FAO (OS) No. 649 OF 2006 Page 1

REPORTABLE

* IN THE HIGH COURT OF DELHI AT NEW DELHI

+ FAO (OS) No. 649 OF 2006

% Date of Decision : 12

th

October, 2007.

M/S.YOG SYSTEMS INDIA LTD. .... Appellant.

Through Mr. P.N. Lekhi, Sr. Advocate with

Mr. P.K. Aggarwal and Ms. Noor Alam, Advocates.

VERSUS

M/S. SU-KAM POWER SYSTEMS LTD. .... Respondent.

Through Mr. Sanjeev Puri, Advocate

for respondent no.1.

Mr. Pankaj Chander for respondent no.2.

CORAM:

HON'BLE DR. JUSTICE MUKUNDAKAM SHARMA, CHIEF JUSTICE

HON'BLE MR. JUSTICE SANJIV KHANNA

1. Whether Reporters of local papers may be

allowed to see the judgment?

2. To be referred to the Reporter or not ?

3. Whether the judgment should be reported

in the Digest ?

SANJIV KHANNA, J:

1. The present appeal is directed against the Order dated 29

th

August, 2006 passed by the learned Single Judge restraining the

FAO (OS) No. 649 OF 2006 Page 2

appellant-M/s. Yog Systems India Limited from encashing the bank

guarantee and confirming ex-parte ad-interim injunction dated 6

th

July, 2006 till disposal of the suit. The said suit has been filed by the

respondent-M/s.Su-Kam Power Systems Limited. Learned Single

Judge accepted the case of the respondent that the appellant had

played fraud inasmuch as he had attempted to invoke the bank

guarantee on a false pretext without supplying the goods.

2. On 26

th

May, 2006, the appellant had sent quotation to the

respondent for supply of 5000 transformers. The quotation records

that the supply would be made on Free on Board basis at Baddi,

Himachal Pradesh within one week from the date of the purchase

order. The place of delivery mentioned in the purchase order was

Baddi, Himachal Pradesh, where the factory of the respondent is

located. It is further stated in the quotation that local transport at

Baddi, Himachal Pradesh would be on buyer's account. The

quotation required that payment for the material shall be made within

7 days and secured against a bank guarantee.

3. Thereafter, a purchase order dated 26

th

May, 2006 was

FAO (OS) No. 649 OF 2006 Page 3

placed on the appellant by the respondent for supply of 5000

transformers on various dates stipulated therein. The supply order

specifically mentions that the delivery was to be made at Baddi,

Himachal Pradesh and mode and time of payment was stipulated as

against delivery. The total value of the supply order was

Rs.57,20,000/-. There is also another Purchase Order dated 26

th

May, 2006 for the same number of transformers i.e. 5000 pieces, for

the same value. The said Purchase Order, however, in supplier's

reference refers to Rev-01 dated 12

th

June, 2006. As per the said

Purchase Order delivery was to be made at Baddi, Himachal

Pradesh and the mode and terms of payment as stipulated required

payment within ten days from the date of lorry receipt.

4. A bank guarantee dated 26

th

May, 2006 for Rs.60,00,000/-

was issued by Standard Chartered Bank at the request of the

respondent in favour of the appellant. The said bank agreed to pay to

the appellant in case of default, refusal, denial, disputes raised due to

failure of the buyer to make the payment as per agreed terms. The

relevant recital in the bank guarantee reads as under:-

FAO (OS) No. 649 OF 2006 Page 4

“WHEREAS M/s Yog Systems India

Ltd. having its Registered office at DELHI at

4A, Ramchandra Lane, Civil Lines, Delhi –

110054 hereinafter for the sake of brevity

referred to as “the SELLER” (which

expressions shall include its successors in

interest and assigns) AND M/s Su-Kam

Power Systems Ltd., a public Limited

Company and having its Registered Office at

WZ-1401/2, Nangal Raya, New Delhi-110046

and Corporate Office of Business at Plot

No.196-C, Udyog Vihar Ph-VI, Sector-37,

Gurgaon hereinafter for the sake of brevity

referred to as “the Buyer” (which expressions

shall include all its existing Partners/Directors

and there respective successors in interest

and heirs and executors as the case may be)

