Judgment 1. THIS appeal is directed against an order of injunction passed by A. N. Sen, J. restraining the appellant, the Minerals and Metals trading Corporation Ltd., from enforcing and the respondent No. 2, the Bank of India Ltd., from making any payment under two bank guarantees. The order was made on the respondent No. 1 giving an undertaking to keep the bank guarantees alive till the disposal of the suit. 2. BY an agreement in writing dated June 12, 1964, the appellant appointed the respondent No. 1, hereafter referred to as the Agent its Handling and Clearing Agent for non-ferrous metals to be received into the Port of Calcutta up to June 30, 1965. The said agreement provided inter alia:- Clause VI Any loss suffered, extra expenses incurred by the Corporation on account of inadequate supervisor, inadequate supply of labour, scales or transport, inefficient attention to claims, documentation or any other work alleged thereto, will be recovered from the Handling Agent's Security Deposit or payable bills, if any. Clause VIII : The Handling Agent shall furnish to the Corporation a Security Deposit of Rs. 20,000/- either in cash or in bank guarantee executed in favour of the Corporation towards the efficient and timely discharge of the items of work mentioned in this contract. Clause IX : The Corporation shall have the right to forfeit the whole or part of the Security Deposit towards any loss or damage sustained by the corporation due to the negligence or failure on the part of the Handling agent in discharging the items of work enumerated in the contract. The Agreement was renewed from time to time in respect of imports up to the end of March, 1968 on the same terms and conditions except that the rates of payment were enhanced and the security deposit was raised to Rs.30,000| -. 3. THE Agent in terms of the said agreement furnished a bank guarantee hereinafter referred to as the first guarantee through the Bank, initially for Rs.20,000/- and thereafter for Rs.30,000/-. The period of the guarantee was extended from time to time till April 30, 1963. 4. BY another agreement in writing dated March 3, 1966 the appellant appointed the Agent its Handling and desiring Agent for steel and pig iron to be imported into the Port of Calcutta till the end of March 1968. The period of the guarantee was extended from time to time till April 30, 1963. 4. BY another agreement in writing dated March 3, 1966 the appellant appointed the Agent its Handling and desiring Agent for steel and pig iron to be imported into the Port of Calcutta till the end of March 1968. The said Agreement was entered into on terms identical with clauses (viii) and (ix) of the former Agreement, except that the Agent was required to furnish security deposit in the sum of Rs.50,000/- in cash or in bank guarantee. The said Agreement was renewed from time to time till the end of March, 1968 under the same terms and conditions. 5. THE Agent in terms of the said agreement furnished a bank guarantee through the Bank for Rs. 50,000/ -. The period of the guarantee was extended till April 30, 1968. 6. IN pursuance of the aforesaid agreements the Agent acted as the handling and Clearing Agent of the appellant in respect of non-ferrous goods, steel and pig iron. By a letter dated June 21. 1967 the Agent requested the appellant to enhance the rates. The request was repeated more than once but in vain. The appellant asked the Agent to extend the period of the contracts as also of the guarantees from time to time. The Agent agreed to such extensions but only for short periods. As no decision was taken by the appellant to enhance the rates, the Agent by its letter dated March 30, 1968 finally intimated to the appellant that it was not agreeable to extend the period of the contract of appointment beyond March 31, 1968. On March 29, 1968 the appellant made demands in writing in identical terms asking the Bank to pay forthwith two separate sums of Rs. 30,000/- and Rs. 50,000|- payable under the guarantees in case the guarantees were not extended up to 30th April, 1968. One of these letters may be set out in extenso. Dear Sir, we understand from Messrs. Fallon Agency that they are arranging through you the extension of the above-mentioned bank guarantee for a period of one month with effect from 1st April, 1968 to 30th April, 1968 for presentation of claims demands by you. If, however, no extension is granted by you, we would request you to pay us immediately Rs. Fallon Agency that they are arranging through you the extension of the above-mentioned bank guarantee for a period of one month with effect from 1st April, 1968 to 30th April, 1968 for presentation of claims demands by you. If, however, no extension is granted by you, we would request you to pay us immediately Rs. 30,000/- against the said guarantee as we have suffered loss of at least Rs. 30,000/- arising out of or in connection with handling of our nonferrous materials by Messrs. Fallon agency. The guarantee duly discharged shall be returned to you after receipt of your cheque for Rs. 30,000/ -. Yours faithfully, p. K. Majumdar,. . . . Deputy Chief Accounts Officer. As already stated, a similar demand was made for payment of Rs. 50,000 under the other guarantee. As the guarantees were extended by the Bank till 30th April, 1968 no action was called for under those letters of demand. 