TEXMACO LTD. v. STATE BANK OF INDIA — 1979 DIGILAW 246 (CAL)

A. N. SEN, S. C. GHOSH ( 1 ) THIS is an appeal from the judgment an order dated 12th May 1978 delivered by Sabyasachi Mukherji, J. By and under the said judgment and order his Lordship dismissed the appellant's application for injunction restraining the defendant No. 1 State Bank of India from making any payment to the defendant No. 2 or defendant No. 3 under a Performance Guarantee mentioned in paragraphs 8 and 9 of the petition. By the said order His Lordship was further pleased to reject the appellant's prayer for injunction restraining the defendant No. 2 or the defendant No. 3 from enforcing or realising any payment under the Performance Guarantee mentioned hereinabove. ( 2 ) BEING aggrieved by the said judgment and order the appellant has come up in appeal before this Court. In order to appreciate the questions involved in the appeal, we shall briefly relate the facts leading to the making of the application. ( 3 ) THE State Trading Corporation of India (hereinafter referred to as S. T. C.) canalizes the export trade of the country in various commodities including Wagons. On October 23, 1970 the S. T. C. agreed to manufacture in India and supply in Yugoslavia to the community of Yugoslav Railways known as ZTPS 1300 GAS type and 2300 EAS type of wagons. The said contract briefly referred to hereinafter as the Export Contract inter-alia includes the following provisions:1. THE following shall be the manufacturers of the wagons : (a)m/s. Braithwaite and Co. (India) Ltd. , Calcutta-43 m/s. Burn and Co. Ltd. , Calcutta. M/s. Indian Standard Wagon Co. Ltd. , Burnpur. M/s. Jessop and Co. Ltd. , Calcutta -1 and m/s Textile Machinery Corporation Ltd. , Calcutta - 56 2. TECHNICAL GUARANTEEThe Seller gives the guarantee for the high quality of the delivered wagons for the period of 1 (one) Year after the acceptance of the wagons in Yugoslavia. RUDNAP a Yugoslav firm was the agent of the Community of Yugoslav Railways and also the confirming party to the agreement dated October 23, 1970. ( 4 ) THEREAFTER on June 4, 1971 STC entered into a back to back contract with the appellant for manufacture and supply of 434 GAS wagons and 425 EAS wagons on the same terms and conditions as the export contract dated 23. 10. 1970. ( 4 ) THEREAFTER on June 4, 1971 STC entered into a back to back contract with the appellant for manufacture and supply of 434 GAS wagons and 425 EAS wagons on the same terms and conditions as the export contract dated 23. 10. 1970. All the terms and conditions of the export contract were included as the terms and conditions in the said back to back contract. Wagons to be supplied to the ZPTS could only be shipped in a knocked down condition and were to contain various parts not available in India. For the said reason another contract was entered into between, inter alia, the appellant and other Indian manufacturers and RUDNAP whereby RUDAP was required to assemble the components of the wagons in Yugoslavia and fit into the same the other imported parts. ( 5 ) ON January 20, 1973 a tripartite agreement was arrived at between the appellant, STC and Braithwaite and Co. Ltd. for reallocation between the appellant and Braithwaite, regarding manufacture and delivery of Railway wagons. Back to back agreement stood modified to the extent that the appellant was required to manufacture and supply 433 GAS wagons in addition to said 434 GAS wagons already agreed by the appellant to manufacture and supply; but the appellant was discharged from its obligation to manufacture and supply 425 EAS wagons. On February 26, 1973 in terms of the said back to back contract the respondent State Bank of India at the instance of the appellant gave a Bank Guarantee in favour of STC for a sum of Rs. 49,50,570/- being 5% of the price of the wagons for due performance by the appellant in an orderly manner its contractual obligations under the back to back contract. ( 6 ) ON or about August 24, 1973 back to back contract dated 4th June 1971 was formally modified by adding thereto an addendum to the aforesaid effect. On January 16, 1975 export contract dated October 23, 1970 was further modified by reducing the total number of EAS type of wagons to be supplied by the STC to the ZTPS to 850 and GAS type of wagons to 450. The export contract thus stood modified as aforesaid and a necessary addendum was added to the said export contract by way of modification. The export contract thus stood modified as aforesaid and a necessary addendum was added to the said export contract by way of modification. ( 7 ) THEREAFTER it appears that the number of wagons to be manufactured and supplied by the appellant was reduced to 275 GAS type of wagons only. Consequently on June 27, 1975 the amount under Bank Guarantee given by the respondent State Bank, the appellant's bankers, was reduced to Rs. 21,51,875/ -. Other conditions of the said guarantee, however, remained the same. The period of validity of the said guarantee was extended till May 8, 1977. On November 25, 1975 the STC's Banker gave a Bank Guarantee to