes raised by the party at
whose instance the Bank guarantee was furnished. No temporary
injunction could be granted to restrain the Bank from performing the
Bank guarantee or so as to restrain the beneficiary under the
guarantee from invoking the guarantee except in case of fraud or
special equities in the form of preventing irretrievable injustice,'

In this case, the Supreme Court surveyed most of the earlier cases on
the subject and formulated the relevant principles. In this case, the
amount was payable under the Bank guarantee without reference to
the question as to whether the seller had failed to fulfil the terms of the
sale. It was also provided in the two Bank guarantees in that case that
the sole judge for deciding whether the seller had failed to fulfil the
terms of the sale, shall be the PCF. In this case, the supreme Court
referred to the judgment of Court of Appeal in England in the case of
Elian and Rabbath v. Matsas and Matsas, (1966) 2 Lloyd LLR 495,where
lord Denning had granted an injunction to restrain the ship owners
from invoking the Bank guarantee as a special case.In this case, the
telex message showed that ship owners had agreed to release the
goods on furnishing of the Bank guarantee by the ship owner and not
press its Hen for demurrage. It was held that the ship owners had
invoked the guarantee in breach of the understanding between the
ship owners and the shippers and a special case was made out for
grant of injunction. This case shows that in the very exceptional
circumstances and in very special cases, the Courts would he duty
bound to grant the temporary injunction sought for and the recognised
exceptions to the general rule could not be placed in a straight jacket.

21. In paragraph 17 of his judgment, the Hon'ble Mr. justice Sabyasachi

11/36
Mukherji (as His Lordship then was) referred to the judgment of Mr.
Justice Kerr in R. D. Harbottle (Mercantile) Ltd. v. National Westminister
Bank Ltd. (1977) 2 All ER 862, and approved the well known passage
from the judgment of Kerr, J. laying down the law to the effect that the
Courts could grant injunction so as to interfere with irrevocable
obligations of the Bank under the performance guarantees only in
'exceptional cases', 'special circumstances' like 'fraud'.

22. In paragraph 19 of his judgment, Mr. Justice Mukherji referred to

another leading judgment of Court of Appeal in England with approval
i.e. in the case of Edward Owen Engineering Ltd. v. Barclays Bank
International Ltd., (1978) 1 All ER 976, wherein it was held that a
performance guarantee was similar to a confirmed letter of credit and
the Bank was bound to honour the same according to its terms except
where fraud by one of the parties to the underlying contract had been
established and the Bank had notice of the fraud.

23. In paragraph 22 of its judgment, the Court referred to the judgment

of House of Lords in United. City Merchants [Invest ments) Ltd. v. Royal
Bank of Canada, (1982) 2 All ER 720. If was in terms 'held' that the
principles enunciated in the cases dealing with confirmed irrevocable
letters of credit were equally applicable to the case of Bank guarantees
in internal trade within a country.

24. In paragraph 24 of its judgment, the Court approved the ratio of the
judgment in the case of Taxmaco Ltd. v. State Bank of India :
AIR1979Cal44 , holding that in' absence of any 'clear fraud' or special
equities, the Bank must honour its commitment under the guarantee
and no injunction could be granted. As regards the recognised
exception of 'special equities' arising from a particular situation is
concerned, it was observed by the Apex Court as under : --

'It appears that special equities mentioned therein may be a situation

where the injunction was sought for to prevent injustice which was
irretrievable in the words of Lord Denning, Mr. R. in Elian and Rabbath
v. Matsas and Matsas (1966) 2 LR 495.' .

25. Referring to the judgment of the High Court of Madras in. Arul
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Marugan Traders v. Rashtriya Chemicals &Fertilizers;, Bombay.,'' :
AIR1986Mad161 (being the case in which interim injunction to restrain
encashment of Bank guarantee was rightly granted), the Court
observed that interim injunction could be granted to restrain the
operation of letter of credit or the bank guarantee if the plaintiffs made
out a good case of fraud and special equities in the form of preventing
irretrievable injustice between the parties. In my judgment, 'special
equities' is a separate head of recognised exception and the Hon'ble
Supreme Court approved the ratio of the judgment of the High Court of
Calcutta in the case of Texmaco Ltd. v. State Bank of India, :
AIR1979Cal44 (supra).

26. In its above referred later judgment, the Supreme Court reiterated
the principles of law laid down in the case of United Commercial Bank
v. Bank of India, : [1981]3SCR300 , and held that the Courts usually
refrained from granting injunction to restrain the performance of
contractual obligations arising out of a letter of credit or a Bank
guarantee. The Supreme Court has taken a similar view in Centax.
(India) Ltd. v. Vinmar Impex Inc., : AIR1986SC1924 . This case did not
deal with the ground of economic duress as an exception to the
general rule that injunction must be refused in Bank guarantee cess.

27. In the above referred case, the Hon'ble Mr. Justice Jagannatha
Shetty, in his separate concurring judgment, highlighted the principles
of law laid down in the most illuminating case of Sztein v. J. Henry
Schroder Banking Corporation (1941) 3 HYS 2 631, decided by the New
York Supreme Court in 1941. In this 'case, the Court enunciated the
principle of law applicable to the exception of fraud to the rule of
autonomy of letter of credit. The plaintiff Sztejn wanted to buy bristles
from India and entered into a deal with an Indian seller to sell him' a
quantity. The issuing Bank issued a letter of credit to the Indian seller
which provided that, upon receipt of appropriate documents, the Bank
would pay for the shipment. Somehow Mr. Szlejn discovered that the
shipment made was not crates of bristles, but crates of worthless
material and rubbish. The Bank took the view that the letter of credit
was an independent undertaking and it would have to pay. The Court
issued an injunction to restrain the payment. This is the landmark
13/36
judgment from amongst the judgments of American Courts on the
subject and was referred to with approval by the English Court of
Appeal in Edward Owen Engg. Ltd. v. Barclays Bank International Ltd.,
(1978 (1) All ER 976 (supra). Shientag, J. further observed in the said
American case as under :--

'...on the present motion, it must be assumed that the seller has
intentionally failed to ship any goods ordered by the buyer. In such a
situation, where the seller's fraud has been called to the bank's
attention before the drafts and documents have been presented for
payment, the principle of the independence of the bank's obligation
under the letter of credit should not be extended to protect the
unscrupulous seller.'