7. IN view of the Agent's refusal to extend the period of the contracts beyond March 31, 1968 the appointment of the Agent ceased to have effect from the 1st of April, 1968. On April 10, the Agent brought an action against the appellant for a decree for rs. l,19,290/- a perpetual injunction restraining the appellant from claiming or receiving payment from the Bank and the Bank from making any payment to the appellant under the bank guarantees. In that suit, the Agent made an application for an injunction restraining the appellant from enforcing the said guarantee and the Bank from making payment thereunder. By an order dated July 8,1968 A. N. Sen, J. granted the injunction asked for. Against the order the appellant has come up on appeal. It may be stated that the Bank has neither entered appearance nor has taken any part in the proceedings so far. 8. THE Agent's case as made out in the plaint, is that a sum of Rs. 1,19,290|- is due and owing by the appellant to the Agent after adjustment of all payments made by the appellant. It is also contended that although the Agent has duly carried out all the terms of the said Agreements and no loss or damage has been suffered by the appellant on account of any default or negligence on the part of the Agent, the appellant wrongfully claims payment of the said sum of Rs. 30,000 - and Rs. It is also contended that although the Agent has duly carried out all the terms of the said Agreements and no loss or damage has been suffered by the appellant on account of any default or negligence on the part of the Agent, the appellant wrongfully claims payment of the said sum of Rs. 30,000 - and Rs. 50,000/- from the bank under the said deeds of guarantee. Apart from relying on the letters of March 29, 1968 the agent sought to found its cause of action in paragraph 20 of the plaint on the averment that the appellant is wrongfully threatening to realise from the Bank the said sums of Rs. 30,000/- and Rs. 50,000/-although the appellant is not entitled to receive and the Bank is not liable to pay the same under the said guarantees. It is on the basis of the threat on the part of the appellant to realise the said sums payable under the guarantees that the Agent has claimed a perpetual injunction against the appellant, and the Bank. In the application before A. N, Sen, J. the Agent stated in paragraph 37 of the petition that the Bank, on receipt of the letters dated March 29, 1968, informed the Agent that it would be compelled to pay the total sum of Rs.80,000|- under the guarantees 143 nuless restrained by an order of a competent court. It is difficult to believe that the Bank could have made any such representation. For one thing, no letter has been disclosed to support the statement; if the demand was made orally, no particulars of the demand have been given. The letters of March 29,1968 are not in the nature of unqualified demands for payment of moneys payable under the guarantees. By those letters the Bank was requested to pay the moneys only if the guarantees were not extended till April 30, 1968. As the guarantees were so extended, their was no present or effective demand and the Bank was not called upon to pay any money under the guarantees. We are, therefore, unable to base our judgment on the allegations made in paragraph 37 of the petition. The matter, however, does not rest here. In paragraph 20 of the petition, it is said that the appellant has not sustained any loss or damage or incurred penalty or avoidable expenses in respect of the services rendered by the agent. We are, therefore, unable to base our judgment on the allegations made in paragraph 37 of the petition. The matter, however, does not rest here. In paragraph 20 of the petition, it is said that the appellant has not sustained any loss or damage or incurred penalty or avoidable expenses in respect of the services rendered by the agent. In paragraph 19 it is said that the Agent has duly carried out all the terms and conditions of the Agreements or in other words, that there has been no default or negligence on its part. In paragraph 23 it is urged that the: guarantees have not become enforceable. In paragraph 21, the agent claims that the appellant is wrongfully threatening to realise from the Bank Rs. 30,000|- and Rs. 50,000/-although it is not entitled to realise the said sums under the said guarantees. On the basis of those statements it is contended that the threat to enforce the guarantees is wrongful. 