have agreed to trade transformer worth

Rs.60,00,000/- (Rs.Sixty Lakhs over a period

of time in staggered delivery schedule for

which necessary Purchase Orders will be

placed on the Seller from time to time, the

Seller is agreeable to accept Bank Guarantee

for Rs.60,00,000/- (Rupees Sixty Lakhs Only)

as security for the Buyer's obligation to make

the payments as per the agreed terms and at

the request of the Buyer we Standard

Chartered Bank, H-2, Connaught Place,

New Delhi-110001 (hereinafter referred to as

“THE BANK”) have agreed to issue a

guarantee in favour of the Seller.”

5. It is the case of the appellant that on 12

th

June, 2006 , 600

FAO (OS) No. 649 OF 2006 Page 5

pieces of transformers for value of Rs. 7,13,856/- were dispatched to

the respondent for delivery at Baddi, Himachal Pradesh. Invoice

dated 12

th

June 2006 was issued and terms of delivery was stated as

direct. These goods were dispatched through Jai Kisan Tempo

Transport Association. A lorry receipt (GR) consignment note dated

12

th

June, 2006 was also executed and has been enclosed by the

appellant in the present Appeal.

6. The appellant raised a Bill of Exchange of Rs. 7,13,856/-

being the value of the goods stating, inter alia, that the said amount

was payable by the respondent within ten days from the date of the

lorry receipt i.e. 22

nd

June, 2006. It was requested that the said

payment be made by the respondent in the name of Canara Bank,

the designated bankers of the appellant-M/s. Yog Systems India Ltd.

7. On 22

nd

June, 2006, the respondent replied to Canara Bank

stating that they cannot accept the Bill of Exchange as the material

had not been supplied and it appears that the said Bill of Exchange

had been issued erroneously. Another letter with similar averments

was issued on 23

rd

June, 2006. In this letter it was also stated that the

FAO (OS) No. 649 OF 2006 Page 6

respondent had investigated into the matter and the transporter had

confirmed that the material was lying with them due to breakdown of

the vehicle. The bank was asked to submit the documents after the

goods were received and accepted.

8. Canara Bank vide letter dated 24

th

June, 2006 informed the

respondent that payment in terms of the Bill of Exchange was due

and, therefore, should be made.

9. It may be stated here that on 20

th

June,2006 the appellant had

made supply of 382 transformers, for which payment was made by

the respondent.

10. On 5

th

July, 2006 the appellant invoked the bank guarantee

and asked the Standard Chartered Bank to make payment of

Rs.60,00,000/-.

11. On 7

th

July, 2006, the respondent protested pointing out the

correspondence that was exchanged between the parties and

claimed that the bank guarantee had been fraudulently invoked and

stated that the Purchase Order stood cancelled with effect from 24

th

June, 2006. It was reiterated that the material had not been received

FAO (OS) No. 649 OF 2006 Page 7

and, therefore, the payment was not due.

12. Before the bank paid any amount the respondent filed a

civil suit being CS(OS) No.1368/2006 against the appellant and the

Standard Chartered Bank along with an application for interim

injunction. By an ex-parte Order dated 6

th

July, 2006, a restraint order

was passed against the appellant and the respondent-Bank from

encashing the bank guarantee. The appellant appeared in the suit

and filed it's written statement and reply to the application for interim

injunction.

13. On 4

th

August, 2006, the Court recorded the statements of

Mr. Parakh Gupta, Director of the appellant and one Mr.Bir Singh,

sole proprietor of Jai Kisan Tempo Transport Association, who had

issued the lorry receipt. The statements are relevant for deciding the

present Appeal and are reproduced below :-

“STATEMENT OF SHRI BIR SINGH , S/O SHRI

MANGE RAM, R/O J-164, SECTOR-41, NOIDA

(U.P.) ON S.A.