This case shows that even the principles of autonomy of bank

guarantee or letter of credit has some limitation and if the conduct of
the beneficiary of the bank guarantee is unscrupulous, the Courts can
intervene and ought to intervene by granting necessary injunction.

28. In the case of Elian and Rabbath v.Matsas and Matsas, (1966) 2 LR
495, the plaintiff had claimed a declaration that the guarantee was not
valid and an injunction to restrain the ship owners or their agents from
enforcing the bank guarantee. Having regard to the facts of this case,
Lord Denning M. R. in the Court of Appeal held that it was a special
case in which the Court should grant an injunction to prevent
irretrievable injustice', as the guarantee was given on the
understanding that the lien was raised and no further lien would be
imposed and that when the shipowners committed a breach of the
understanding, they were disabled from acting on the guarantee. The
facts of the present case also appear to be special as the conduct of
defendant No. 1 is clearly blame-worthy in insisting on paying deemed
export price when the transaction can never be treated as deemed
export. It is true that the bank guarantee is enforceable
notwithstanding the disputes between the parties to the main contract
and the non-performance of the underlying contract is not sufficient to
resist the enforcement of the bank guarantee. If, however, allegations
of economic duress and fraud are made, all the facts and

14/36
circumstances of the case will have to be considered together in
perspective and the necessary inference will have to be drawn by
considering the cumulative effect of all the facts and circumstances.
For the limited purpose of -considering as to whether a recognised
exception to the general rule of refusing to grant injunction is made out
or not, the questions as to what was the original contract, why the
contract was re-negotiated, what was the circumstance in which the
plaintiff was compelled to furnish a bank guarantee and what was the
mutual understanding between the parties throughout will have to be
taken into consideration as all these factors must enter the judicial
verdict before a finding is recorded one way or the other as to whether
the allegations of fraud, coercion or special equities are proved or not.

29. It shall have to be considered as to what is the meaning of the

word 'fraud' while examining the issue as to whether a strong prima
facie case is made out so as to bring the case within one of the well
recognisedexception available to a party to seek injunction in a case of
this kind. Mr. Cooper, the learned counsel for the plaintiff, has relied
upon the judgment of Variava, J. in suit, No. 807 of .1986 in the case of
Jaihind Mills, Co. v. Canara Bank decided on 17th April 1989, In this
case, large number of American cases were cited by the learned
counsel and the learned Judge appears to have accepted the ratio of
the judgment in the case of Dynamics Corporation of America v. The
Citizens and Southern National Bank 356 Fed supp 991. It was held in
this case that thelaw of 'fraud' was not static. It was in terms observed
by the Court that 'fraud' had a broader meaning in equity than at law
and an intention to defraud or to misrepresent was not a necessary
element. The relevant portion of the quotation from the judgment of
Dynamics Corporation of America's case is as under : --

'Fraud, indeed, in the sense.of a court of equity properly includes all

acts, omissions and concealments which involve a breach of legal or
equitable duty, trust, or confidence, justly reposed, and arc injurious to
another, or by which an undue and unconscientiously advantage is
taken of another.'

I am in complete agreement with this judgment.

15/36
30. Mr. Cooper, the learned counsel for the plaintiff, has relied upon
various meanings of the word 'fraud' given in Black's Law Dictionary,
Fifth Edition. One such meaning relied upon by the learned counsel
reads as under:

'Fraud in the inducement. Fraud connected with underlying transaction

and not with the nature of the contract or document signed.'

31. Mr. Cooper, the learned counsel for the plaintiff, has also heavily
relied upon three unreported judgments of our High Court in support of
his plea that the ground of special equity resulting from the situation is
available to the plaintiff as an exception to the general rule of refusing
to grant injunctions in matters of bank guarantee and letter of credit.

Mr. Cooper relied upon the judgment ofLentin, J. dated 9th August 1979
in Notice of Motion No. 843 of 1979 in Long Cause Suit No. 1113 of
1979. It was held in this case, following the judgment of the Calcutta
High Court in Texmaco Ltd.'s case : AIR1979Cal44 , that the Court must
interfere at the interim stage in view of special equities arising from
the situation in the exceptional and peculiar facts and circumstances of
the case. The special equities propounded on behalf of the plaintiffs
seeking injunction were that the guarantee given by the 3rd defendant
Bank at the instance of the plaintiffs in favour of defendants Nos. 1 and
2 was that the exporter i.e. the 1st defendant, having procured from
the foreign buyer an order for supply of certain goods, had agreed to
place a back-to-back order on the same terms and conditions with the
plaintiffs-manufacturer for supply of those goods. It was observed by
the learned Judge that the 1st defendant had wrongfully failed to enter
into a back-to-back contract with the plaintiffs. It was held in this case
that the goods could not be exported due to the objection raised by the
Customs authorities which was a circumstance beyond control, Mr. M.
S. Sanghavi, the learned counsel for the defendant No. 1, has
submitted that the ratio of this judgment is impliedly overruled by the
subsequent judgment of the Supreme Court in the case of U. P.
Cooperative Federation Ltd. v. Singh Consultants and Engineers (P.)
Ltd. : [1988]1SCR1124 (supra) and even the judgment of the High
Court of Calcutta in Texmaco's case : AIR1979Cal44 no longer
16/36
represents the correct law. It is not possible to accept this submission
of Mr. Sanghavi. According to my reading, the ratio of the judgment in
the case of Texmaco Ltd. was in terms approved by the judgment of
the Supreme Court. Merely because of observations in the Supreme
Court judgment to the effect that 'Special equities mentioned therein
(meaning thereby, mentioned in Texmaco Ltd.'s case) may be a
situation where the injunction was sought to prevent injustice which
was irretrievable in the words of Lord Denning, M. R. in Elian and
Rabbath v. Matsas and Matsas, (1966) 2 L R 495,' it cannot be inferred
that Texmaco's case : AIR1979Cal44 is overruled entirely or in part. In
some situations, special equities may coincide with another recognised
exception like 'irretrievable injustice', but it cannot be said that apart
from irretrievable injustice special equities arising from a particular
situation as a separate exception (referred to in Texmaco Ltd.'s case)
has now ceased to be available as a recognised exception to the
plaintiff seeking injunction to restrain encashment of bank-guarantees.
It is not possible to accept Mr. Sanghavi's interpretation of judgment of
the Supreme Court in the case' of U, P. Cooperative Federation Ltd.
(supra) and High Court of Calcutta in the case of Texmaco Ltd. (supra).
In very rare cases the Court would grant injunction. But if a rate case is
made out, it is the duty of the Court to protect the victim and suppress
the wrong and grant an injunction on appropriate terms, if necessary.