9. THE question arises whether at the time the suit was instituted the appellant entertained any intention to enforce the guarantees. It is quite clear from the letters of March 29, 1968 addressed to the Bank by the appellant that the appellant intended to enforce the guarantees before the guarantees expired. The only reason why it did not do so in March, 1968 was b because the guarantees were extended till April 30, 1968. In its affldavit-in-opposition the appellant has clearly stated that it is desirous of realising from the Bank the sums payable under the said guarantees and the Bank: is liable to pay the said sums. In so far as the suit is one for a permanent injunction restraining the appellant from realising any money under the said guarantees, it is in the nature of a qua time action. An intention or a threat to realise the bank guarantees in the near future is enough to found the cause of action in. such an action. In these circumstances, we are not prepared to hold that the threat to enforce the guarantees did not exist at the material time or that the apprehensions of the Agent were unfounded. A great deal of argument was advanced on the locus standi of the Agent in seeking to interfere with the enforcement of the guarantees. such an action. In these circumstances, we are not prepared to hold that the threat to enforce the guarantees did not exist at the material time or that the apprehensions of the Agent were unfounded. A great deal of argument was advanced on the locus standi of the Agent in seeking to interfere with the enforcement of the guarantees. It was said that the guarantees were given by the bank to the appellant, and the Agent, a stranger to the contracts of guarantee can have no say on the question whether the guarantees have become enforceable or not. 10. IT is true that the guarantees were executed by the Bank in favour of the appellant; it is equally true that the Agent is not a party to either of the guarantees. The guarantees, however, have a duel aspect. They are not merely contracts between the appellant and the Bank; they are also securities furnished by the Agent in terms of the Agreements between the agent and the appellant. In seeking to enforce the bank guarantees the appellant is in effect seeking to realise the securities furnished by the Agent on the basis that it has suffered loss and the loss has been occasioned by negligence or default on the part of the agent. It is necessary, in this connection, to examine the guarantees a little more closely. By the first guarantee, the Bank undertook on behalf of the agent to pay to the appellant a sum up to Rs.20,000/- subsequently raised to Rs.30,000/- in respect of any loss, damage, penalty and avoidable expense incurred by the appellant arising out of or in connection with the handling of non-ferrous metals. There is an express stipulation that the decision of the appellant as to whether there has been any default and or negligence on the part of the Agent, will be final and binding. 11. UNDER the terms of the guarantee, the money secured is payable only if two conditions are satisfied- (i) the appellant must suffer loss or damage or incur penalty or avoidable expense, arising out of or in connection with the handling of non-ferrous metals by the Agent, (ii) the loss, damage, penalty or avoidable expense must be occasioned by default or negligence on the part of the Agent. 12. 12. UNDER the terms of the guarantee the decision on the question whether the second condition has been satisfied or not, has been left to the appellant; as regards the first condition the decision has not been so left. It is true that by the letter of 29th march, 1968 the appellant intimated to the Bank that it had suffered loss of at least Rs. 30,000/- arising out of or in connection with handling of non-ferrous metals by the Agent. The letter is not addressed to the Agent nor does it give any particulars of loss. Even if the Agent were told that the appellant had suffered loss such a bare statement unsupported by any prima facie evidence could not have been treated as evidence of the loss, the more so, when the decision on the question whether such loss has in fact been incurred or not has not been left to the appellant. The appellant can only claim payment under the guarantee strictly in accordance with its terms and conditions. In order to accede to the prayer for injunction restraining the Bank from paying under the guarantee, an interlocutor court has to be satisfied on the material on record that the party in whose favour the guarantee has been given is not prima facie entitled to payment under the terms and conditions of the guarantee. In our opinion, there is no evidence or at leaast no worthwhile evidence on record on the basis of which the court can come to the prima facie conclusion, that at the time of the institution of the suit the appellant had suffered any loss in respect of handling of non-ferrous metals by the Agent. By the guarantee dated March 28, 1966, hereinafter referred to as the second guarantee, the Bank guaranteed to the appellant true and faithful performance and observance by the Agent of the terms, agreements, covenants and conditions contained in the letter of appointment dated March 2, 1966 and undertook to pay to the appellant any sum up to Rs.50,000|- in respect of any loss, damage, penalty and avoidable expense incurred by the appellant by reason of or in consequence of any default and or negligence on the part of the Agent or its servants in the performance of the terms, agreements covenants and conditions of the said letter of appointment. The second guarantee also contains a clause that the decision of the appellant as to whether there has been any default and or negligence on the part of the Agent will be final and binding. The second guarantee, however, contains a further stipulation which, in our opinion, is of great importance in this case. It provides : "your right to recover from us any amount due to you shall not be affected or suspended by reason of the fact that any dispute or disputes have been raised by the Agent with regard to its liability or that proceedings are pending before any tribunal or court with regard thereto or in connection therewith." 