THE STATE TRADING CORPORATION OF INDIA LTD. versus JAINSONS CLOTHING CORPORATION AND ANR.

Citation: [1994] SUPP. 3 S.C.R. 527 · Decided: 14-09-1994 · Supreme Court of India · Bench: K. RAMASWAMY, N. VENKATACHALA · Disposal: Appeal(s) allowed

Judgment (excerpt)

.. 
THE STATE TRADING CORPORATION OF INDIA LTD. 
A 
v. 
JAINSONS CLOTHING CORPORATION AND ANR. 
SEPTEMBER 14, 1994 
[K. RAMASWAMY AND N. VENKATACHALA, JJ.) 
B 
Indian Contract Act, 1872: Section 126--Contract of Guarantee-What 
is. 
Plea _of fraud-Held fraud must be of egr~gious nature. 
Contract between Principal Supplier and foreign buyer-Contract also 
between Principal Supplier and its agent-Contract with agent not co-terminus 
with non performance of contract with buyer-Held cancellation of contract 
with foreign buyer does not have the effect of frustrating the contract with 
agent. 
Section 17-Fraud-Meaning of. 
Code of Civil Procedure, 1908: Order 39--Rule i:-Temporary injuc-
tion-Grant of-Necessary conditions for-What are. 
The appellant-Corporation (Principal Supplier) entered into a con-
tract with Abu Dhabi Municipality (foreign buyer) for supply of 7,SOO M.T. 
of 'B' grade basmati rice. In turn the appellant-Corporation also entered 
into an agreement with the respondent for supply of 'B' grade basmati rice. 
In terms of clause 17 of the contract, the respondent executed a contract 
c 
D 
E 
of guarantee, the terms of which were: (i) the bank guarantee was· ir-
F 
revocable and unconditional; (ii) In the event of default by respondent for 
whatsoever reason to perform all or any of its obligations under the 
contract the appellant was entitled to invoke the guarantee; and (iii) the 
default certificate issued by the Corporati!)n was not only sufficient for 
invoking guarantee but was also conclusive, final and binding on the Bank. G 
On June 15, 1986 the appellant-Corporation issued a certificate that 
the respondent had committed a default in the performance of the contract 
and accordingly it invoked the bank guarantee. The respondent filed a suit 
in the High Court seeking a perpetual injunction restraining the appellant 
from enforcing the bank guarantee as well as an application under Order H 
527 
528 
SUPREME COURT REPORTS (1994] SUPP. 3 S.C.R. 
A 
39 Rule 1 of Civil Procedure .Code, 1908 for grant of temporary injuction, 
which was rejected. On appeal, the Division Bench of the High Court 
issued injunction against which the appellant-corporation filed appeal in 
this Court. 
B 
c 
D 
On behalf of the Respondent it was contended that the appellant-
Corporation having cancelled the. contract with foreign buyer and also 
having intimated the same to the respondent committed fraud in invoking 
the Bank guarantee. 
Allowing the appeal, this Court 
HELD : 1. The High Court was wholly wrong in its conclusion that 
the respondent has proved prima facie case for granting injunction in 
favour of enforcement of the bank guarantee. The Single Judge was quite 
right in refusing to issue the injuction in terms of clause 17 of the contract 
and the bank guarantee given by the respondent. [536-G] 
2. None of the conditions postulating fraud as mentioned in Section 
17 of Indian Contract Act, 1872 are satisfied or applicable to the facts in 
this· case. It is not the case that there is any fraud committed by the 
appellant in entering into contract with the respondent in particular with 
E reference to clause 17 of the Contract. Nor is there any fraud into forma-
tion or execution of bank guarantee. There is no clause in the contract 
entered into between the appellant and the respondents that the contract 
with the respondents is co-terminus with non- performance or frustration 
of the contract with the foreign buyer. Under those circumstances, it is not 
a case of any fraud, but at best, it is a case of cancellation of the contract 
F 
by the appellant-principal supplier with the foreign buyer. But that does 
not have the effect of frustrating or cancelling ·the contract which the 
respondent had entered into with the appellant. [533-E, F, 534-B] 
3. Before issuing the injunction under Order 39, Rule 1 and 2 of Civil 
Procedure Code, the Court should prima facie be satisfied that there is 
G triable issue, strong prim a f acie case of fraud or irretrievable injury and 
balance of convenience in favour of· issuing injunction to prevent ir-
remedial injury. The Court should normally insist upon enforcement of 
the bank guarantee and the court should not interfere with the enforce-
ment of the contract of guarantee unless there is a specific plea of fraud 
H or special equities in favour of the plaintiff. One must necessarily plead 
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S.T.C.l LTD. v. JAINSONS CLOTIIlNGCORPN. 
529 
and produce all the necessary

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