32. Mr. Cooper, the learned counsel for the plaintiff, also relied upon
the judgment of a Division Bench of our High Court in the State Trading
Corporation of India Limited v. Indian Cotton Mills Federation. In this
case, it was held that if the beneficiary invoked bank-guarantee for a
collateral purpose and was not acting bona fide, the Court would
restrain the invocation of the bank-guarantee. In this case, the Court
called upon the appellant beneficiary to explain to the Court as to why
the bank guarantee was being invoked even though the decision of the
beneficiary on the question was stated to be final under the terms of
the bank guarantee. The appellant did not explain the basis of
invocation of the bank guarantee to the Court and accordingly the
above referred proposition of law was laid down that the Court should
refrain from granting injunction against the operation of bank
guarantee because such injunction will stultify normal commercial
17/36
transactions and allow the parties to evade commercial obligations
solemnly undertaken, but that there were certain well known
exceptions to the general principle. It was further observed by the
Hob'ble Division Bench as under:--

'One of the exception is where it is alleged and prima facie established

that the bankguarantee is sought to be operated for collateral
purposes and that the party invoking the same is not acting bona fide.'

Mr. M. S. Sanghavi has submitted that this case also does not lay down
the correct law and, according to him, fraud and irretrievable injustice
are the only two exceptions available to the party seeking injunction. In
other words, the learned counsel for the defendant No. 1 submits that
the exception recognised in the above-referred Division Bench
judgment and the said observations are not in conflict with any of the
judgments of the Hon'ble Supreme Court. I must, therefore, follow the
same judgment.

33. Mr. Cooper, the learned counsel for the plaintiff, also relied upon
the judgment of D. N. Mehta, J. of our High Court dated 17th and 18th
October, 1989 in Notice of Motion No. 1067 of 1988 in Suit No. 1078 of
1988, Techma Incorporated v. Oil and Natural Gas Commission. In this
case, the learned Judge granted an injunction restraining the
enforcement of the bank guarantee as he came to the conclusion that
the first defendant to the suit in that case had committed fraud and a
prima facie case was made out. This case does not lay down any new
or additional principle and is, therefore, not of much assistance to me.

34. The defendant No. 1 by its conduct had represented to the plaintiff
that defendant No. 1 would pay the normal domestic price for the
supply of the said goods made and to be made in the month of October
and November, 1983, as already discussed by me earlier. Defendant
No. 1 had induced the plaintiff to make the said supplies on this
footing. Defendant No. I also induced the plaintiff to manufacture
further goods and import further raw materials on that footing. When
the plaintiff repeatedly asserted in the correspondence before effecting
the supplies that the plaintiff would be supplying the goods at the

18/36
domestic price and if the defendant No. 1 had any reservation, the
defendant No. 1 should immediately disclose its intention to the
plaintiff then and there before accepting the supply, the defendant No.
I did not say a word. On this aspect, theExplanation to Section 17 of
the Indian Contract Act, 1872 is of considerable significance. The said
Explanation reads as under:--

'Explanation silence as to facts likely to affect the willingness of a

person to enter into a contract is not fraud, unless the circumstances of
the case are such that, regard being had to them, it is the duty of the
person keeping silence to speak, or unless his silence is, in itself,
equivalent to speech.'

Illustration (c) to the said Section, which is a statutory illustration, is as

under:--

'(c). 'B' says to 'A' - 'If you do not deny it, I shall assume that the horse
is sound. 'A' ' says nothing. Here' A's silence is equivalent to speech.'

Thus, both by express representation as well as by intentional silence,

the defendant No. 1 induced the plaintiff to change their position and
supply the said goods. At this stage, the defendant No. 1 strengthened
the said belief in the mind of the plaintiff by accepting the invoices at
domestic rate and by keeping mum for a period of about 5 to 6 weeks.
Prima facie, it is established that defendant No. 1 committed fraud on
the plaintiff when it tried to resile from its earlier representation made
to the plaintiff on which representation the plaintiff had acted upon and
supplied the said goods.

35. In a given case, the conduct of the beneficiary of the Bank

guarantee may be fraudulent in invoking the bank guarantee even
though the bank guarantee itself may not be totally void or voidable,
as in this case. Such a possibility cannot be ruled out in the realm of
human affairs. A party defrauded may not exercise the option available
to him to avoid the entire transaction. A party defrauded may resist the
enforcement of a particular stipulation incorporated in the contract by
unfair means or by committing fraud in the wider sense of the term. In
the instant case, the demand made by defendant No. 1 on defendant
19/36
No. 2 to pay the amount under the bank guarantee is not contrary to
the mandate of the written bank guarantee, but is in breach of the
understanding pleadedby the plaintiff. The plaintiff has averred, in
paragraph 25 of the plaint, that the bank guarantee was void and of no
effect whatsoever. The learned counsel for defendant No. 1 has
submitted that no such declaration is asked for in the plaint and the
reliefs claimed in the plaint are only to the effect that the demand
made by defendant No. 1 on defendant No. 2 to pay the amount under
the bank guarantee and its invocation is void. In other words, the
learned counsel for defendant No. 1 has contended that the bank
guarantee itself is not challenged as such by the plaintiff, but only its
invocation is challenged and that also not on valid grounds. It is open
to the party wronged to claim limited reliefs in a plaint and it cannot be
said that the plaintiff should have necessarily challenged the bank
guarantee in its entirety. Even today the plaintiff says that in case the
plaintiff receives the amount of refund of customs duty from the
Government of India, the plaintiff would pass on the same to the
defendant No. 1 and in case the plaintiff does not pass on the same,
the defendant No. 1 can enforce the said bank guarantee. Of course,
the chances of the plaintiff getting the refund of Customs duty from the
Government of India are almost nil as even recently the Government
has declined to grant any refund to the plaintiff.

