1999SCMR591

[Supreme Court of Pakistan]

Present: Ajmal Mian, C. J., Abdur Rehman Khan and Ch.

Muhammad Arif, JJ

HARAL TEXTILES LIMITED---Appellant

versus

BANQUE INDOSUEZ BELGIUM, S.A. and others---

Respondents

Civil Appeal No.612 of 1997, heard on 19th October, 1998..

(On appeal from the judgment dated 21-3-1997 of the Lahore

High Court, Lahore, passed in F.A.O. No.318 of 1996).

(a) Civil Procedure Code (V of 1908)---

----0. XXXIX, Rr. 1 & 2---Negotiable Instruments Act (XXVI

of 1881), Ss. 13, 9 & 5---Constitution of Pakistan (1973), Art.
185(3)---Import of machinery by plaintiff on the basis of Letter
of Credit on terms that payment was to be made in twelve
instalments on the dates specified on the Bills of Exchange---
Machinery so imported was found to be defective resulting in
serious josses to the importer---Breach of specifications and
inferior quality was also alleged--Application of importer under
O.XXXIX, Rr. 1 & 2,'C.P.C. for ad interim injunction
restraining respondents from claiming payment or remitting
under the Letter of Credit until the respondents furnished Bank
Guarantee equivalent to the amount of Letter of Credit, was
granted by Trial Court which was set aside by. High Court in
appeal---Validity---Leave to appeal was granted by Supreme
Court to consider the questions as to whether the High Court
was not justified to interfere with the discretionary order of the
Trial Court, and whether the appellant/plaintiff was estopped
from asking for restraint order against payment under the Letter
of Credit on the facts and circumstances of the case.
(b) Negotiable Instruments Act (XXVI of 1881)---

----Ss. 13, 9 & 5---Irrevocable Letter of Credit---Bill of

Exchange---Bank guarantee---Concept---Dispute between the
seller and the buyer---Effect---So long as the documents of title
to the goods which the seller tenders to the Bank are in
accordance with the terms of the contract, the Bank is under an
obligation to accept the same regardless of any dispute between
the seller and the buyer as to the quality of the goods or
otherwise---Any dispute between the seller and the purchaser is
extraneous in such a case---"Holder in due course" of a Bill of
exchange executed in respect of a Letter of Credit stands on a
higher pedestal than a simpliciter beneficiary under a Letter of
Credit---Contract of Bank 'guarantee is a trilateral contract
under which the Bank undertakes to unconditionally and
irrevocably abide by the terms of the contract---Banker's
confirmed credits are of that character which do not call for
interference by a Court of law---Court, however, in exceptional
cases will interfere with the machinery of irrevocable obligation
assumed by Banks for the reason that they are the life blood of
international commerce---Exceptional cases, include, where it is
proved that any demand for payment already made or will
thereafter be made, will clearly be fraudulent or when there .is a
challenge to the validity of a Letter of Credit on a ground akin
to fraud ' or concealment of material facts.

The effect of an irrevocable Letter of Credit is `to substitute the

issuing bank for the buyer as to the person who undertakes to
buy the shipping documents and this undertaking is absolute in
the sense that so documents of title to the goods, which the seller
tenders to the bank, are in accordance with the terms of the
contract, the bank is under an obligation to accept the same
regardless of any dispute between the seller and the buyer as to
the quality of the goods or otherwise. Any dispute between the
seller and the purchaser is extraneous in such a case. On the
basis of the above legal position an elaborate commercial
system has been built up on the footing that bankers' confirmed
credits are of that character which do not call for interference by
a Court of law. The above system would break down completely
if a dispute as between the seller and the purchaser was to have
the effect of freezing the suit in respect of which the letter of
credit was opened.

It is only in exceptional cases that the Court will interfere with

the machinery of irrevocable obligation assumed by banks for
the reason that they are the life blood of international commerce.
Such exceptional cases include, where it is proved that any
demand for payment already made or will, thereafter, be made,
will clearly be fraudulent or when there is a challenge to the
validity of a Letter of Credit on a ground akin to fraud or
concealment of material facts.

Holder in due course of a Bill of Exchange executed in respect

of a Letter of Credit stands on a higher pedestal than a
simpliciter beneficiary under a Letter of Credit. The interest of
innocent parties, who may hold drafts upon Letter of Credit,
should not be made to suffer by a reason of rights that may exist
between the parties to the contract in reference to which the
Letter of Credit was issued. It would be a sad day in the business
world, if for every breach of contract between the buyer and the
seller, a party may come to a Court of equity and enjoin payment
on drafts drawn upon a Letter of Credit issued by a bank which
owes no duty to the buyer in respect of the breach.

A contract of Bank Guarantee is a trilateral contract under which

the bank has undertaken to unconditionally and irrevocably
abide by the terms of the contract. It is founded on an act of trust
with full faith to facilitate free growth of trade and commerce in
internal or international trade or business. It, like a Letter of
Credit, creates an irrevocable obligation to perform the contract
in terms thereof. A bank must honour a Bank Guarantee free
from interference by the Courts otherwise trust of any
commerce, internal and international, would be irreparably
damaged. If a Bank Guarantee is unconditional and irrevocable,
the bank concerned must pay when demand is made unless the
bank has pledged its own credit involving its reputation.
Generally, it has no defence except in case of fraud.