CS (OS) No. 1368/2001

I am the sole proprietor of Jai Kisan Tempo

Transport Association. Ex.P-1 was faxed by my

FAO (OS) No. 649 OF 2006 Page 8

employee Rajesh to SuKam Power Systems Ltd.

The fax was transmitted from a PCO nearby my

office at Hosiery Complex, NOIDA. The fax

message was sent because some information

was sought by Su-Kam company. One Mr.

Sabharwal had rung up from Su-Kam company.

The goods entrusted to us by Yog Systems India

Ltd., reference whereof has been made in Ex.P-

1, are lying at Karnal. We had informed the

defendant that the consignment is lying at Karnal.

Information to this effect was given by us to the

defendant on or about 24.6.2006. Defendant has

told me to keep the goods at Karnal till further

instructions.”

“STATEMENT OF SHRI PARAKH GUPTA,

S/SHRI Y.K. GUPTA, R/O 4, RAMCHANDRA

LANE, CIVIL LINES, DELHI ON S.A.

I am a director on the Board of defendant

No. 1. I have brought along with me in court

today Shri Bir Singh who is known to me and I

identify him. Ex.P-1 was not faxed by us to the

plaintiff. I had seen Ex.P-1 for the first time on

23.6.2006 in the office of the plaintiff at Guargaon

as I had gone there in connection with the

purchase orders and the payment. I had asked

Jai Kisan Tempo Transport Assn. as to why

goods in question entrusted to it as a carrier were

not delivered. Mr. Bir Singh told me that the

tempo carrying the goods had broken down.

Letter Ex.P-2 was received by me personally.

Q.In what context plaintiff wrote letter Ex.P-2?

Ans.Su-Kam wanted the bills to be submitted

FAO (OS) No. 649 OF 2006 Page 9

again for payment. At my asking Ex.P-2 was

written by the plaintiff to my banker.

It is correct that the written statement filed

by defendant No. 1 has been verified on

22.7.2006. I have signed and verified the written

statement.

Q.You have just admitted that on 23.6.2006 it

came to your knowledge that the carrier to whom

you entrusted the goods for delivery to the

plaintiff did not deliver the goods to plaintiff and

that it came to your knowledge that goods are

lying in Karnal. Why have you not disclosed this

fact in the written statement and what is the basis

on which you have pleaded that having supplied

600 transformers became due and payable on

22.6.2006. What do you have to say in respect

of your pleadings mark 'A' to 'A' in para II of the

preliminary objections.

Ans.I have no explanation to furnish”.

14. Mr. Parakh Gupta admitted in his statement that on 23

rd

June, 2006 he came to know that the goods given to Jai Kisan

Tempo Transport Association had not been delivered to the

respondent and were lying at Karnal. This fact however was not

mentioned in the written statement filed by the appellant. On being

confronted why this fact had not been mentioned in the written

statement, Mr. Parakh Gupta stated that he had no explanation to

FAO (OS) No. 649 OF 2006 Page 10

give. Mr. Bir Singh in his statement admitted that he had sent fax

dated 23

rd

June, 2006 to the respondent that due to breakdown of the

vehicle, goods despatched by the appellant vide receipt dated 12

th

June, 2006 had to be unloaded. It would take some time to repair the

vehicle and therefore the goods had not been delivered for which

they were sorry. Mr. Bir Singh also stated that the goods were lying

at Karnal. He admitted that similar information was given on the next

date i.e. 24

th

June, 2006 to the appellant. Thus he confirmed the fact

that the appellant was aware that the goods had not been delivered

to the respondent. However, the last sentence in the statement of

Mr. Bir Singh is most crucial. The appellant had directed Mr. Bir

Singh to keep the goods at Karnal till further instructions. Thus, it is a

clear admission that the appellant had asked the transporter not to

deliver the goods to the respondent. Even otherwise it is

inconceivable that it would take more than 10 days to repair a vehicle

and the transporter would not have informed the appellant. It is also

difficult to conceive that the transporter could not have made alternative

arrangements for delivery. Prima facie, the goods were deliberately

FAO (OS) No. 649 OF 2006 Page 11

not delivered to the respondent and this was at the behest and on

instructions of the appellant.