36. I shall now turn to the additional ground of economic duress relied
upon by the plaintiff in support of its application for interim relief. On
this aspect, the legal position emerging from the decided cases and
from the enunciation of the principles set out in well known legal books
is as under: --

(i) In Universe Tankships Inc. of Monrovia v. International Transport

Workers Federation, reported in (1982) 2 WLR 803, the House of Lords
dealt with a 'problem involving 'Economic duress'. A ship registered in
Liberia and flying a Liberian flag docked at Milford Howen on July 17,
1978 and discharged her cargo by the following afternoon. The
International Transport Workers Federation adopted a policy to 'black
the ships' in an attempt to improve the wages and conditions of service
of crews on ships. As a result of blacking by the respondent, no tugs
20/36
were available and the ship could not sail. The ship owners were
virtually compelled to pay U. S. Dollars 80,000 by way of back pay for
crew of the ship and a contribution of 6,480 Dollars to the I.T.F. Welfare
Fund. The owners acceded to the respondent's demands for fear of
disastrous economic consequences if they refused. In consequence of
payment made and the agreement signed by the American shipowners
in these circumstances, the ship was allowed to sail on July 29, 1978.
On August 10, 1978, the owners' Solicitors demanded the return of
80,000 Dollars maintaining that the agreement was arrived at by
duress and was void. The owners commenced and pursued action for
return of Dollars 6,480 paid to the I.T.F.'s Welfare Fund. Parker J.
upheld the plea of duress. The Court of Appeal allowed the appeal of
the respondent. The owners appealed to the House of Lords. The House
of Lords referred to large number of cases cited by counsel including
the case in North Ocean Shipping Co. Ltd. v. Hyundai Construction Co.
Ltd., (1979) OB 705, and the Privy Council judgment in Pao On v. Lau
Yiu Long, (1980) AC 614, Lord Diplock observed, inter alia, as under:--

'It is not disputed that the circumstances in which I.T.F. demanded that
the shipowners should enter into the special agreement and the
typescript agreement and should pay the moneys of which the latter
documents acknowledge receipt, amounted to economic duress upon
the shipowners; that is to say, it is conceded that the financial
consequences to the shipowners of the Universe Sentinel continuing to
be rendered off-hire under her time charter to Texaco, while the
blacking continued, were so catastrophic as to amount to a coercion of
the shipowner's will which vitiated their consent to those agreements
and to the payments made by them to I.T.F.'

'This concession makes it unnecessary for your Lordships to use the

instant appeal as the occasion for a general consideration of the
developing law of economic duress as a ground for treating contracts
as voidable and obtaining restitution of money paid under economic
duress as money had and receivedto the plaintiffs' use. That economic
duress may constitute a ground for such redress was recognised, albeit
obiter, by the Privy Council in Pao On v. Lau Yiu Long, (1980) AC 614.'

21/36
In this case, Lord Diplock inter alia expressed the view that the rational
behind the developing law of economic duress was that the apparent
consent of the party aggrieved was induced by pressure exercised
upon him by the other party which the law does not regard as
legitimate, with the consequence that his consent was treated as
revocable unless approbated expressly or by implication after the
illegitimate pressure had ceased to operate on mind. Lord Diplock took
specific precaution to distinguish the doctrine or concept of 'economic
duress' from mere 'commercial pressure' which in some degree always
existed whenever one party to a commercial transaction was in a
stronger bargaining position than the other party. Commercial pressure
by itself does not amount to economic duress. Lord Diplock equated
the rationale behind recognition of economic duress as a ground of
relief by observing inter alia at page 813 as under:--

'It is a rationale similar to that which underlies the avoid ability of

contracts entered into and the recovery of money exacted under colour
of office or under influence or in consequence of threats of physical
duress.' The majority of law Lords decided to allow the appeal. Lord
Scarman dissented. Lord Brandon also dissented. Lord Scarman
observed that the demand for contribution and blacking of the ship in
support of the demand amounted to a legitimate exercise of pressure
and did not constitute duress. In his dissenting judgment, Lord
Scarman referred to the Privy Council judgment in the case of Pao On
v. Lau Yiu Long (supra) highlighting the law of economic duress. It was
held by the Privy Council in this case that two elements were
necessary to constitute duress i.e. (1) pressure amounting to
compulsion of the will of the victim; and (2) the illegitimacy of the
pressure exerted. For all practical purposes, the victim of duress must
have no other choice. The early law of duress dealt with threat to life or
limb. The later developmentsrecognise threat to property or threat to
business or trade as duress. In a given situation, a party may be
virtually ruined unless it submitted to illegitimate pressure for the time
being although the wrongdoer was exploiting the situation and
theoretically it could be said in every case that the victim should have
refused to submit to duress and resorted to law Courts. Lord Scarman

22/36
also observed that the development of law on this subject was well
traced in Goff and Jones, The Law of Restitution, 2nd ed. (1978) Ch 9.

(ii) Mr. M. S. Sanghavi, the learned counsel for defendant No. 1, has
submitted that the concept of coercion or duress could not be applied
to a business transaction arrived at between the parties who were sui
juris. With respect, this submission ignores the development of law and
modem trends and this Court must assess as to whether the situation
of jeopardising of viability of the plaintiff creating the crisis was
brought about by misconduct of defendant No. 1 in resiling from the
firm commitment already made and whether the plaintiff victim had
any other choice in practical terms other than submitting to the
illegitimate pressure exercised by defendant No. 1 at all stages from
and after 17th December, 1983 when the plaintiff received the formal
written order dated 12th 'December, 1983 setting out 'deemed export
price' as the price payable for the supply made and to be made,
although defendant No. 1 had originally agreed to pay the price for the
contract goods at domestic rate subject to passing on of refund of
Customs duty on raw materials used as and when received.