the ZTPS guaranteeing due performance of the obligations by the STC under the aforesaid export contract. The modification of the back to back contract mentioned in the preceding paragraph was formally made by adding to the said contract an addendum dated May 10, 1976. ( 8 ) ON or about November 23, 1976, the period of validity of the Bank guarantee was further extended up to February 8, 1978. On March 11, 1977 the STC's Bank wrote to the respondent the Projects and Equipments Corporation of India, a subsidiary of the STC to the effect that the said Bank had received a cable from the foreign Banker of the ZTPS claiming full payment of the money secured by the above mentioned Bank guarantee given by the Banker of the STC on the ground that STC had failed to perform in orderly manner their obligations under the Export contract. On or about 3rd June, 1977, a period of one year from the dates of acceptance of 220 wagons had expired. Thereafter various correspondence passed between STC and Rudnap wherein of the performance guarantee by the ZTPS was improper in view of the fact that there was no default on the part of STC to perform the obligations and further the guarantee automatically stood reduced in proportion to the value of the wagons for which the guarantee period had expired. These correspondence by Telex as well as by letters appear at pages 227-235 of the Paper Book. It should be noted here that this contention was made by the STC on behalf of the Indian manufactures including the appellant. These correspondence by Telex as well as by letters appear at pages 227-235 of the Paper Book. It should be noted here that this contention was made by the STC on behalf of the Indian manufactures including the appellant. ( 9 ) ON or about June 29, 1977, the appellant received a letter dated June 24, 1977 from the respondent State bank enclosing a letter dated June 15, 1977 received by the State Bank from the STC. In the said letter the STC stated that ZTPS had invoked the STC's performance guarantee on the ground of failure on the part of the STC to perform in orderly manner its obligation under the abovementioned export contract and that STC was contesting the claim of the ZTPS. The STC however stated that the appellant failed to perform in an orderly manner its obligation under the back to back contract and called upon the respondent State Bank to pay to the STC the whole of the guaranteed amount of Rs. 21,51,875/- by invoking the abovementioned performance guarantee issued by the respondent State Bank in its favour. Thereafter between march 1977 to July 1977 various correspondence passed between STC the appellant and the respondent State Bank. In its letter the appellant contended that the invocation of the Bank guarantee by the STC was improper and that the STC was improper and that the STC was not liable to the ZTPS. By its letter dated 30th August 1977 written to the respondent State Bank the STC again invoked the Bank guarantee and asked for payment of the full amount under the said Bank guarantee. On or about August 31, 1977, the STC's Bank informed the respondent Project and Equipment Corporation of India Ltd. that payment had been made to the foreign suppliers under the Bank guarantee given by the State Bank of India on behalf of the STC. On 12th September 1977 the present suit was filed by the appellant and the interlocutory application was made for the reliefs mentioned hereinabove which application was dismissed on May 12, 1978, as mentioned hereinbefore. ( 10 ) BEFORE we set out, the contentions of either party it is necessary for us, to be able to appreciate the rival contentions to setout the said performance guarantee which is the subject matter of the instant appeal. ( 10 ) BEFORE we set out, the contentions of either party it is necessary for us, to be able to appreciate the rival contentions to setout the said performance guarantee which is the subject matter of the instant appeal. The said guarantee reads as follows :"and whereas according to Art. 2 (iii) of the Back to Back contract Texmaco has to provide STC with a performance Bank guarantee for 5% (five percent) of the price guaranteeing orderly performance of Texmaco's contractual obligations. And whereas at the request of Texmaco, the Bank has agreed to give a guarantee and STC has agreed to accept the same. NOW THIS GUARANTEE WITNESSETH THAT : 1. In consideration of the aforesaid premises and at the request of TEXMACO we, the Bank, hereby irrevocably and unconditionally guarantee that TEXMACO shall perform, in an orderly manner, their contractual obligations under the Back to Back contract, and in the event of TEXMACO's failure to do so, the Bank shall pay to STC on its first demand, any amount upto Rs. 49,50,570/- (Rupees forty nine lacs fifty thousand five hundred and seventy only) being 5% of the price, without any contestation, demur or protest and/or without any reference to TEXMACO and/or without questioning the legal relationship subsisting between STC and TEXMACO. 