13. THE guarantee, therefore, contemplates that even if any dispute is raised by the Agent as to the occurrence of any loss or damage in connection with the handling of non-ferrous metals or as to whether such loss or damage has been occasioned by default or negligence on the part of the Agent and even if proceedings are pending for adjudication of the rights and liabilities of the parties, the right of the appellant to recover the moneys payable tender the guarantee will not be affected by such disputes or such proceedings. This is a clear indication that the parties did not intend that payment under the guarantee would have to wait till the question of the liability of the respondent No. 1 was decided by a competent court or tribunal. An injunction restraining the appellant from realising payment under the second guarantee on the ground that the respondent No. 1 has raised disputes in the suit will, therefore, run counter to one of the express terms of the contract. There is moreover, evidence in the correspondence which passed between the parties and in particular, in the letters dated August 8, 1967 and January 25, 1968 that the appellant alleged, rightly or wrongly, that it had suffered loss of Rs.91,423.56 paise in respect of handling and clearing steel. 14. IN our opinion, the absence in the first guarantee of a term, similar to the term in the second guarantee namely that the right of the appellants to recover the moneys from the Bank shall not be affected by reason of any dispute raised or any proceedings taken by the Agent, makes a difference. 14. IN our opinion, the absence in the first guarantee of a term, similar to the term in the second guarantee namely that the right of the appellants to recover the moneys from the Bank shall not be affected by reason of any dispute raised or any proceedings taken by the Agent, makes a difference. In the absence of any prima facie evidence that the appellant has suffered loss there is no reason why, so far as the first guarantee is concerned, the prayer for injunction should be refused. The second guarantee stands on a different footing. In view of the terms and conditions of the guarantee any dispute or controversy as to the liability of the Agent or the pendency of proceedings for adjudication, of any such dispute should not be permitted to stand in the way of the appellant enforcing the guarantee. We, therefore, do not feel that we shall be justified in restraining the appellant from enforcing the second guarantee. Counsel appearing on behalf of the appellant strongly relied on a decision of the Supreme Court in (1)Tarapore and another v. V. O. Tractors and Anr. Supreme Court Cases Vol. 1, part IV p. 233. An Indian firm entered into a contract with a Soviet firm for supply of certain excavation equipments. Under the terms of the contract the Indian firm opened an irrevocable letter of credit with the Bank of India for Rs.66,09,372 - covering the value of the equipments upon the condition that 25 p. c. of the value should be paid on the presentation of the documents specified in the letter of credit and the balance of 75 p. c. within one year from the date of the first payment. The letter of credit was opened on the condition that the confirmation of the letter of credit should constitute a definite undertaking on the part of the confirming Bank, that the provisions for payment would be duly fulfilled and that the undertaking could neither be modified nor cancelled without the agreement of all concerned. The letter of credit was opened on the condition that the confirmation of the letter of credit should constitute a definite undertaking on the part of the confirming Bank, that the provisions for payment would be duly fulfilled and that the undertaking could neither be modified nor cancelled without the agreement of all concerned. The letter of credit was opened and confirmed on the basis of a further stipulation, viz., (c) Bank assumes no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any documents, or for the general and or particular conditions stipulated in the documents or superimposed thereon; nor do they assume any liability or responsibility for the description, quantity, weight, quality, condition, packing, delivery, value or existence of the goods represented thereby, or for the good faith or acts and or omission, solvency, performance or standing of the consigner, the carriers or the insurers of the goods or any other person whomsoever. 