C.M.A. No.519 of 1998 in Civil Appeal No.879 of 1998; Messrs

U.D.L. Industries Ltd. v. Hongguang Electron Tube Plant and
others PLD 1997 Kar. 553; Pan Ocean Enterprises (Pvt.)
Limited v. Thai Rayon Company Limited and 5 others PLD
1990 Kar. 395; Messrs Kohinoor Trading (Pvt.) Ltd v. Mangrani
Trading Co.. and 2 others 1987 CLC 1533; The State Trading
Corporation of India Ltd. v. Jainsons Clothing Corporation and
another AIR 1994 SC 2778; Syndicate Bank v. Vijay Kumar and
others AIR 1992 SC 1066; General Electric Technical Services
Company Inc. v. M/s. Punj Sons (P) Ltd and another AIR 1991
SC 1994; U.P. Cooperative Federation Ltd. v. Singh
Consultants and Engineers (P) Ltd. (1988) SCC 174; Centax
(India) v. Vinmar Impex Inc. and others AIR 1986 SC 1924;
United Commercial Bank v. Bank of India and others AIR 1981
SC 1426; Messrs Tilokchand Motichand and others v. H.B.
Munshi, Commissioner of Sales Tax, Bombay and another;
Messrs Synthetic Foams Ltd. v. Simplex Concrete Piles (India)
(Pvt.) Ltd. AIR 1988 Delhi 207; Messrs Banerjee & Banerjee v.
Hindusthan Steel Works Construction Ltd. and others AIR 1986
Cal. 374: National Oils & Chemical Industries, Delhi v. Punjab
& Sindh Bank Ltd., Delhi and another AIR 1979 Delhi 9; Braja
Kishore Dikshit v. Puma Chandra Panda AIR 1957 Orissa 153;
(Vatakkam Chirayil Parkum) Kurundaliammal v. T.P.E.N.
Kunhi Kanna and others AIR 1930 Mad. 141; The Law of
Bankers' Commercial Credits by the late H.C. Gutteridge and
Maurice 1984 Edn.; Documentary, Credits by Raymond Jack,
1993 Edn.; Frey & Sons Incorporated v. E., R. Sherburne
Company and The National City Bank' of New York App. Div.
ol. CCCIII, November 12, 1920; Hamzeh Malas & Sons v.
British lmex Industries Ltd. (2 QBD 127: Discount Records Ltd.
v Barclays Bank Ltd. and another (1975) 1 All ER 1071; B.S.
Aujla Company (Pvt.) Ltd. v. Kaluram Mahadeo Prosad and
others AIR 1983 Cal. 106; Sirafi Trading Establishment v.
Trading Corporation .of Pakistan Ltd. 1984 CLC 381; Messrs
Allied Industries Hub (Pvt.) Ltd. v. Messrs China National
Metais and Mineral Import and Export Corporation and another
1989 MLD 2027 and Sevenska Handelsbanken v . Messrs
Indian Charge Chrome andothers 1995 PSC 1276 ref.

(c) Negotiable Instruments Act (XXVI of 1881)---

----Ss. 9 & 5---Holder in due course of a "Bill of Exchange"

executed in respect of a Letter of Credit stands on a higher
pedestal than a simpliciter beneficiary under a Letter of Credit-
--Interest of innocent parties, who may hold drafts upon Letter
of Credit should not be made to suffer by a reason of rights that
may exist between the parties to the contract in reference to
which the Letter of Credit was issued---Not appropriate if for
every breach of contract between the buyer and the seller a party
may come to a Court of equity and enjoin payment on drafts
drawn upon a Letter of Credit issued by a Bank which owes no
duty to the buyer in respect of the breach.

(d) Negotiable Instruments Act (XXVI of 1881)---

----Ss. 13, 9 & 5---Bank guarantee---Concept---Contract of

Bank Guarantee is a trilateral contract under which the Bank has
undertaken to unconditionally and irrevocably abide by the
terms of the contract---Bank Guarantee is founded on an act of
trust with full faith to facilitate free growth of trade and
commerce in internal or international trade or business---Bank
Guarantee like a Letter of Credit, creates an irrevocable
obligation to perform the contract in terms thereof---Bank must
honour a Bank Guarantee free from interference by the Courts-
--If a Bank Guarantee is unconditional and irrevocable, the Bank
concerned must pay when demand is made unless the Bank has
pledged its own credit involving its reputation, generally, Bank
has no defence except in case of fraud.

Gul Zarin Kiani, Advocate Supreme Court and Ch. Akhtar Ali,
Advocate-on-Record for Appellant.

Jawwad S. Khawaja, Advocate Supreme Court and Mehr Khan

Malik, Advocate-on-Record for Respondents Nos. 1 to 3.

Date of hearing: 19th October, 1998.

JUDGMENT

AJMAL MIAN, C.J.--This is an appeal with the leave of this

Court, against the judgment dated 21-3-1997 passed by a
learned Single Judge of the Lahore High Court in F.A.O. No.318
of 1996, filed by the respondents against the order dated 29-10-
1996 of the learned Civil Judge, 1st Class, Lahore, on the
respondents' application filed under Order XXXIX, Rules I and
2, C.P.C. granting ad interim injunction restraining respondents
Nos. 3 and 8 from claiming payment or remitting under the
Letter of Credit until and unless respondents Nos.3 and 8 furnish
Bank guarantee equivalent to the amount of letter of credit,
allowing the same as follows:--

"10 For the above reasons, this appeal is allowed and the
impugned order dated 29-10-1996, restraining payment under
the Letter of Credit except on the condition of furnishing of bank
guarantee. is set aside and the application of plaintiff-respondent
No.1 herein filed under Order 39, Rules 1 and 2, C,,P.C. is
hereby dismissed. No order as to costs. "

2. Leave to appeal was granted to consider the questions

whether the High Court was not justified to interfere with in the
discretionary order of the Trial Court, and whether the
appellant/plaintiff was estopped from asking for restraint order
against payment under the Lettat: of Credit on the facts and
circumstances of the case.