(iii) Mr. Cooper, the learned counsel for the plaintiff, cited the judgment
of Lord Tucker of Queen Bench Division (Commercial Court) in the case
of Atlas Express Ltd. v. Kafco (Importers and Distributors) Ltd.,
reported in (1989) 1 All ER 641. In this case, a national road carrier
backed out of the contract already entered into and compelled the
other side to re-negotiate the terms of the contract. The defendants
were heavily dependent on the retail chain's contract and were unable
at that time to find an alternative carrier. The defendant agreed to the
newterms but later on refused to pay at the new rate. It was held by
the Court as under:--

'Where a party to a contract was forced by the other party to re-

negotiate the terms of the contract to his disadvantage and had no
alternative but to accept the new terms offered, his apparent consent
to the new terms was vitiated by economic duress.' The Court applied
the dictum of Lord Scar-man Pao On v. Lau Yiu Long 1980 AC 614
(supra) and dismissed the plaintiff's claim. At page 645 of the report.

23/36
Lord Tucker formulated a question as under:--

'The first question raises an interesting point of law, i.e. whether

economic duress is a concept known to English law.' The learned Judge
answered the question formulated in the affirmative, distinguishing the
concept of economic duress from mere commercial pressure. Mere
commercial pressure by itself is never sufficient to vitiate the consent.
The learned Judge held that in appropriate cases, economic duress may
afford a defence. The learned Judge relied on passages from Chitty on
Contract and Goff and Jones on the Law of Restitution. During the
course of his judgment, the learned Judge followed the following dictum
of Lord Denning, M. R. in the case of D. & C. Builders Ltd. v. Rees,
(1965) 3 All ER 837 :--

'No person can insist on a settlement procured by intimidation.' During

the course of his judgment, the learned Judge also referred to the
judgment of Kerr J. in the case of Occidental Worldwide Investment
Corpn. v. Skibs A/s. Avanti,(1976) 1 L R 293, holding thateconomic
duress could operate as a ground of relief in appropriate
circumstances. Lord Tucker in terms relied upon the judgment of
Scarman in Pao On v. Lau Yiu Long 1980 AC 614 (supra).) In the above-
referred Privy Council judgment, the Privy Council in terms held that
there was commercial pressure but no coercion. In the case of B & S
Contracts and Design Ltd. v. Victor Green Publications. Ltd (1989) ICR
419, the Court followed the judgment of House of Lords inthe case of
Universe Tankships Inc. of Monrovia v. International Transport Workers'
Federation 1982 (2) WLR 803 and explained the difference between
legitimate pressure and non-legitimate pressure as under:--

'For the purpose of this case, it is sufficient to say that if the claimant
has been influenced against his will to pay money under the threat of
unlawful damage to his economic interest, he will be entitled to claim
that money back,' (iv) Mr. M. S. Sanghavi, tbe learned counsel for
defendant No. 1, heavily relied on the judgment of Privy Council in the
case of Pao On v. Lau Yiu Long, 1980 AC 614 (supra) in an appeal from
the Court of Appeal of Hong Kong. At page 635 of the judgment, Lord
Scarman accepted the finding of fact recorded by the Courts below in

24/36
the following terms:--

'In the present case there is unanimity amongst the Judges below that
there was no coercion of the first defendant's will.....Even if this Board
was disposed, which it is not, to take a different view, it would not
substitute its opinion for that of the Judges below on this question of
fact.' Having recorded the above finding, the Privy Council observed in
terms that it was therefore unnecessary for the Board to embark upon
an inquiry into the question 'whether English law recognises a category
of duress known as 'Economic duress''. After making the above
observations, Lord Scarman indicated very briefly the opinion which
the Privy Council had formed on this question. Lord Scarman in terms
held that the American law as well as English law recognised the
ground of economic duress. On this aspect, it is worthwhile quoting a
short passage from this judgment enunciating the principles to be
applied in such cases as the obiter observations of the Privy Council in
this case have been approved and followed in subsequent English
cases:--

'The commercial pressure alleged to constitute such duress must,

however, be such that the victim must have entered the
contractagainst his will, must have had no alternative course open to
him and must have been confronted with coercive acts (1970) Section
1603.' Thereafter Lord Scarman referred to similarprinciples
enunciated by American authorsand in American judgments and the
judgmentof Macotta J. in North Ocean Shipping Co.Ltd. v. Hyundai
Construction Co. Ltd., (1979) QB 705.

(v) Mr. M. S. Sanghavi, the learned counsel for defendant No. 1, relied
on the following passage from Commentary of Pollock and Mulla on
Indian Contract and Specific Relief Act, 10th Edition, at page 148. The
said passage is based on the understanding and analysis of the above
referred Privy Council judgment in Pao On v. Lau Yiu Long 1980 AC 614
referred to hereinabove and reads as under:--

'Duress -- Commercial or economic pressure-- The Privy Council has

held in a later case that a guarantee is not voidable because of duress

25/36
on the plaintiff's part.' The Privy Council has not said so and with
respect the Commentary to this extent is misleading and incorrect. In
the case before the Privy Council, it was held that there was no
coercion as a matter of fact. The Privy Council as well as the House of
Lords have made clear distinction between economic duress
amounting to coercion and mere commercial pressure. Some of the
judgments to which reference is already made make distinction
between lawful pressure and unlawful pressures. Tt is clear from the
judgment of the Privy Council in Pao On's case that the Privy Council
would have granted the relief to the appellant if the factual allegations
were proved and if these allegations constituted 'economic duress' as
known to law. At any rate, with respect, the formulation of the Editor of
the above-referred Commentary is much wider and does not correctly
summarise the Privy Council's judgment. Lord Scarman has himself
explained the above-referred Privy Council judgment in his own words
as a member of House of Lords in his dissenting judgment in the case
of Universe TankshipsInc. of Monrovia v. International Transport
Worker's Federation 1982 (2) WLR 803.