2. Our obligation under this guarantee shall be reduced automatically in proportion to the value of the wagons for which the guarantee period has expired from time to time in terms of the Back to Back contract. 3. The decision of the STC as to the liability of the Bank under this guarantee and the amounts payable there under shall be final and binding on the Bank. The Bank shall pay forthwith the amount demanded by STC notwithstanding any dispute between STC and TEXMACO. 4. Notwithstanding any thing stated above our liability under the guarantee is restricted to Rs. 49,50,570/- (Rupees forty nine lacs fifty thousand five hundred and seventy only ). Our guarantee shall remain in force until the 31st December, 1975. The Bank shall pay forthwith the amount demanded by STC notwithstanding any dispute between STC and TEXMACO. 4. Notwithstanding any thing stated above our liability under the guarantee is restricted to Rs. 49,50,570/- (Rupees forty nine lacs fifty thousand five hundred and seventy only ). Our guarantee shall remain in force until the 31st December, 1975. Unless a suit or an action to enforce a claim under the guarantee is filed against us before that date, all your rights under the guarantee shall be forfeited and we shall be released and discharged from all liability thereunder, provided always that if at the expiry of this guarantee period any wagon remain undelivered or the contractual guarantee period in respect of wagons has not expired, the Bank shall forthwith on demand pay to STC a sum equal to 5% of the price in respect of such wagons provided further that the statement of STC with regard to such wagons shall be final and conclusive in this connection. For State Bank of India sd: B. K. Chakraborti, chief Manager, commercial Division" ( 11 ) ON behalf of the appellant Mr. S. Ray submitted before us that the appellant was not entitled to invoke the performance of the guarantee in view of the fact that the terms of the guarantee have not been fulfilled as yet because no 'decision' has been taken by the STC. Secondly Mr. Ray contended that there are special equities in favour of appellant for not enforcing the performance guarantee namely it should be held that even it any 'decision' was taken in terms of the performance guarantee, the same was not "decision" within the meaning of the said expression for the same was arbitrary and whimsical. Thirdly the said 'decision' was no 'decision' inasmuch as the STC cannot approbate and reprobate at the same time. The STC itself has contended before ZTPS that there has been orderly performance of the export contract and if the export contract had been performed in orderly manner there could be no question of non-performance of the back to back contract in an orderly manner. Mr. Ray next contended that the performance guarantee could not be enforced inasmuch as it was invoked on 30th August 1977 by the STC when the respondent State Bank of India received the letter of the STC dated August 30, 1977. Mr. Ray next contended that the performance guarantee could not be enforced inasmuch as it was invoked on 30th August 1977 by the STC when the respondent State Bank of India received the letter of the STC dated August 30, 1977. At that time the validity of the performance guarantee in regard to all the wagons delivered by the appellant had expired. And there was no obligation on the part of the respondent State Bank to pay any money under the performance guarantee given by it on behalf of the appellant. The said performance guarantee stood discharged prior to that date. Alternatively, Mr. Ray contended that the performance guarantee could not be enforced in any event in respect of 220 wagons in view of the fact that the performance guarantee stood expired in respect of 220 wagons out of 275 wagons inasmuch as the period of guarantee for the said 220 wagons had expired before the invocation of the guarantee on 15th June 1977 by the STC. ( 12 ) MR. Ray drew our attention to the performance guarantee appearing at pages 61 and 62 of the paper book and submitted that Paragraphs 2 in the operative portion of the said performance guarantee was in fact and in law proviso to paragraph 1 of the said guarantee and submitted that the obligation under the guarantee of the appellant had stood reduced automatically in proportion to the value of the wagons accepted in Yugoslavia one year prior to the invocation of the guarantee. Thus in any event the S. T. C. was not entitled to invoke the entire amount under the performance guarantee. Mr. Ray next contended that having regard to the terms and conditions of the performance guarantee in the instant case payment has not become due. In any event there was according to Mr. Ray, a fair and arguable prima facie case in favour of the appellant and thus the injunction should be granted against payment under the performance guarantee in question in an interlocutory proceeding. ( 13 ) MR. In any event there was according to Mr. Ray, a fair and arguable prima facie case in favour of the appellant and thus the injunction should be granted against payment under the performance guarantee in question in an interlocutory proceeding. ( 13 ) MR. Solicitor General