3. The brief facts are that the appellant agreed to purchase

certain machinery from respondent No.2, a Belgium firm, and
for that purpose opened an irrevocable Letter of Credit through
M/s. Allied Bank of Pakistan Limited, which have been
arraigned as respondents Nos.6 to 8 in the present appeal
through Branch Managers referred to therein, in favour of
respondent No.2 (i.e the seller). It seems that under the terms of
the Letter of Credit the payment was to be made in 12
instalments on the dates specified on the bills of exchange drawn
by respondent No.2, i.e. the seller, and accepted by the
appellant/purchaser. It appears that the required machinery and
other allied articles were duly received and the same were
installed. It is the case of the appellant that upon operation of
the above machinery it was discovered that the same was
defective, resulting in serious losses to the appellant. The
appellant, therefore, filed Suit No.375 of 1996 for the recovery
of Rs.344.68 million or its equivalent amount in Belgium
currency on the ground of breach of specifications and the
inferior quality thereof. They also sought permanent injunction
against the defendants inter alia for restraining M/s. Allied Bank
of Pakistan Limited from releasing or remitting any payment by
annual instalments. Alongwith the plaint of the suit the appellant
also filed an application under Order XXXIX, Rules 1 and 2,
C.P.C., which was allowed by learned Civil Judge, 1st Class,
Lahore, through his above order dated 29-10-1996 in the
aforesaid terms; against which respondent No.1 bank (which is
the holder in due course) sought further injunction restraining
the seller and the negotiating bank/respondent No.1 from
claiming any amount under the Letter of Credit or the bills of
exchange drawn under the Letter of Credit by making payment
of the sale price to respondent No.2, the seller, filed F.A.O.
No.318 of 1996, which was allowed in the above terms.
Thereupon, the appellant filed a petition for leave to appeal
which was granted to consider the above questions.

4. In support of the aforesaid appeal Mr. Gul Zarin Kiani,

learned A.S. C. appearing for the appellant, has vehemently
contended that since the order of the learned Civil Judge
directing the appellant and M/s. Allied Bank of Pakistan Limited
not to remit the balance of the amount under the Letter of
Credit/Bills of Exchange without getting the bank guarantee was
just and proper, the learned Judge in Chambers was not justified
to interfere with the above discretionary order particularly when
it was alleged that respondent No.2, the seller, had committed
fraud to which respondent No. l was also a party.

On the other hand, Mr. Jawwad S. Khawaja, learned Advocate

Supreme Court for respondents Nos. l to 3. has urged that no
allegation of fraud or any other misconduct on the part of
respondent No. l was alleged by the appellant in their plaint and
since respondent No. l is the holder in due course of the bills of
exchange for consideration drawn under the letter of credit and
after having paid the price to the seller, the learned Civil Judge
was not justified in burdening the above respondents to furnish
bank guarantee for the balance amount to be remitted under the
Letter of Credit guaranteed by the Bills of Exchange.

5. Before touching upon the above contentions on merits, we

may observe that Mr. Gul Zarin Kiani, learned Advocate
Supreme Court appearing for the appellant, pas candidly
submitted that in the body of the plaint or in the application
under Order XXXIX, Rules 1 and 2, C.P.C. or in the supporting
affidavit, no allegation as to fraud or any other misconduct on
the part of respondent No.1 was alleged. However, he submitted
that an application for amendment of the plaint has been filed in
which the amendment is sought of the plaint as to include the
above plea of fraud on the part of respondent No.1 Mr. Jawwad
S. Khawaja has submitted that his client has not received any
copy of such application.

6. Be that as it may, it will not be appropriate on our part to take

into consideration the allegations which are now sought to be
made through the amendment. Even the amendment application
has not yet been allowed. We would, therefore, proceed on the
assumption that there is no allegation of fraud or any misconduct
on the part of respondent No. l bank, which is holder in due
course of the Bills of Exchange for consideration.

7. Mr. Gul Zarin Kiani, learned Advocate Supreme Court for the
appellant, has referred to section 9 of the Negotiable Instruments
Act, 1881, particularly the Explanation to the same. Above
section 9 lays down that "Holder in due course" means any
person who for consideration becomes the possessor of a
promissory note, bill of exchange or cheque if payable to bearer,
or the payee or indorse thereof, if payable to order, before it
became overdue, without notice that the title of the person from
whom he derived his own title was defective.

Explanation to the same provides that "For the purpose of this

section the title of a person to a promissory note, Bill of
Exchange or cheque is defective when he is not entitled to
receive the amount due thereon by reason of the provisions of
section 58".

It may be stated that section 58 lays down that "when a

promissory note, Bill of Exchange or cheque has been lost or
has been obtained from any maker, drawer, acceptor or holder
thereof by means of an offence or fraud, or for an unlawful
consideration, neither the person who finds or so obtains the
instrument nor any possessor or indorsee who claims through
such person is entitled to receive the amount due thereon from
such maker, drawer acceptor or holder, unless such possessor or
indorsee is, or some person through whom he claims was,, a
holder thereof in due course".