(vi) Mr. Cooper, the teamed counsel for the plaintiff, has heavily relied
on the judgment of Macotta J. in the case of North Ocean Shipping Co.
Ltd. Hyundai Construction Co. Ltd., (1979) 1 QB 705. In this case, the
shipbuilders refused to honour the contract unless the stipulated
payment was increased. In this case, a special case was stated by the
Arbitrators. In this case, two questions arose; (1) Whether the threat of
the shipbuilding company to break the contract without any legal
justification unless increase in price by 10% was agreed upon
constituted duress and the re-negotiated agreement was therefore
voidable by the victim of duress and (2) Whether the alleged victim of
duress had conducted themselves so as to affirm the renegotiated
contract? The dictum of House of Lords in the case of Universe
Tankships's case, (1982) 2 WLR 803 reopening the Court to consider as
to whether the alleged victim of duress had approbated in the matter
or affirmed the impugned transaction expressly or by implication after
the illegitimate pressure had ceased to operate on the mind of the
victim must be kept in mind while appreciating and analysing the
judgment of Macotta J. in North Ocean Shipping v. Hyundai & Co.
26/36
(supra). In the above-referred judgment, Mocatta, J referred to large
number of cases decided by the Courts in various countries of the
world including Australian and American Courts. The learned Judge held
that the threat to break the contract unless the price was increased in
the circumstances amounted to economic duress. Mocatta J. agreed
with the proposition of law formulated by Issac J. of High Court of
Australia in Smith v. William Charlick Ltd., (1924) 34 CLR 28. The
learned Judge held that the owners were free from duress on
November 27, 1974 and took no action by way of protest or otherwise
till 30th July 1975. It was therefore held that there was no danger in
registering protest at the time when the final payments were made
without any qualification. It was held in substance that the shipowners
had affirmed the contract after the duress had ceased to operate and
theowners could not avoid their liability at a late stage and plead
duress.

(vii) Most of the above-referred cases were noticed by our Supreme

Court in paragraph 52 of its judgment in the case of Central Inland
Water Transport Corporation Ltd. v. Brojo Nath, : (1986)IILLJ171SC .
Paragraph 82 of the above referred judgment reads as under :--

'82. It would appear from certain recent English cases that the Courts
in that country have also begun to recognize the possibility of an
unconscionable bargain which could be brought about by economic
duress even between parties who may not in economic terms be
situate differently.' I am in complete agreement with the principles of
law to be applied in cases involving economic duress. It is not possible
to accept the submission of Mr. M. S. Sanghavi, the learned counsel for
defendant No. 1, that the principles of law enunciated in English,
American and Australian judgments have no relevance in Indian legal
system. The Indian Contract Act, 1872 is not exhaustive. The, above-
referred principles are also relevant for interpretation and elucidation
of law of coercion contained in Section 15 of Indian Contract Act, 1872.
These principles was broadly approved by our Supreme Court in a
different context in the case of Central Inland Water Transport's case
and cannot be ignored in a case pertaining to bank guarantee as bank
guarantee is also a contract governed by the same provisions. Section
27/36
15 of the Indian Contract Act, 1872 defines 'coercion' as under:--

' 'Coercion' is the committing, or threatening to commit, any act

forbidden by the Indian Penal Code, or the unlawful detaining, or
threatening to detain, any property, to the prejudice of any person
whatever, with the intention of causing any person to enter into an
agreement.' The underlined portion of the Section brings within its
sweep the concept of 'Economic Duress'. If the consent of a party to
any transaction is not a free consent, such consentwill be revocable at
the option of the party whose consent was obtained by coercion, undue
influence, fraud etc. It is open to the victim of duress to impugn the
part of the transaction or even a particular stipulation which was got
incorporated in the contract by use of duress. Sometimes it may
happen that the entire transaction is not vitiated by duress or fraud
and only a particular stipulation is vitiated. It all depends upon facts of
each case. The plaintiff is entitled to rely on Sections 14 and 15 of
Indian Contract Act, 1872 as well as the general principles of law of
economic duress now being recognised in English, American and
Australian legal system. Whenever the duress results in a varied
contract, the victim of duress may refuse to abide only by the new term
introducing the variation. In certain situations, the victim of duress may
seek an injunction restraining enforcement of the impugned term
imposed on him by the other side by use of economic duress without
setting aside the entire transaction and in appropriate case subject to
consideration of equities of the situation, the Court may be persuaded
to grant permanent or temporary injunction if the allegations made are
substantiated by the plaintiff. In my judgment, Courts must always
bear in mind the distinction between mere commercial or business
pressures permissible in the trade conforming no cause of action and
the 'economic duress' amounting to coercion vitiating the consent. The
distinction between the two concepts is well-recognised although the
divided line in a given case may appear to be every thin. If the
beneficiary under a bank guarantee invokes a stipulation in the bank
guarantee, brought about by economic duress and the conscience of
Court of equity is shocked and the conduct of beneficiary is inequitable,
it shall be duty of the Court to grant the injunction and protect the

28/36
victim of the duress.

(viii) Reference may now be made to Anson's Law of Contract, 26th

Edition, edited by A. G. Guest, pages 240-241 summarising the leading
judgments on law of economic duress. Referring to the judgment in
Shipbuilder's case reported in (1979) QB 705, the learned author
observes as under;--

'In particular, one party may threaten to break an existing contract

unless the contract is re-negotiated in his favour, and the other party
accedes to this demand in order to avoid the adverse financial
consequences which would ensure from the threatened breach.' In this
case, it was held that the shipbuilders' threatened breach of contract
amounted in the circumstances to economic duress rendering the
variation voidable at their option. One finds the same principles
enunciated and summarised in Law of Contract by Cheshire, Fifoot and
Furmston, Eleventh Edition, at pages 300-301. At page 300 of the
above standard work, the learned authors refer to the contribution of
Lord Denning to this branch of law by introducing two new doctrines,
economic duress and inequality of bargaining power, and his two
judgments inD & C Builders Ltd. v. Rees and Llod's BankLtd. v. Bundy,
reported in (1966) 2 QB 617 and (1975) QB 326 respectively. In the
case of Llyods Bank Ltd. v. Bundy, the Court of Appeal set aside the
guarantee and the charge. Both the above doctrines have been
accepted by our Supreme Court as a part of Indian legal system in its
leading judgment in the case of Central Inland Water Corporation v.
Brojo Nath, : (1986)IILLJ171SC (supra). Thedeclaration of law by our
Supreme Court in the above case is reiterated once again with full
force in the case of Delhi Transport Corporation v. D.T.C. Mazdoor
Congress, : (1991)ILLJ395SC . Paragraphs 486 to 501 of Chitty on
Contracts, 25th Edition, may usefully be referred to for clear
enunciation of the relevant principles on the subject. Relevant portion
of paragraph 490 of Chitty on Contracts reads as under:--

'But other cases can be put in which a threat not to act, or not to
contract, may be lawful in itself, and yet may be strongly coercive, for
example where the threatened is in a monopoly position,' In the

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American case of Thompson Crane & Trucking Co. v. Eyman, (1954)
267 P. 2d. 1043, the Court set aside a contract obtained by economic
duress. In a given situation, economic duress and fraud may overlap.
The conduct of wrongdoer in causing the consentof the victim to
variation may amount to economic duress. The enforcement of such a
stipulation in breach of understanding and assurances given may
amount to committing of fraud. All these concepts affecting the validity
of consent given by the innocent party are overlapping in a way at
least to a certain extent although the two concepts are separate and
distinct in their content and meaning. 'Economic duress' would be
available to the plaintiff as an additional exception to the general rule
of refusing injunction in Bank guarantee cases if it is duly established.