15. IN pursuance of the contract of sale the Soviet Firm supplied the equipments. After using them for some time, the Indian firm complained to the Soviet firm about the poor quality of the equipments and brought an action on the Original Side of the Madras High Court for a permanent injunction restraining the Soviet firm from realising the balance of the sum payable under the letter of credit. Thereafter the parties arrived at an agreement under which the Indian firm withdrew the suit and efforts were made to settle the dispute amicably. As no settlement between the parties could be effected the Indian firm again brought an action on the Original Side of the Madras High Court for an injunction restraining the Bank of India as well as the Soviet firm from taking any further step in pursuance of the letter of credit. The Court granted a temporary injunction. The Soviet firm appealed to a Division Bench of the High Court and the appeal succeeded. The Indian firm appealed to the Supreme Court under a certificate granted by the High Court. The Soviet firm challenged the validity of the certificate on the ground that the order of the High Court was not a final order within the meaning of Article 133 (1) of the Constitution. The Supreme Court revoked the certificate and granted special leave to the Indian firm to appeal against the order of the high Court. The Soviet firm challenged the validity of the certificate on the ground that the order of the High Court was not a final order within the meaning of Article 133 (1) of the Constitution. The Supreme Court revoked the certificate and granted special leave to the Indian firm to appeal against the order of the high Court. The Indian firm, in its turn, objected that the appeal to the division Bench of the High Court from the order of the trial judge was incompetent because the order was not a judgment, within the meaning of clause 15 of the Letters Patent. The Supreme Court, therefore, granted special leave to the Soviet firm to appeal against the order of the trial court. The appeals were heard together. The court dissolved the order of injunction granted by the learned trial judge of the Madras High Court. In course of his judgment Hegde, J. who spoke for the Court, observed : "an irrevovable letter of credit has a definite implication. It is a mechanism of great importance in international trade. Any interference with that mechanism is bound to have serious repercussion on the international trade of the country. Except under very exceptional circumstances, the court should not interfere with that mechanism." 16. THE Court relied on the decision in (2) Hamzeh Malas and Sons v. British Imex Industries Ltd. (1958) 2 q. B. 127. There Jenkins, L. J. said: "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 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. " The court also relied on the leading American case on the subject (3)Dulien Steel Products Inc. v. Bankers trust Co. Federal Reporter 2nd Series 298, p. 836 where it was said that "letters of credit are independent of and unqualified by the contract of sale or underlying transaction. The autonomy of irrevocable letter of credit is entitled to protection. As a rule, courts refrain from interfering with that autonomy. v. Bankers trust Co. Federal Reporter 2nd Series 298, p. 836 where it was said that "letters of credit are independent of and unqualified by the contract of sale or underlying transaction. The autonomy of irrevocable letter of credit is entitled to protection. As a rule, courts refrain from interfering with that autonomy. " The Courts are slow to interfere with the operation of irrevocable letters of credit not merely on the ground of their importance in international trade but also on the ground that under the terms and conditions of their issue, the beneficiary, who is often the seller, is assured of payment by the bank once he complies with the terms and conditions of the letter of credit irrespective of his non-compliance with the terms of the contract into which he enters with the buyer, or in other words, on the ground of autonomy of the letter of credit. Bank guarantee is an important instrument in the internal trade of a country; sometimes it also plays a useful role in international trade. It is not enough to make a distinction between a bank guarantee and a letter of credit on the basis that one is important in international trade and the other in ternal trade. The more important point of distinction is the autonomy of an irrevocable letter of credit and the dependence of a bank guarantee On a contract between the beneficiary of the bank guarantee and a third party. Section 126 of the Contract Act defines a contract of guarantee as a contract to perform the promise or discharge the liability of a third person in case of his default. The obligation is not an unqualified obligation. By an irrevocable letter of credit, on the other hand, the issuing bank gives an undertaking to the beneficiary that all bills drawn in compliance with the terms of the letter of credit will be honoured without qualification-The Law of Bankers commercial Credits by Gutteridge and megrah 1st edition, p. 38. Payment under an irrevocable letter of credit, therefore, does not depend on the performance of obligation on the part of the seller except those which the Letter of Credit expressly imposes. The obligation is of the Bank to the beneficiary. No third party comes into the picture. In the case of a bank guarantee, by definition, the third party is always on the scene. The obligation is of the Bank to the beneficiary. No third party comes into the picture. In the case of a bank guarantee, by definition, the third party is always on the scene. Unless there is some act of omission or commission on the part of the third party, payment under a bank guarantee does not become due. In other words, a bank guarantee does not enjoy the autonomy of a letter of credit. 