8. On the other hand, Mr. Jawwad S. Ktiawaja, learned

Advocate Supreme Court for respondents Nos. 1 to 3, has
referred to section 118 of the aforesaid Act, which provides as
under:--

" 118. Presumptions as to negotiable instruments --Until the

contrary is proved, the following presumption shall be made--

(a) of consideration; that every negotiable instrument was made

or drawn for consideration, and that every such instrument,
when it has been accepted, indorsed, negotiated or transferred,
was accepted, indorsed, negotiated or transferred, for
consideration

(b) as to date; that every negotiable instrument bearing a date

was made or drawn on such date;

(c) s to time of acceptance; that every accepted bill of exchange

was accepted within a reasonable time after its date and before
its maturity;

(d) as to time of transfer; that every transfer of a negotiable

instrument was made before its maturity;

(e) as to order of endorsement; that the endorsements appearing

upon a negotiable instrument were made in the order in which
they appear thereon;

(f) as to stamp; that a lost promissory note, bill of exchange or

cheque was duly stamped;

(g) that holder is a holder in due course; that the holder of a

negotiable instrument is a holder in due course; provided that,
where instrument has been obtained from its lawful owner, or
from any person in lawful custody thereof, by means of an
offence or fraud, or has been obtained from the maker or
acceptor thereof by means of an offence or fraud, or for
unlawful. consideration, the burden of proving that the holder is
a holder in due course lies upon him."

9. In our view, prima facie there is nothing uptil now on record

from which it can be concluded that either the above
Explanation to section 9 of the above Act is attracted to or
section 58 thereof. On the contrary, as pointed out hereinabove,
there is no allegation in the body of the plaint or in the
application filed under Order XXXIX, Rules 1 and 2, C.P.C. or
in the supporting affidavit which may disentitle respondent No.
l from receiving the amount under the Bills of Exchange. There
is nothing reliable on record till now from which the
presumption attached to the validity of the Bills of Exchange
under section 118 of the above Act can be negated.

10. Mr. Gal Zarin Kiani, learned Advocate Supreme Court for
the appellant, has referred to the following case-law in support
of his above submissions:--

(i) An unreported order dated 26-6-1998 passed on C.M.A.

No.519 of 1998 in Civil Appeal No.879 of 1998 by this Court,
which appeal was directed against the order of a learned Single
Judge of the Lahore High Court directing that the amount of
instalments due under the Letter of Credit be paid to the
appellant on the condition of furnishing a bank guarantee was
modified as the quantum of amount.

(ii) Messrs U.D.L. Industries Ltd. v. Hongguang Electron Tube

Plant and others PLD 1997 Karachi 553;

in which a learned Single Judge of the High Court of Sindh

allowed the encashment of a Letter of Credit subject to
furnishing bank guarantee by the defendants on an application
under Order XXXIX, Rules 1 and 2, C.P.C. after having found
that the whole transaction was vitiated by fraud on the part of
the seller.

(iii) Pan Ocean Enterprises (Pvt.) Limited v. Thai Rayon

Company Limited and 5 others PLD 1990 Karachi 395;
In the above case a learned Single Judge of the High Court of
Sindh after having found prima facie that the bill of lading
contained wrong statements of facts particularly about the dates
of shipping, vessels in-which the goods were loaded and that
there was transshipment, and all -this was in violation of the
terms of Letter of Credit, restraining defendants Nos. 1 and 6
from claiming payment under the Letter of Credit in question
and defendants Nos. 4 and 5 from making any payment
thereunder until and unless defendants Nos.1 and 6 furnished
bank guarantee equivalent to the amount of Letter of Credit.

(iv) Messrs Kohinoor Trading (Pvt.) Ltd. v. Mangrani Trading

Co. and 2 others 1987 CLC 1533;

in which a Division Bench of the High Court of Sindh to which

one of us (Ajmal Mian, C.J.) was a party, maintained the order
of a learned Single Judge declining to issue a restraint order
against the bank from releasing the amount under a Letter of
Credit and observed as follows as to the law governing the grant
of an ad interim injunction restraining the bank from honouring
its commitment under a Letter of Credit:--

"The above cases cited by Mr. Nasim Farooqui and the passages
from the Book referred to by him indicate that generally an
irrevocable Letter of Credit cannot be dishonoured by a bank
but there may be exceptions to the above general rule, for
example, where it is proved that the bank knows that any
demand for payment already made or which may thereafter be
made will clearly be fraudulent but the evidence on the question
of fraud as to the bank's knowledge must be clear, or when there
is challenge to the validity of the Letter of Credit. In the present
case respondent No.3 Bank was to remit L/C amount to their
counterpart in Switzerland on the basis of the commitment made
by them. The appellants obtained the documents from
respondent No.3 without any protest and without pointing out
that there was any breach as to the terms of the L/C. It is also
apparent that though the alleged survey report (which according
to the learned counsel for the respondents 1 and 2 is an ex parte
carried out after several weeks from the date of the delivery)
indicates that the packing of the goods were allegedly found in
damaged condition, the appellants had taken the delivery of the
goods from the carrier without any protest. The

question, whether the goods were despatched by respondent

No.2 in accordance with the description given in the Letter of
Credit or whether there was any breach as to ;re quality would
be an issue at the trial. In our view, under an irrevocable Letter
of Credit payment cannot be stopped on the ground that there
was some breach on the part of the vendor as to the quality of
the goods. An irrevocable Letter of Credit is a negotiable
document in the commercial world which is negotiated inter
alia inter se between the banks and, therefore, the Court a cannot
lightly cause its dishonouring by one bank to another, unless
prima facie a sufficiently grave cause is shown. If we were to
accept the contention of Mr. Nasim Farooqui it will gravely
impair reliability and sanctity of an irrevocable Letter of Credit
and will lead to commercial uncertainty. an irrevocable Letter
of Credit is open in favour of a foreign exporter through a bank,
which in turn makes commitment to a foreign bank, which in
turn makes the payment generally against the bill of lading and
other necessary documents after the shipment of the goods. "

(v) The State Trading Corporation of India Ltd., v. Jainsons

Clothing Corporation and another (AIR 1994 SC 2778).