(ix) Applying the above principles to the acts of this case, I am of the
opinion that the plaintiff has made out a strong prima facie case of a
concluded and binding commitment on the part of defendant No. 1 to
pay the domestic price prior to 12th December 1983 and inducing the
plaintiff to proceed on that footing requiring investment of about Rs. 2
1/2 crores with speed and thereafter coercing the plaintiff to
renegotiate the contract coupled with threat not to perform the original
contract at a time when the plaintiff would be placed in great jeopardy
of adverse financial consequences affecting the economic viability of
the plaintiff if the defendant No. 1 refused to take delivery of the
contract goods. In my judgment, the defendant No. 1 coerced the
plaintiff to agree to accept the amount of difference in price between
domestic price and deemed export price as a so-called advance
against bank guarantee to be enforced only if the plaintiff did not
refund the Customs duty on imported raw materials within 10 days
from receipt thereof from the authorities. On the basis of the
representation and the varied stipulation in the bank guarantee to be
furnished in terms aforesaid, the defendant No. 1 procured delivery of
balance of goods from the plaintiff. In my judgment, the plaintiff has
made out a strong prima facie case to prove that the defendant No. 1
once again withheld Rs. 1 crore and 48 lacs without any justification
and ultimately coerced and dressed the plaintiff to agree to a
stipulation in the bank guarantee that the bank guarantee for an
amount up to Rs. 1,50,00,000/- shall be enforceable by defendant No. 1
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even if the plaintiff was notable to obtain refund of the Customs duty
from the Government of India. Prima facie, the defendant No. 1 was
not entitled to invoke the bank guarantee unless the refund of Customs
duty was made available by the Government of India to the plaintiff.

(x) The question still arises as to whether the plaintiff approbated the
transaction of bank guarantee with all its stipulations in writing as they
stand by its conduct after the illegitimate pressure had ceased to
operate. The plaintiff has not been able to make out an equally strong
prima facie case on this aspect. The plaintiff has renewed the bank
guarantee many times. Mr. Cooper submits that the plaintiff has not
affirmed the variation brought about by duress or fraud and it is of
considerable significance that the defendant No. 1 did not enforce the
stipulation of bank guarantee becoming payable irrespective of receipt
of refund of Customs duty for several years and the conduct of both
parties indicates that the bank guarantee was to be enforced only if
the plaintiff obtained the amount of refund of Customs duty which has
been denied by the Government of India. Mr. M. S. Sanghavi has
invited me to infer approbation or affirmation of written transaction of
bank guarantee from subsequent conduct of the plaintiff and bind the
plaintiff by written terms of guarantee in view of about 19 extensions
thereof at the instance of the plaintiff prior to the suit. The defendant
No. 1 has contended that the plaintiff has waived its rights to complain
of duress and fraud and the plaintiff is in any event estopped from
raising the said plea. On this aspect, the case of both sides appear to
be almost equally balanced and nothing more can be said unless oral
evidence is led at the trial. This aspect of the case has given me some
anxiety as I am considerably impressed by the plaintiff's case on the
first part of the case and not similarly impressed on the second part
thereof as discussed above.

37. It was argued that all these pleas are not to be found in the plaint
and chips Court cannot go beyond the plaint. I have carefully examined
this submission. In my judgment, by and large, the plaint is quite
adequate.In paragraph 17 of the plaint, it is clearly stated that an
agreement was arrived at between the plaintiff and defendant No. 1
that PPD would be supplied at the domestic/ normal price. In paragraph
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20 of the plaint, it is stated that by the time the defendant No. 1
backed out of the transaction, the plaintiff had already incurred
expenses of about Rs. 1.7crores towards payment of Customs duty,
that the plaintiff was saddled with huge liability and that the very
financial viability of the plaintiff was in jeopardy. It is also stated in the
said paragraph that the 1st defendant obtained an unfair advantage
and bargaining position over the plaintiff and the plaintiff was
compelled to accede to the demands of the 1st defendant to furnish
the bank guarantee. It is stated in the plaint that it was the mandate of
written bank guarantee itself that the said bank guarantee would not
be invoked if the amount of refund was not received by the plaintiff
from the Government of India. The bank guarantee does not say so.
The bank guarantee in terms provides that even if the amount was not
refunded, the plaintiff would be liable to pay the amount to the 1 st
defendant. To this extent the statement in the plaint appears to be
erroneous. If there are any minor lacunae in the plaint, the same can
be remedied, but 1 am not prepared to non-suit the plaintiff on such a
ground at this stage, as by and large the pleading in the plaint is
adequate.

38. It must be stated that in the affidavits filed on behalf of the 1st
defendant, the factual statements made in the plaint are not denied,
even though the submissions based thereon are denied. 1 need not say
anything more on this aspect at this stage.