appearing on behalf of the respondent S. T. C. submitted before us that the export contract, the back to back contract, the performance guarantee given on behalf of S. T. C. to the Z. T. P. s and the performance guarantee in question should be looked at the same time in a chain in order to appreciate the contention of the respondent S. T. C. that money has become due and payable under performance guarantee in question executed by the respondent State Bank on behalf of the appellant in favour of the S. T. C. Mr. Keckar drew our attention to the main contract appearing at pages 237 to 271 of the Paper Book and submitted that the provision that the guarantee would expire after the expiry of one year from the receipt of the wagons in Yugoslavia was indeed a guarantee in respect of the quality of the wagons to be supplied, and relied on the clause on Technical Guarantee being annexure VI to the main contract appearing at page 255 of the Paper Book. The guarantee, inter alia, reads as follows : technical GUARANTEE"the seller gives the guarantee for the high quality of the delivered wagons for the period of 1 (one) year after the acceptance of the wagons in Yugoslavia?????. . "mr. Keckar drew our attention also to the relevant clauses in the export contract as also the performance guarantee given on behalf of the S. T. C. that the goods were to be delivered in an orderly manner. It is admitted, according to Mr. Keckar, that in any event the goods were not delivered within the stipulated period and there was delay in supplying the said goods. Thus the technical guarantee of the contract as mentioned hereinbefore had no effect on the performance of the obligations under the performance guarantee in cases where the quality of the goods were not questioned, but the goods were not delivered in an orderly manner, that is to say, inter alia, within the stipulated period. Thus the technical guarantee of the contract as mentioned hereinbefore had no effect on the performance of the obligations under the performance guarantee in cases where the quality of the goods were not questioned, but the goods were not delivered in an orderly manner, that is to say, inter alia, within the stipulated period. In such cases, expiry of one year from the receipt of the wagons in Yugoslavia could have no effect on the performance guarantee according to Mr. Kacker. In support of his submission Mr. Kacker relied on a statement showing the monthwise contractual delivery-time-schedule for the 275 wagons to be supplied by the appellant appearing at page 236 of the paper book. Thus, according to Mr. Kacker, it is apparent that the goods were not delivered within the stipulated period and as such the performance guarantee has become enforceable and the S. T. C. is entitled to invoke and enforce the performance guarantee. ( 14 ) IN support of the contentions on behalf of the appellant Mr. Ray relied on the authorities to which we shall advert a little later. Mr. Ray drew our attention to the authorities mentioned hereinafter. In the case of The Minerals and Metals Trading Corporation of India Ltd. v. Surajbalaram Sethi and Anr. reported in 74 CWN 991 wherein a Division Bench of this Court considered the effect of a performance guarantee given by a Bank as well as a letter of credit. After considering various authorities the Division Bench came to the conclusion that "the distinction between an irrevocable letter of credit and a bank guarantee is not merely one of function, namely, that the former is important for international trade and the latter for internal 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 guarantee and a third party Payment under an irrevocable letter of credit does not depend on the performance of obligation on the part of the seller except those which the letter of credit expressly imposes. There 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. There 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 an irrevocable letter of credit". ( 15 ) NONETHELESS the said Division Bench observed that the guarantee itself might provide that the decision of the beneficiary on the question of the loss or damage suffered by him or on the question of default or negligence by reason of which the guarantee becomes enforceable would be final. The Division Bench observed that in order to issue a temporary injunction restraining the enforcement of a bank guarantee the court had to come to the conclusion that having regard to the terms and conditions of the guarantee payment under the guarantee had not become due or at least there was a fair and arguable prima facie case for such a contention. ( 16 ) IN effect the said decision in our opinion states the law to be that whether a performance guarantee can be enforced or not by the beneficiary will depend on the terms of the performance guarantee itself. We respectfully agree with the said statement of law. The next case cited by Mr. Ray was the case of State Bank of India, Appellant v. The Economic Trading Co. and Ors. reported in AIR 1975 Cal. 145 . The said case, in our opinion, does not threw any light on