In the above case the Indian Supreme Court allowed an appeal

against a restraint order against the encashment of a bank
guarantee and enunciated law in respect thereof in the following
terms:--

"9. The grant of injunction is a discretionary power in equity

jurisdiction. The contract of guarantee is a trilateral contract
which the bank has undertaken to unconditionally and
unequivocally abide by the terms of the contract. It is an act of
trust with full faith to facilitate free flow of trade and commerce
in internal or international trade of business. It creates an
irrevocable obligation to perform the contract in terms thereof.
On the occurrence of the events mentioned therein the bank
guarantee becomes enforceable. The subsequent disputes in the
performance of the contract does not give rise to a cause nor is
the Court justified on that basis, to issue an injunction from
enforcing the contract, i.e. bank guarantee. The parties are not
left with no remedy In the event of the dispute in the main
contract ends in the party's favour he/it is entitled to damages or
other consequential reliefs.

10. It is settled law that the Court, before issuing the injunction
under Order 39, Rules 1 and 2, C.P.C. should prima facie be
satisfied that there is triable issue strong prima facie case of
fraud or irretrievable injury and balance of convenience is in
favour of issuing injunction to prevent irremedial injury. The
Court should normally insist upon enforcement of the bank
guarantee and the Court should not interfere with the
enforcement of the contract of guarantee unless there is a
specific plea of fraud or special equities in favour of the
plaintiff. He must necessarily plead and produce all the
necessary evidence in proof of the fraud in execution of the
contract of the guarantee, but not the contract either of the
original contract or any of the subsequent events that may
happen as a ground for fraud. "

(vi) Syndicate Bank, v. Vijay Kumar and others, AIR 1992 SC

1066.

in which the Indian Supreme Court allowed the appeal of the

appellant bank against a restraint order passed in respect of two
F.D.Rs. over which the bank had lien in respect of the liability
of the judgment-debtor. However, the case was remanded in the
following terms:--

"However, in the view taken by us above namely that the Bank

has a general lien over the two F.D.Rs. we set aside the order of
the High Court directing the appellant-Bank to deposit an
amount of Rs.35,000. The High Court shall, however, consider
the objections raised by the Bank, namely that no amounts are
due to the judgment-debtor, in the light of the above principles
laid down by us and then decide whether there is any amount
left for being attached by the decree-holder in execution of his
decree. With the above directions the appeal is accordingly
allowed. In the circumstances of the case, there will be no order
as to costs. "
(vii) General Electric Technical Services Company Inc. v. M/s.
Punj Sons (P) Ltd. and another AIR 1991 SC 1994.

In the above case the Indian Supreme Court allowed the appeal
against the judgment of the High Court and reiterated the
principle of law relating to unconditional bank guarantee and
unconditional bond in the case of U.P. Cooperative Federation
Ltd. v. Singh Consultants and Engineers (P) Ltd. (1988) 1 SCC
174 as under:--

"Almost all such cases have been considered in a recent

judgment of this Court in U.P. Cooperative Federation Ltd. v.
Singh Consultants and Engineers (P) Ltd., (1988) 1 SCC 174,
wherein Sabyasachi Mukherji, J., as he then was, observed (at
p.189): 'that is order to restrain the operation either of
irrevocable Letter of Credit or of confirmed Letter of Credit or
of bank guarantee. There should be good prima facie case of
fraud and special equities in the form of preventing irretrievable
injustice between the parties. Otherwise, the very purpose of
bank guarantee would be negatived and the fabric of trading
operations will get jeopardized'. It was further observed that the
Bank must honour the bank guarantee free from interference by
the Courts. Otherwise, trust in commerce internal and
international would be irreparably damaged. It is only in
exceptional cases that is to say in case of fraud or in case of
irretrievable injustice, the Court should interfere.

In the concurring opinion one of us (K. Jagannatha Shetty, J.)

has observed that whether it is a traditional bond or performance
guarantee, the obligation of the Bank appears to be the same. If
the documentary credits are irrevocable and independent, the
Bank must pay when demand is made. Since the Bank pledges
its own credit involving its reputation. It has no defence except
in the case of fraud. The Bank's obligations of course should not
be extended to protect the unscrupulous party, that is, the party
who is responsible for the fraud. But the banker must be sure of
his ground before declining to pay. The nature of the fraud that
the Court talk about is fraud of an egregious nature as to vitiate
the entire underlying transaction'. It is fraud of the beneficiary,
not the fraud of somebody else."
(viii) Centax (India), Appellant v. Vinmar Impex Inc. and others
AIR 1986 SC 1924.

In the above case the Indian Supreme Court, while dismissing

the appeal and maintaining the order of the High Court
declining to restrain the Bank from making payment, reiterated
the principle governing the grant or refusal of injunction in
respect of payment under the Letter of Credit as follows:--

"This case is really an extension of the principles laid down by

this Court in United Commercial Bank's case. The main point
in controversy in that case was whether the Court should in a
transaction between a banker and banker grant an injunction at
the instance of the beneficiary of an irrevocable Letter of Credit,
restraining the issuing bank from recalling the amount paid
under reserve from the negotiating bank, acting on behalf of the
beneficiary against a document of guarantee/indemnity at the
instance of the beneficiary. In dealing with the nature of a
banker's obligation under an irrevocable Letter of Credit, the
Court observed:

'In view of the banker's obligation under an irrevocable Letter

of Credit to pay, his buyer-customer cannot instruct him not to
pay. In Hamzeh Malas v. British Imex Industries Ltd., (1958)
2QB 127, the plaintiffs, the buyers, applied for an injunction
restraining the sellers, the defendants, from drawing under the
credit established by the buyer's bankers. This was refused,
Jerking, LJ stating at p.129 that: ,

the opening of a confirmed Letter of Credit constitutes a bargain

between the banker and the vendor of the goods which imposes
on the banker an absolute obligation to pay .... and that this was
not a case in which the Court ought exercise its discretion and
grant the injunction.