17. THE guarantee may, however, provide that the decision of the beneficiary on the question of loss or damage suffered by him or on the question of default or negligence by reason of which the guarantee becomes enforceable will be final. A bank guarantee like any other contract is no more or no less than what the parties make it. Payment under a bank guarantees like payment under a letter of credit becomes due only on compliance with the terms on which the Bank is to pay under the respective documents. Nobody has ever claimed that a letter of Credit becomes payable until and unless the conditions of payment are satisfied; likewise, conditions for payment under a bank guarantee have to he satisfied before payment can be legitimately claimed. In order to issue a temporary injunction restraining the enforcement of a bank guarantee the court has to come to the conclusion that having regard to the terms and conditions of the guarantee payment under the guarantee has not become due or at least there is a fair and arguable prima facie case for such a contention. 18. IT is said in the Law of Principal and Surety by Sir Arthur Taylor, third edition at page 1 : "the obligation of a surety is necessarily a collateral obligation, postulating the principal liability of another, the principal debtor. " It is again said at page 143 that "when the subject-matter of the guarantee is conduct, some breach of duty by the principal causing damage to the holder of the guarantee must, of course, arise before there is anything which the surety can be called upon to make good. " In (4) C. L. Philips v. A. E. Michael, AIR 1930 Cal. " In (4) C. L. Philips v. A. E. Michael, AIR 1930 Cal. 17 it was observed that a guarantee is a contract to indemnify upon a contingency and the whole point in such a case is to determine what was the contingency which the parties had in their mind when the instrument of guarantee was executed. In the case of a guarantee, therefore, there is always the question of a contingency on the occurrence of which the guarantee becomes enforceable. Learned Counsel for the appellant contended that even when the bank guarantee stipulates that the decision of the beneficiary on the question of default or negligence of a third party will be final, the decision must be taken after hearing the third party. We are unable to agree that the principle of natural justice or some principle analogous thereto requires the beneficiary to give the other party a hearing. Be that as it may, the appellant has not yet demanded payment under the guarantees. It only appears that the appellant intends to enforce the guarantees. Before the appellant can legitimately call upon the Bank to pay the moneys payable under the first guarantee a loss must occur and the appellant must decide that the loss is due to some act of default or negligence on the part of the plaintiff. Unless there is a prima facie case for such a contention, the court ought to issue an injunction restraining the enforcement of the guarantee. As stated hereinbefore, there is no material on the basis of which we can come to the conclusion that a prima facie case has been established that such loss has occurred. As for the second guarantee, the respondent No. 1, under the terms of the guarantee, is entitled to seek payment irrespective of any dispute raised by the plaintiff or any proceedings pending for adjudication of the nights and liabilities of the parties. The Court, therefore, ought not to issue an injunction restraining the enforcement of the second guarantee. 19. THE learned trial judge has exercised his discretion by granting an injunction restraining the appellant and the Bank from enforcing or paying under the guarantees on an undertaking given by the respondent No. 1 to keep the guarantees alive until the disposal of the suit. 19. THE learned trial judge has exercised his discretion by granting an injunction restraining the appellant and the Bank from enforcing or paying under the guarantees on an undertaking given by the respondent No. 1 to keep the guarantees alive until the disposal of the suit. This will have the effect of maintaining the security intact so that the appellant can enforce it, if it is found entitled to do so after the suit is disposed of. In these circumstances we do not think we ought to interfere with the order as regards the first guarantee. As regards the second guarantee we are of the view, for reasons we have given, that the respondent No. 1 is not entitled to an injunction. 20. IN the result the appeal succeeds in part. The order of the learned judge is varied to the extent that the injunction, in so far as it relates to the guarantee for the sum of Rs.50,000/- is dissolved. The respondent No. 1 is also released from the undertaking to keep alive the said guarantee. The injunction granted by the learned judge as regards the guarantee for rs. 30,000/- is hereby confirmed subject to the undertaking given by the respondent No. 1 to keep the said guarantee alive, which undertaking remains in force. Parties will bear their own costs of the appeal.