the question involved before us, and was decided on the basis of peculiar facts of the case. Mr. Ray next cited two unreported decisions of two Division Benches of this Court, namely, Shree Ram Cloth Stores v. M/s. Trading Corporation of Bangladesh and Ors. and Bird and Co. Ltd v. Tripura Jute Mills Ltd. and Anr. Since reported in 83 C. W. N. 802. In the case of Shree Ram Cloth Stores v. M/s Trading Corporation of Bangladesh and Ors. and Bird and Co. Ltd v. Tripura Jute Mills Ltd. and Anr. Since reported in 83 C. W. N. 802. In the case of Shree Ram Cloth Stores v. M/s Trading Corporation of Bangladesh and Ors. (Appear from Original Order No. 29 of 1974) an injunction was passed by a Division Bench of this Court comprising of myself and Hazra J. restraining the beneficiary buyer from enforcing the Bank Guarantee given in its favour for an alleged breach of the contract committed by the seller. In the said judgment, however, the terms of the Bank Guarantee concerned do not appear and as such the said case is of no assistance, in our opinion, for deciding the instant appeal. Mr. Ray drew our attention to another unreported decision of the Division Bench of this Court presided over by my learned brother. Since reported, Bird and Co. v. Tripura Jute Mills 83 C. W. N. 802 in Appeal No. 84 of 1977 (Suit No. 559 of 1976 ). In the said case guarantee bond ws couched in the following terms :-"2. The Bank undertakes to the Purchaser indemnified to the extent of a sum of Rs. 10,38,440,/- (Rupees Ten Lakhs thirty eight thousand four hundred and forty only) from and against all such losses, damages, costs charges or expenses that may be caused to or suffered by the Purchaser in relation to the advance payment to be made by the Purchaser to the contractor as aforesaid by reasons of any default or defaults on the part of the Contractor in repayment of the said advance as aforesaid and the Bank hereby under takes to pay to the Purchaser forthwith on demand and without any demur any sum or sums not exceeding in total the said sum of Rs. 10,38,440/- (Rupees Ten Lakhs thirty eight thousand four hundred and forty only) as may be claimed by the Purchaser to be due from the Contractor to the Purchaser by way of refund or such advance or nay portions thereof by reasons of such default on the part of the contractor in repayment as aforesaid. 3. The Bank both hereby agree that the decision of the Purchaser as to whether the Contractor has made any default or defaults in repayment of the said advance thereof shall be binding on the Bank. 3. The Bank both hereby agree that the decision of the Purchaser as to whether the Contractor has made any default or defaults in repayment of the said advance thereof shall be binding on the Bank. The Bank shall not be entitled to raise any dispute on the decision of the Purchaser in this regard but shall on demand pay the sum of money due forthwith without any objection or demur. 4. This guarantee shall come into force immediately with effect form the date of payment of the said advance sum of Rs. 10,38,440/- (Rupees Ten Lakhs thirty eight thousand four hundred and forty only) by the Purchaser to the Contractor and shall remain valid upto 24th April, 1976 and shall not be revoked by the Bank at any time during its currency without the previous consent in writing of the Purchaser. " ( 17 ) IN the said case an application was made by the appellant after institution a suit for an ad-interim order of injunction restraining the bank from making any payment to the respondent No. 1 under or in respect of the guarantee and for an injunction restraining the respondent No. 1 and its servants and agents from receiving or realizing or claiming any amount under or in respect of the said guarantee. In the court of the first instance no order was passed by the learned single Judge in the interlocutory application. In appeal the said performance guarantee come to be considered by the Division Bench. The Division Bench was of the view after considering the various clauses of the said guarantee in question that in view of the provisions contained in clause 3 of the guarantee, the learned trial Judge in the facts and circumstances of the case was justified in not passing any order of injunction. According to the Division Bench the said clause specifically provided that the decision of the purchaser as to whether the contractor had made any default or defaults in repayment of the said advances would be binding on the bank and the bank would not be entitled to raise any dispute on the decision of the purchaser in this regard but would on demand pay the sum of money due forthwith without any objection or demur. After noting the cases cited, the Division of the unconditional obligation to pay under taken by the bank without any demur at the instance of the purchaser whose decision as to whether any default had been committed or not would be final, payment under the said bank guarantee could not be prohibited that effect. The said Division Bench, in passing, we may mention, also considered in coming to the above conclusion the decision of the Court