The Court held that the same considerations should apply to a

bank guarantee, and added: "

(ix) United Commercial Bank, v. Bank of India and others, AIR

1981 SC 1426;
In the above case the Indian Supreme Court allowed an appeal
against the judgment of the High Court and held that the Courts
should refrain from granting injunction to restrain the
performance of the contractual obligations arising out of Letter
of Credit or a bank guarantee between one bank and another by
reiterating as follows:--

"A bank which gives a performance guarantee must honour that

guarantee according to its terms. In R.D. Harbottle (Mercantile)
Ltd. v. National Westminster Bank Ltd., (1977) 3 WLR 752,
Kerr, J. considered the position in principle. We would like to
adopt a passage from his judgment at p.761: It is only in
exceptional cases that the Courts will interfere with the
machinery of irrevocable obligations assumed by banks. They
are the life-blood of international Commerce. Such obligations
are regarded as collateral to the underlying rights and
obligations between the merchants at either end of the banking
chain. Except possibly in clear cases of fraud of which the banks
have notice, the Courts will leave the merchants to settle !heir
disputes under the contracts by litigation or arbitration as
available to them or stipulated in the contracts. The Courts are
not concerned with their difficulties to enforce such claims;
these are risks which the merchants take. In this case the
plaintiffs took the risk of the unconditional wording of the
guarantees. The machinery and commitments of banks are on a
different level. They must be allowed to be honoured, free from
interference by the Courts. Otherwise trust in international
commerce could be irreparably damaged.

(x) M/s. Tilokchand Motichand and others v. H.B.Munshi,

Commissioner of Sales Tax, Bombay and another.

In this case also the Indian Supreme Court re-affirmed its view
that in international trade irrevocable Letters of Credit are very
important and the Court should refrain from interfering with the
autonomy of an irrevocable Letter of Credit is entitled to
protection.

(xi) M/s. Synthetic Foams Ltd. v. Simplex Concrete Piles

(India) (Pvt.) Ltd. AIR 1988 Delhi 207;
in which a learned Single Judge of the Delhi High Court granted
an ad interim injunction restraining the enceshment of a bank
guarantee and after having found prima facie that the
beneficiaries/defendants had invoked the bank guarantee by
suppression of material facts but where there allegations of
fraud in so far as
they had not disclosed that the contract had been cancelled by
the defendants due to increase in price and technical reasons
without any fault or mistake of the plaintiff. ,

(xii) M/s. Banerjee & Banerjee v. Hindusthan Steel Works

Construction Ltd. and others (AIR 1986 Calcutta 374):

In the above case a learned Single Judge of the Calcutta High

Court observed 'that suppression of material facts by
beneficiary while seeking enforcement of bank guarantees will
entail special equity in favour of principal debtor to stop
payment by Bank on the basis of demand letters in respect of
the bank guarantees and the Letters of Credit.

(xiii)National Oils & Chemical Industries, Delhi v. Punjab &

Sindh Bank Ltd., Delhi and another (AIR 1979 Delhi 9):

In the aforesaid case a learned Single Judge of the Delhi High

Court held that the principle of independence of Bank's
obligation under the Letters o; Credit was not to be extended to
protect unscrupulous sellers and that in the case before him
there was good ground for an ad interim injunction.

(xiv) Braja Kishore Dikshit v. Puma Chandra Panda (AIR 1957

Orissa 153);

in which a learned Single Judge of the Orissa High Court

construed inter alia section 9 of the Negotiable Instruments Act,
1881, and held that in order to be a holder in due course. three
conditions are necessary, namely:

(i) That the endorsee becomes the holder in due course when it
is for consideration;
(ii) he can be an indorsee before the amount mentioned in the
promissory note became payable; and

(iii) without having sufficient cause to believe that any defect

existed in the title of the person from whom he derived his title.

(xv) (Vatakkam Chirayil Parkum) Kurundaliammal v. T.P.E.N.

Kunhi Kannan and others (AIR 1930 Madras 141):

In the above case, a learned Single Judge of the Madras High

Court, while construing section 9 of the Negotiable Instruments
Act, held that unless a person proves that he is a holder in due
course within the meaning of section 9, he could not have any
higher or superior rights against the drawer than the
intermediate holders themselves would have, and that, the
person knows of the defect of title of the intermediate holders
and it is enough to disentitle that person to the benefits of a
holder in due course

11. On the other hand, Mr.Jawwad S.Khawaja, learned

Advocate Supreme Court appearing for respondents Nos.l to 3,
besides referring the cases mentioned at Serial numbers (v), (xi)
and (xiv) of para. 10 already referred to-by Mr.Gul Zarin Kiani
and discussed hereinabove and need not be repeated, has relied
upon the following treatises and the case-law.

(i) The Law of Bankers' Commercial Credits by the late H. C.

Gutteridge and Maurice, 1984 Edition.

In the above treatise the authors dealt with the effect of

irrevocable Letter of Credit as follows:--

"The effect of an irrevocable credit is to substitute the issuing

Bank for the buyer as the person who undertakes to 'buy' the
shipping documents, and this is an undertaking which is
absolute in the sense that so long as the documents of title to the
goods which the seller tenders to the Bank are in order, in the
sense of being those prescribed in the credit, the bank must
accept them regardless of any controversy between the seller
and the buyer as to whether the contract of sale has been
performed. "
(ii) Documentary Credits by Raymond Jack, 1993 Edition.