15. The statements made by the Director of the appellant and

Mr. Bir Singh virtually take out the fire and fundus behind the

argument of Mr. P.N. Lekhi, the learned senior counsel for the

appellant, relying upon Sections 19, 20, 23 and 39 of the Sale of

Goods Act, 1968, on the basis that the contract in question was a

FOB contract. It was submitted that in a FOB contract, title in the

goods passes on to the buyer (i.e. in the present case to the

respondent) once the goods were handed over to the carrier, i.e. Jai

Kisan Tempo Transport Association. If this contention of the

appellant is to be accepted, then the conduct of the appellant and the

direction given by the appellant to Jai Kisan Tempo Transport

Association to keep the goods at Karnal till further instructions

amounted to misappropriation of goods by the appellant, though title

had already passed on to the respondent. It will amount to fraud as

understood in law. It is, therefore, apparent and clear that the goods

were retained at Karnal and not transported and delivered to the

FAO (OS) No. 649 OF 2006 Page 12

respondent at Baddi, Himachal Pradesh by the transporter- Jai Kisan

Tempo Transport Association, on instructions given by the appellant.

Learned Single Judge was therefore right in holding that a prima

facie case of fraud had been made out. The plea of the appellant that

the goods were appropriated to the account of the respondent, on

delivery to the common carrier as the contract was a FOB contract

are aspects on which we cannot give any final or conclusive opinion.

The said stand of the appellant is contradicted by his conduct and

statement of the appellant that the common carrier was asked by the

appellant-seller not to deliver the goods to the respondent. The

question whether appropriation of goods had taken place depends

upon the intention of the parties. When a seller exercises right of

disposal or where a seller agrees to deliver goods at their destination,

the carrier is the seller's agent and delivery to the carrier is not a final

appropriation. (See in this regard observations of the Supreme Court

in Mahabir Commercial Company Limited versus CID, West

Bengal, Calcutta, reported in 1972 (2) SCC 704.)

16. Learned Single Judge has quoted para 2 of the preliminary

FAO (OS) No. 649 OF 2006 Page 13

objections in the written statement filed by the appellant. When the

said paragraph is contrasted and compared with the statement made

by Mr. Parakh Gupta on oath before the Court, it is apparent that the

appellant wanted to conceal facts from the Court and had made

wrong averments in the written statement that the goods had been

supplied, yet payment was not made justifying invocation of the bank

guarantee. The appellant was fully aware that the goods were lying

at Karnal and as per the transporter the goods were directed to be

kept at Karnal till further instructions from the appellant. The

transporter had been asked by the appellant not to supply goods to

the respondent.

17. In view of the above prima facie findings, we are not

examining the Sections of the Sale of Goods Act, 1968 in detail. We

may, however, state that it is the case of the respondent that the

contract in question is not a FOB contract. It was argued on behalf of

the respondent that the said term finds mention in the quotation but

was not mentioned in the Purchase Orders. It was also stated that

the place of delivery as specified even in the quotation was Baddi,

FAO (OS) No. 649 OF 2006 Page 14

Himachal Pradesh and only local transportation was on buyer's

account.