of Appeal in England in the case of Edward Owen Engineering Ltd v. Barclays Bank International Ltd. and Anr. (1977) 3 W. L. R. 764 as well as the case of The Minerals and Metals Trading Corporation of India v. Surajbalaram Sethi and Anr. , 74 CWN 991. ( 18 ) MR. Kacker besides the cases mentioned hereinafter relied also on the authorities cited by Mr. Ray. In the case of R. D. Harbottle (Mercantile) Ltd. v. National West minister Bank Ltd. and Ors. , Same v. Same and Ors. Harbottle Coal Co. Ltd. and Anr. v. Same and Others, reported in (1977) 3 W. L. R. 752 relied on by Mr. Kacker, the plaintiffs entered into three contracts of sale with Egyptian buyers and each contract provided that the plaintiffs would establish a guarantee confirmed by a bank in favour of the buyers. Such guarantees were established and the amounts secured by such guarantees were payable on the buyers' demand. The guarantees were established with Egyptian banks and confirmed by the defendant English bank. The buyers sought to enforce the guarantees. The plaintiffs contended that the buyers had no justification for demanding payment, instituted three actions against the bank and in each action the other defendants were the relevant Egyptian bank and buyers. The plaintiff sought a declaration against each defendant that the buyers had no right to draw on the guarantees and injunctions restraining all the defendant banks from making and all the buyers from demanding payment under the guarantees. The plaintiffs applied ex-parte for interlocutory injunctions against each defendant. Such Injunctions were granted. ( 19 ) THE Egyptian defendants did not enter appearance and took no part in the proceedings. On the bank's application to have the injunction against them discharged. The plaintiffs applied ex-parte for interlocutory injunctions against each defendant. Such Injunctions were granted. ( 19 ) THE Egyptian defendants did not enter appearance and took no part in the proceedings. On the bank's application to have the injunction against them discharged. It was held that even on the assumptions that the courts would entertain an action against the bank and the Egyptian banks for a declaration that the buyers were not entitled to payment under the guarantees and that the court had rightly granted injunctions on the ex-parte applications where it was obvious that the actions were a contrivance to obtain relief against the bank and the Egyptian defendants and to bring the latter within the jurisdiction of the court, the plaintiffs would only have a cause of action against the bank if the bank debited their account in breach of contract and since the plaintiffs would have an adequate remedy in damages. But the damage incurred by the bank if it failed to honour its international obligations far outweighed any damage likely to be incurred by the plaintiffs, the court would therefore discharge the injunctions granted against the bank. Kerr J. in deciding the said application for discharge of the order of Injunction observed at page 761 as follows :-"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 their disputed sunder the contracts by litigation or arbitration as available to them or stipulated in the contacts. 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 lever. They must be allowed to be honoured, free form interference by the courts. Otherwise, trust in international commerce could be irreparably damaged. " ( 20 ) MR. Kackar then drew our attention to the case of Edward Owen Engineering Ltd. v. Barclays Bank International Ltd. and Anr. The machinery and commitments of banks are on a different lever. They must be allowed to be honoured, free form interference by the courts. Otherwise, trust in international commerce could be irreparably damaged. " ( 20 ) MR. Kackar then drew our attention to the case of Edward Owen Engineering Ltd. v. Barclays Bank International Ltd. and Anr. In the said case the plaintiffs, English suppliers, contracted with Libyan customers to erect greenhouses in Libya and agreed that a performance guarantee for 10 percent of the contract price should be issued by the defendant English bank and lodged wit a Libyan Bank. The contract, which was governed by Libyan law, provided that an irrevocable confirmed or confirmable, letter of credit payable at the English bank was to be opened in favour of the plaintiffs. After the plaintiffs had given a counter-guarantee to the English bank, the letter on their own responsibility and on the plaintiffs' behalf gave a performance bond for ?. 50,203 to the Libyan bank and confirmed that their guarantee was payable "on demand without proof or conditions". The Libyan bank then issued a guarantee bond for the plaintiffs for the said sum in favour of the Libyan customers. No letter of credit which complied with the terms of the contract was opened by the customers and the plaintiffs, after telling them that the guarantee given had no effect, accepted their conduct as a repudiation of the contract. At the customers' request the Libyan bank then claimed ?. 