In the aforesaid treatise the author under the caption ".'the

autonomy of the credit" has made the following observations as
to the basic rule that the Court will not interfere to prevent the
operation of credit:--

"The basic rule -- the autonomy of the credit.--The basic rule is

that the Court will not interfere to prevent the operation of a
credit on the ground of matters which are extraneous to the
credit itself, This is but one aspect of the autonomy principle.
In Hamzeh Malas & Sons v British Imex Industries Ltd. the
plaintiff buyers considered that the goods supplied as the first
installment under a two-installment contract were seriously
defective and sought to prevent the defective sellers from
presenting documents in respect of the second installment under
the confirmed credit which the buyers had arranged to be
opened as the means of payment. The injunction was refused.
In giving the leading judgment in the Court of Appeal Jenkins,
LJ. stated:

' We have been referred to a number of authorities, and it seems

to be plain enough that the opening of a confirmed Letter of
Credit constitutes a bargain between the banker and the vendor
of the goods, which imposes upon the banker an absolute
obligation to pay, irrespective of any dispute there may be
between the parties as to whether the goods up to contract or
not. An elaborate commercial system has been built up on the
footing that bankers' confirmed credits are of that character,
and, in my judgment, it would be wrong for this Court in the
present case to interfere with that established practice.

There is this to be remembered, too. A vendor of goods selling

against a confirmed Letter of Credit is selling under the
assurance that nothing will prevent him from receiving the
price. That is of no mean advantage when goods manufactured
in one country are being sold in another. It is, furthermore, to
be observed that vendors are often reselling goods bought from
third parties-.ten they are doing that, and when they are being
paid by a confirmed Letter of Credit, their practice is -- and I
think it was followed by the defendants in this case-- to finance
the payments necessary to be made to their suppliers against the
Letter of Credit. That system of financing these operations, as I
see it, would break down completely if a dispute as between the
vendor and the purchaser was to have the effect of "freezing",
if I may use that expression, the sum in respect of which the
Letter of Credit was opened."

(iii) Frey & Sons, Incorporated v. E.R. Sherburne Company and

The National City Bank of New York App. Div. Vol. CCCIII,
November 12, 1920.

In the above case the Appellate Court Division maintained the

order declining to grant an ad interim injunction restraining the
bank from making payment to the holder of a bill of exchange
by observing as under:--

"We are of opinion that the facts appearing in the opinion of

that case did not warrant the granting of an injunction. Interests
of innocent parties who may hold drafts upon the Letter of
Credit should not be made to suffer by reason of rights that may
exist between the parties to the contract of sale in reference to
which the Letter of Credit was issued. It would be a calamity to
the business world if for every breach of a contract between
buyer and seller a party may come into a Court of equity and
enjoin payment on drafts drawn upon a Letter of Credit issued
by a bank which owed no duty to the buyer in respect of the
breach. The parties should be remitted upon their claim for
damages, to an action at law.

We think the order should be affirmed, with ten dollar cost and
disbursements. "

(iv) Hamzed Malas & Sons v. British Imex Industries Ltd. (2

Queen's Bench Division 127.)

In the above case the Court of Appeal England maintained the

order of Donovn, J. declining to restrain the bank at the behest
of a Jordanian firm which purchased from the defendant, a
British firm, a large quantity of reinforced steel rods and
observed as follows:--
"We have been referred to a number of authorities, and it seems
to be plain enough that the opening of confirmed Letter of
Credit constitutes a bargain between the banker and the vendor
of the goods, which imposes upon the banker an absolute
obligation to pay, irrespective of any dispute there may be
between the parties as to whether the goods are up to contract
or not. An elaborate commercial system has been built up on
the footing that bankers' confirmed credits are of that character,
and, in my judgment, it would be wrong for this Court in the
present case to interfere with that established practice. "

(v) Discount Records Ltd. v Barclays Bank Ltd. and another

(1975) 1 All ER 1071.

In the above case Megarry, J. of Chancery Division declined to

grant interlocutory injunction restraining the payment under the
Letter of Credit and made the following observations as to the
ground of fraud:---

"The complaint alleged fraud, and of course, no established

fraud, but merely an allegation of fraud. The defendants, who
were not concerned with that matter, have understandably
adduced no evidence on the issue of fraud. Indeed, it seems
unlikely that any action to which Promodise was not a party
would contain the evidence required to resolve this issue.
Accordingly, the matter has to be dealt with on the footing that
this is a case in which fraud is alleged but has not been
established. I should also add that on the facts required to be
assumed in the Sztejn case (1941) 31 NYS 2d 63 the collecting
bank there was not a holder in due course, who would not be
defeated by the fraud, but was merely an agent for the
fraudulent seller."

(vi) B.S. Aujla Company (Pvt.) Ltd: v. Kaluram Mahadeo

Prosad and others AIR 1983 Calcutta 106;

in which a Division Bench of the Calcutta High Court, while

setting aside the order of granting an ad interim injunction in
respect of Letter of Credit made the following observations:-- ,
"The .Courts usually refrain from granting injunction to restrain
the performance of the contractual obligations arising out of the
Letter of Credit or a bank guarantee between one banker and
another. If such temporary injunctions are to be granted in a
transaction between a banker and a banker restraining a bank
from recalling the amount due when payment was made under
reserve to another bank or in terms of the letter of guarantee or
credit executed by it, the whole banking system in the country
would fail. It is only in exceptional cases that the Courts would
interfere with the machinery of irrevocable obligations assumed
by bankers. The Supreme Court emphasised further that these
were the life-blood of the international commerce. The
machinery and commitments of banks were on a different level.
These must be allowed to be honoured free from interferences
by the Courts, otherwise trust in international commerce could
be irreparable damages. Certain observations in certain English
Courts which were followed' were referred. We shall have to
refer to these decisions to which our attention was also drawn."