18. In the written synopsis filed by the appellant it is admitted

that it had asked the transporter to hold the goods at Karnal i.e. at

the place of break down of the goods vehicle. Thus, it is admitted in

the written submission that the goods vehicle by which 600

transformers were being supplied to the respondent had broken

down at Karnal and the goods had not been delivered to the

respondent on instructions of the appellant. It is stated that the

appellant was justified in instructing the transporter as the respondent

had cancelled the contract. The contract was cancelled by the

respondent on 24

th

June,2006 but before the said date 382

transformers were supplied by the appellant and the respondent had

made payment. Moreover, the above statement in the written

submissions is contrary to the averments and the stand taken in the

written statement filed before the learned Single Judge and even the

stand taken in the grounds of appeal. In preliminary objection V in

the written statement, the appellant has stated as under:-

FAO (OS) No. 649 OF 2006 Page 15

“That the Plaintiffs have filed the above suit for

mala fide intentions and for ulterior motives in

order to avoid the contract and avoid the

payment to the Defendant No. 1 in respect of

the supplies made by him. A sum of

Rs.7,13,856/- had become due to the

Defendant No. 1 on 22

nd

June, 2006. The

Plaintiffs have not made any payment

whatsoever in respect of the said supply. On

the one hand, the Plaintiffs engaged the

Defendant No. 1 and its bankers and asked for

re-submission of the Bill of Exchange and, on

the other hand, on 24

th

June, 2006, wrongly

and illegally sought to revoke the Purchase

Order on wholly flimsy grounds.”

19. Similarly, in preliminary objection VI it is stated that the

respondent herein was not making payment in respect of the supplies

already made. The preliminary objection No. VI reads:-

“Since the Plaintiffs are not making the

payment in respect of the supplies already

made and also unilaterally revoking the order

and are not willing to accept the goods

manufactured for them, the Defendant No. 1

has incurred huge loss.”

20. In reply to paragraph 11 of the plaint, on merits it is stated

that the parties had orally agreed that 600 pieces of transformers

would be delivered on 12

th

June, 2006 itself and the balance 4400

FAO (OS) No. 649 OF 2006 Page 16

pieces of transformers would be supplied after about a week i.e. from

19

th

-20

th

June, 2006 and the entire order would be completed within

4-5 days after 20

th

June, 2006. It is further stated that these broad

oral terms were accepted, but were not reproduced in writing as the

parties did not feel the necessity of having a formal agreement.

21. There is no averment in the written statement about break

down of vehicle at Karnal and/or any direction by the appellant herein

to the transporter not to deliver the goods to the respondent because

of cancellation of the contract.

22. In the grounds of appeal, the appellant has distinctly shifted

it's stand as statement of the Director of the appellant and the

transporter had been recorded before the learned Single Judge. In

paragraph 12 of grounds of appeal, it is stated that on 24

th

June,

2006 the transporter sought to deliver the goods to the respondent

No. 1, but the said respondent refused to take/accept delivery on the

ground that the purchase order stands cancelled. It is further alleged

that thereafter the transporter contacted the appellant for return of

goods, who refused to take delivery of the returned goods. Mr. Bir

FAO (OS) No. 649 OF 2006 Page 17

Singh has not made any such statement nor any such averment has

been made in the written statement. The constant shift in the stand

taken by the appellant is a pointer towards fraud. The appellant has

even tried to conceal facts from the Court and when confronted

sought to change and alter its stand but the declension is apparent.

23. Courts normally do not grant injunction against invocation of bank

guaranties/letters of credit. A bank guarantee or a letter of credit is

regarded as an independent and a separate contract between the

bank and the beneficiary and disputes between the two contractual

parties in the underlying/principal contract regardless of the merits,

cannot be a ground for issue of an injunction order. However, the

above general rule is subject to some exceptions. Two well-known

exceptions being fraud of egregious nature, which would vitiate the

very foundation of the bank guarantee/letter of credit and when a

beneficiary seeks to take advantage of his own fraud. The second

ground being irretrievable harm or injustice to one of the parties.

(Refer recent decision of the Supreme Court in Himadri Chemicals

Industries Limited versus Coal Tar Refining Company , reported

FAO (OS) No. 649 OF 2006 Page 18

in 2007 (9) Scale 631, wherein earlier case law has been extensively

considered and principles have been elucidated).