39. Mr. M. S. Sanghavi, the learned counsel for the defendant No. 1,
has submitted that the principles of economic duress cannot be applied
in this case as the transaction is a commercial transaction and the
plaintiff is not a Parda Nashin lady, but is a professionally managed
Corporation. With respect to the learned counsel, it is taking too narrow
a view of the law of economic duress and paragraph 82 of the
judgment of the Supreme Court in the case of Central InlandWater
Transport Corporation Ltd. v. Brojo Nath : (1986)IILLJ171SC (supra) is a
complete answer to this submission. Mr. Sanghavi has further
submitted that the plaintiff should have stopped further supplies to the
defendant unless the defendant No. 1 agreed to pay the domestic price
and ought to have taken steps to recover the balance of the price
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computed on the footing of domestic price by adopting appropriate
proceeding in a Court of law. The plaintiff could have done so, but law
of economic duress and fraud proceeds on the footing that the
wrongdoer cannot take advantage of its own wrong merely because
the victim of the wrong was compelled to submit to the wrongful
demand of the other party to the contract or the beneficiary of the
bank guarantee. In my judgment, there is no merit in this contention
also. Mr. Sanghavi has then submitted that the draft of the bank
guarantee was mutually approved and the plaintiff executed the same
after the draft thereof was approved. It is so. Still the Court will have to
consider the circumstances in which the said bank guarantee was
executed by the plaintiff and all other facts and circumstances. If the
bank guarantee is taken at its face value and the surrounding
circumstances are not even to be analysed, the question of examining
as to whether the recognised exception is made out or not can never
arise. Mr. Sanghavi has submitted that the injunction was refused in
the case of Edward Owen Engineering Ltd. v. Barclays Bank, (1978) 1
All ER 976, even though the conduct of the beneficiary could be termed
as fraudulent conduct. I respectfully disagree. The Court came to the
conclusion that the allegations of fraud were not substantiated and the
relief was therefore denied. Mr. Sanghavi has submitted that the
judgment of the High Court of Calcutta in Texmaco Ltd.'s case :
AIR1979Cal44 , is overruled by the subsequent judgment of the
Supreme Court in U.P. Co-operative Federation Ltd. v. Singh
Consultants & Engineers (P) Ltd., : [1988]1SCR1124 (supra). It is not
possible to agree with this submission. In paragraph 22 of the written
submissions it is contended on behalf of the 1st defendant that the real
dispute was in respect of subsequentsupplies and not in respect of the
order dated 12th December 1983. Mr. Sanghavi has tried to create an
impression on the mind of the Court as if the plaintiff had received
certain benefits from the Government of India in respect of its claim for
drawback etc. It is not possible to accept this submission. It is not to be
found in any of the affidavits filed on behalf of the 1st defendant and it
is not borne out by the correspondence or other documents on record.

40. In the conclusion, 1 hold that the plaintiff has made out a strong
prima facie case establishing at this stage that the 1st defendant had
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procured the consent of the plaintiff to the stipulation in the bank
guarantee for its invocation irrespective of non-receipt of the amount
of refund of Customs duty as a result of economic duress and fraud
committed by it on the plaintiff and the special equities of the situation
also warrant grant of an injunction in favour of the plaintiff as sought
for. I must, however, state that the plaintiff has not made out an
equally strong prima facie case on the second question i.e. whether the
plaintiff has approbated or affirmed the varied transaction by renewal
of the bank guarantee after the economic duress has ceased to
operate on the mind of the plaintiff. On this aspect as to whether the
plaintiff's conduct after release of Rs. 1,48,00,000/- by defendant No. 1
to the plaintiff is consistent with the 1st defendant's case of
approbation of the transaction or with the plaintiff's case that the said
extensions of the bank guarantee were also obtained by the 1st
defendant as a result of duress exercised would, in any event, require
recording of oral evidence at the trial. At this stage, both the sides
appear to have an equally arguable case on this aspect and it cannot
be said that the plaintiff has a strong case and the 1st defendant has a
weaker case. I am of the opinion that the plaintiff shall suffer an
irreparable loss unless the plaintiff is protected by grant of an interim
injunction. I am recording this prima facie conclusion for completion of
record, although this aspect is not much relevant in bank guarantee
cases.

41. In this view of the matter, the question which I have to ask myself
is as to whetherI should dismiss the notice of motion or grant the
interim relief by imposing suitable conditions on the plaintiff. However,
after carefully considering the various pros and cons of the matter I
have come to the conclusion that in view of my prima facie finding on
the first question, injunction will have to be granted in favour of the
plaintiff, but not unconditionally. The question as to whether the
plaintiff can be said to have waived its right to raise the plea against
invocation of bank guarantee or is estopped from raising the pleas
raised is not free from doubt.

42. In the result, I make the notice of motion absolute in terms of

prayer (a), subject to the following conditions:--
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(1) The plaintiff shall file written undertaking in Court, within a period of
two weeks from today, to renew the said bank guarantee and to keep
the same alive during the pendency of the suit till its final disposal and
for a period of 8 weeks thereafter.

(2) The plaintiff shall file a written undertaking in Court, signed by its
Director, supported by a Board Resolution, within a period of two
weeks from today, stating therein that in the event of the suit failing, in
addition to the amount of the bank guarantee being available to
defendant No. 1, the plaintiff shall also pay amount of interest on the
said sum of Rs. 1,48,00,000/ - at the rate of 18% per annum from the
date of filing of the suit till payment.

(3) The plaintiff shall deposit a sum of Rs. 50,00,000/- in Court by the
following instalments:

(i) Rs. 20 lacs on or before 15th March 1991;

(ii) Rs. 15 lacs on or before 15th May 1991; and

(iii) Rs. 15 lacs on or before 30th June 1991.

43. The hearing of the suit is expedited. The defendants are already
directed to file their written statements within a period of four weeks
from 17th January 1991. Parties shall complete discovery and
inspection within a period of two weeks thereafter. The suit shall be
peremptorily placed on board for hearing on 8th July 1991.

44. In the event of the plaintiff committing default in respect of any of

Us above-referred obligations, interim injunction shall stand vacated.

45. In case defendant No. 1 desires to withdraw the said amount of Rs.
50 lacs or any part thereof, the defendant No. 1 shall be at liberty to
make necessary application to the Court in that behalf and the
defendant No. 1 may be permitted to withdraw such amount, subject to
their undertaking to refund the amount back with such interest as the
Court may award in case the suit succeeds.

46. The Prothonotary shall invest the said amount with a nationalised
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bank in fixed deposit for such duration as he deems fit, unless the
defendant No. 1 exercises the liberty to withdraw the said amount on
terms aforesaid.

47. Costs of the notice of motion shall be costs in the cause.

48. Notice of motion made absolute.

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