(vii) Sirafi Trading Establishment v. Trading Corporation of

Pakistan Ltd. 1984 CLC 381.

In the above case a learned Single Judge of the High Court of

India declined to grant an ad interim injunction restraining the
bank from honouring the bank guarantee and observed as
follows:--

"14. From the discussion as above, I find that the bank

guarantee furnished would be governed by the same principles
of law, which are applicable to payments by the banks against
confirmed Letters of Credit. Thus an absolute obligation is
imposed upon the bank which executes the guarantee to banker
the same according to its terms. There may be exceptions to the
general rule in special cases or in cases of fraud to the
knowledge of the bank, where the Court may preclude banks
from fulfilling their obligation to third parties. "

(viii)Messrs Allied Industries Hub (Pvt.) Ltd. v. Messrs China

National Metals and Mineral Import and Export Corporation
and another (1989 MLD 2027).
In the above case a learned Single Judge of the High Court of
Sindh, while declining an application under Order XXXVIII,
Rule. 5, C.P.C. for attachment before judgment and also an
application under Order XXXIX, Rules 1 and 2, C.P.C, for
restraining the defendant bank from remitting the amount under
the Letter of Credit, held that the allegation that the defendant
had no assets in Pakistan and no relevance to the case of
irrevocable Letter of Credit had a definite implication as that
was a mechanism 'of great importance in international trade. It
was further held that except under very exceptional
circumstances the Court should not interfere with the said
mechanism through an interlocutory order.

(ix) Sevenska Handelsbanken v. M/s. Indian Charge Chrome

and others (1995 PSC 1276).

In the above case the Indian Supreme Court reiterated its view
that an ad interim injunction cannot be granted in respect of
Letter of / Credit as follows:-

"53. On the question whether the High Court should, in a

transaction between a banker and a banker, grant an injunction
at the instance of beneficiary of an irrevocable Letter of Credit
restraining the issuing bank acting on behalf of the beneficiary
against a document of guarantee at the instance of the
beneficiary this Court held that: (SCR headnote) (SCC p.784,
para.41):

'The High Court was wrong in granting the temporary

injunction restraining the appellant bank from recalling the
amount paid to the respondent bank. Courts usually refrain from
granting injunction to restrain the performance of the
contractual obligations arising out of a Letter of Credit or a bank
guarantee between one bank and another If such temporary
injunctions were to be granted in a transaction between a banker
and a banker, restraining a bank from recalling the amount due
when payment is made under reserve to another bank or in terms
of the letter of guarantee or credit executed by it, the whole
banking system in the country would fail'."
12. From the above-cited case-law and the celebrated treatises on the subject, it appears
that the effect of an irrevocable Letter of Credit is to substitute the issuing bank for the
buyer as to the person who undertakes to buy the shipping documents and this
undertaking is absolute in the sense that so long as the documents of title to the goods
which the seller tenders to the bank are in accordance with the terms of the contract, the
bank is under an obligation to

accept the same regardless of any dispute between the seller and the buyer as to the
quality of the goods or otherwise. Any dispute between the seller and the purchaser is
extraneous in such a case. On the basis of the above legal position an elaborate
commercial system has been built up on the footing that bankers' confirmed credits are
of that character which do not call for interference by a Court of law. The above system
would break down completely if a dispute as between the seller and the purchaser was
to have the effect of freezing the sum in respect of which the Letter of Credit was
opened.

It is only in exceptional cases that the Court will interfere with the machinery of
irrevocable obligation assumed by banks for the reason that they are the life blood of
international commerce. The above exceptional cases include, where it is proved that
any demand for payment already made or will thereafter be made will clearly be
fraudulent or when there is a challenge to the validity of a Letter of Credit on a ground
akin to fraud or concealment of material facts.

It may be observed that holder in due course of a Bill of Exchange executed in respect
of a Letter of Credit stands on a higher pedestal than a simpliciter beneficiary under a
Letter of Credit. It may be stated that the interest of innocent parties, who may hold
drafts upon Letter of Credit, should not be made to suffer by a reason of rights that may
exist between the parties to the contract in reference to which the Letter of Credit was
issued. It would be a sad day in the business world, if for every breach of contract
between the buyer and the seller, a party may come to a Court of equity and enjoin
payment on drafts drawn upon a Letter of Credit issued by a bank which owes no duty
to the buyer in respect of the breach.

The same principles are applicable to a Bank Guarantee. A contract of Bank Guarantee
is a trilateral contract under which the bank has undertaken to unconditionally and
irrevocably abide by the terms of the contract. It is founded on an act of trust with full
faith to facilitate free growth of trade and commerce in internal or international trade or
business. It, like a Letter of Credit, creates an irrevocable obligation to perform the
contract in terms thereof. A Bank must honour a Bank Guarantee free from interference
by the Courts otherwise trust of any commerce, internal and international, would be
irreparably damaged. If a Bank Guarantee is unconditional and irrevocable, the Bank
concerned must pay when demand is made unless the Bank has pledged its own credit
involving its reputation. Generally, it has no defence except in case of fraud.

13. No doubt in some of the above cases, particularly decided by learned Single Judges
of the High Court of Sindh, the condition to furnish a bank guarantee or any other
security for the entire amount or part thereof in respect of the Letter of Credit involved
was imposed but from the facts of the case it appears that prima facie the Court found
an element of fraud or the breach of the terms of the Letter of Credit. The above cases
have no application to the case in hand.

1 of to The upshot of the above discussion is that the appeal is

dismissed, with no order as to costs.

M.B.A./H-24/S_ Appeal dismissed.