24. In the present case, we are concerned with the first

exception. Fraud can vitiate any contract or even the most solemn

proceedings in a civilised society. One who indulges in an act of

deceit or trickery, seeks to undermine rule of law in a civilised

society. In Webster's New International Dictionary, “fraud” has been

defined as an act or omission to act, concealment by which one

person obtains advantage over the other. In Black's Legal

Dictionary, “fraud” has been defined as intentional perversion of truth

for the purpose of inducing another in reliance upon it, to part with

valuable thing or surrender a legal right. Fraud may be by words or

by conduct or by concealment or by making false or misleading

allegations, when such conduct is intended to deceive another

person. Bad faith and fraud are synonyms. It includes false

statement, suppression of truth etc. with the purpose of deceiving

and gaining advantage over another. A false representation or

deception to gain unjust advantage, dishonest artifice or trick

FAO (OS) No. 649 OF 2006 Page 19

amounts to fraud. Section 17 of the Contract Act,1872 defines

“fraud”as

““17. ‘Fraud’ defined .— ‘Fraud’ means

and includes any of the following

acts committed by a party to a

contract, or with his connivance, or

by his agent, with intent to deceive

another party thereto or his agent,

or to induce him to enter into the

contract—

(1) the suggestion, as a fact, of that

which is not true, by one who does

not believe it to be true;

(2) the active concealment of a fact

by one having knowledge or belief

of the fact;

(3) a promise made without any

intention of performing it;

(4)any other act fitted to deceive;

(5) any such act or omission as the

law specially declares to be

fraudulent.”

25. For grant of temporary injunction, fraud should be of

egregious nature, i.e. clear and apparent. The facts stated above

FAO (OS) No. 649 OF 2006 Page 20

and the conduct of the appellant prima facie establishes fraud of

egregious nature. The present case cannot be regarded as one of

mere allegation of fraud, but one in which it has been sufficiently

established for the purpose of grant of interim injunction. The

appellant was aware that the documents had been presented for

payment in respect of goods, which had been directed by them to be

detained at Karnal till further orders. The appellant seeks to gain

advantage of his own wrong. The fact that the goods were detained

at Karnal and physical delivery was not made to the respondent,

though vaguely denied in the written statement by the appellant,

stands admitted in the grounds of appeal and written submissions

filed before us and the statement of the transporter and the Director

of the appellant recorded before the learned Single Judge.

26. We may refer to the decision of the Court of Appeal in

Edward Owen Engineering Limited versus Barclays Bank

International Limited, reported in (1978) 1 All England Law Reports

976. In the said case, reference was made to an earlier decision in

the case of Sztejn versus J. Henry Schroder Banking Corpn.,

FAO (OS) No. 649 OF 2006 Page 21

reported in (1941) 31 NY SUPP 2d 631, wherein the seller had

intentionally failed to ship the goods ordered. When the situation and

the fraud was brought to court's knowledge/attention, the court

granted injunction from encashment of letter of credit to protect the

buyer against the unscrupulous seller. In the said case, the English

Court held that the bank ought not to pay, when it sees that the

documents are forged or request for payment is made fraudulently in

the circumstances when there is no right to payment. Bank is entitled

to refuse payment if it finds out before payment that the beneficiary

has committed a fraud or has acted fraudulently. We have referred

to the correspondence between the respondent and the bank.

Payment is yet to be made by the bank. The bank is also a party to

the proceedings before the learned Single Judge and this Court.

27. In view of the above facts, we do not find any merit in the

present appeal and the same is dismissed. It is clarified that the

observations and findings in the impugned Order and the present

Order are for the purpose of deciding the interim application and the

suit will be decided on the basis of evidence led by the parties

FAO (OS) No. 649 OF 2006 Page 22

without being influenced by the aforesaid observations and findings.

No costs.

(SANJIV KHANNA)

JUDGE

(DR. MUKUNDAKAM SHARMA)

CHIEF JUSTICE

OCTOBER 12, 2007.

P/VKR

FAO (OS) No. 649 OF 2006 Page 23