M/S. RELIANCE SALT LTD. versus M/S. COSMOS ENTERPRISES AND ANR.

Citation: [2006] SUPP. 9 S.C.R. 280 · Decided: 22-11-2006 · Supreme Court of India · Bench: S.B. SINHA · Disposal: Appeal(s) allowed

Judgment (excerpt)

A 
B 
MIS. RELIANCE SALT LTD. 
v. 
MIS. COSMOS ENTERPRISES AND ANR. 
NOVEMBER 22, 2006 
(S.B. SINHA AND DAL VEER BHANDARI, JJ.] 
Contract Act, 1872-ss. 126 and 17-Agreement of consignment-
Bank Guarantee-Invocation of, by Principal company on non-settlement of 
C bills by consignment agent within stipulated period-Suit for injunction 
restraining Principal Company from invoking Bank Guarantee by 
consignment agent, pleading case of fraud-Courts below holding invocation 
of Bank Guarantee vitiated by fraud-Correctness of-Held: Bank Guarantee 
constitutes agreement between Banker and Principal, though, at instance of 
promisor-On invocation of bank guarantee, bank is to plead case of fraud 
D and not the promisor-consignment agent-In terms of the agreement, Bank 
could not refuse invocation-Further, bank did not dispute claim of Principal 
Company nor contested the suit nor supported the case of consignment 
agent-Thus, order of courts belmv set aside. 
E 
F 
G 
H 
Respondent No. I and the appellant company entered into a sale 
agreement and respondent was appointed as consignment agent. Respondent 
No. I furnished a Bank Guarantee of Rs. 5 lakhs as required. The appellant 
could invoke the Bank Guarantee for any loss or damage suffered by it in 
case of breach of contract on non-payment of bills within 30 days. The bills 
were not settled within the time stipulated. Appellant invoked the Bank 
Guarantee. Respondent No. I filed suit for declaration that the appellant was 
not entitled to invoke the Bank Guarantee and injunction restraining 
respondent No. 2 from encashing Bank Guarantee at instance of appellant. 
Trial court decreed the suit in favour of respondent no. 1 holding that the 
invocation of Bank guarantee was vitiated by fraud. Hence the present appeal. 
Allowing the appeal, the Court 
HELD: 1.1. A bare perusal of the contents of the Bank Guarantee, shows 
that there is no escape from arriving at a conclusion that the guarantee 
furnished was an unconditional one. It not only provided for loss or damage 
280 
RELIANCE SAL TL TD. v. COSMOS ENTERPRISES 
281 
in case of breach of contract, but also loss or damage by reason of non- A 
settlement of bills. Such bills under the agreement of consignment were to 
be settled within a period of 30 days. In the event the bills are not settled 
within the period stipulated in the agreement, the parties intended, as it appears 
from the tenor of the Bank Guarantee, that the same would constitute a breach 
of contract. It is not in dispute that some amount was due to the appellant B 
from the Respondent. The suit was not a suit for settlement of accounts. The 
suit was, inter alia, only for a decree for injunction restraining appellant from 
invoking the Bank Guarantee. Respondent No. 2-Bank, did not controvert 
allegations contained in the demand of the appellant. It did not contest the 
suit. It even did not support respondent No. 1 before the trial judge or before 
the High Court. [288-G-H; 289-A-B] 
C 
1.2. A claim which is denied or disputed, in the event of necessity for 
determination of the /is. may not be found to be correct. If appellant was to 
allege a breach of contract in a properly framed suit, Respondent No. 1 could 
also allege the breach of contract on the part of appellant. Breach of contract D 
by reason of supply of inferior quality of tea or salt or delay in supply or a 
short supply may render a party responsible for damages for commission of 
breach of contract, but, breach of contract alone does not lead to the conclusion 
that a fraud had been committed thereby. It is contended that commission of 
fraud would include any act to deceive but then such act must be confined to 
acts committed by a party to a contract with intention to deceive another party E 
or his agent or to induce him to enter into a contract. Fraud, which vitiates 
the contract, must have a nexus with the acts of the parties prior to entering 
into the contract. Subsequent breach of contract on the part of a party would 
not vitiate the contract itself. [289-B-E] 
1.3. Bank Gu.arantee constitutes an agreement between the Banker and 
the Principal, albeit, at the instance of the promisor. When a contract of 
guarantee is sought to be invoked, it was primarily for the bank to plead a 
case of fraud and not for a promisor to set up a case of breach of contract. 
F 
1.4. The discrepancies in the bills or non-submission of the detailed G 
account in respect of business cannot be a g

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