50,203 under the guarantee from the English bank. The plaintiffs in their exparte application to restrain the English bank from paying the Libyan bank obtained an interim injunction which, however, was discharged later by Kerr J. The plaintiff s went up on appeal and in appeal it was held that a performance bond stood on a similar footing to a letter of credit and a bank giving such a guarantee must honour it according to its terms unless it had notice of clear fraud, and accordingly, since it was impossible to say that fraud on the part of either Libyan customers or bank had been established, the appeal must be dismissed. ( 21 ) LORD Denning M. R. in his judgment stated the scope and effect of performance guarantee Bond in following words :"the long and short of it is that although prima facie the Libyan customers were in default in not providing the letter of credit, nevertheless they appear to have claimed against the Umma Bank on the performance bond issued by them; in turn the Umma Bank claimed upon Barclays Bank : who claimed upon the English suppliers. A little later Barclays applied to discharge the injunction. After hearing argument Kerr J. held that these performance bond must be honoured as between the Banks and that the relations between the English suppliers and the Libyan customers were no concern of the Banks. He held that Barclays Bank International ought to pay the Umma Bank and leave the English suppliers to claim damages against the Libyan customers, presumably in the courts of Libya, because the contract contained a clause giving exclusive jurisdiction to the courts of Libya. The English suppliers appeal to this Court. They ask to restcre the injunction. They say that there is no practical remedy for there in the Libyan courts. The Libya customers are a department of the Libyan State, the Umma Bank is a State Bank. It would be in practice impossible to obtain a visa for the purpose of bringing a claim against the Libyan customers and the Umma Bank. So the English suppliers ask us to order that Barclays Bank should not pay this amount to the Umma Bank. They wish to join the Umma Bank and the Libyan customers as defendants to the action; for by so doing all the matters can be resolved her as to whether or not the Libyan customers should be paid this amount. A performance bond is a new creature so far as we are concerned. It has many similarities to a letter of credit, with which of course we are very familiar. It has been long established that when a letter of credit is issued and confirmed by a Bank, the bank must pay it if the documents are in order and the terms of the credit are satisfied. Any dispute between buyer and seller must be settled between themselves. The bank must honour the credit. That was clearly stated in Hamzeh malas and Sons v. British Imex Industries Ltd. (1958) 2 QB 127. Any dispute between buyer and seller must be settled between themselves. The bank must honour the credit. That was clearly stated in Hamzeh malas and Sons v. British Imex Industries Ltd. (1958) 2 QB 127. Jenkins L. J. giving the judgment of this court said at p. 129 : "?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 and 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 the established practice. "to this general principle there is an exception in the case of what is called established or obvious fraud to the knowledge of the Bank. " ( 22 ) BY the performance guarantee in the instant case as quoted earlier in the judgment the respondent State Bank undertook irrevocably and unconditionally obligation without any contestation, demur or protest and/or without any reference to TEXMACO and/or without questioning the legal relationship subsisting between STC and TEXMACO to pay a sum of Rs. 49,50,570/- subsequently reduced to Rs. 21,51,875/- on first demand being made by the STC. The performance guarantee further stipulated that "the decision of the STC as to the liability of the Bank under this guarantee and the amounts payable thereunder shall be final ad binding on the Bank. The Bank shall pay forthwith the amount demanded by STC notwithstanding any dispute between STC and TEXMACO". ( 23 ) IN our opinion the terms of the performance guarantee in the instant case are very wide indeed. The performance guarantee is a distinct and separate contract to which only respondent State Bank and respondent STC are parties. By and under the said guarantee State Bank irrevocably and unconditionally undertook to pay to the STC the said sum of Rs. 21,51,875/- or the first demand being made, and whenever the STC decided that the Bank was liable to pay under the said guarantee. By and under the said guarantee State Bank irrevocably and unconditionally undertook to pay to the STC the said sum of Rs. 21,51,875/- or the first demand being made, and whenever the STC decided that the Bank was liable to pay under the said guarantee. The plaintiff at whose instance this performance guarantee was executed knew that under the terms of this performance guarantee the STC was the sole arbiter to decide as to whether there was any liability foisted on the Bank to pay under this guarantee, and indeed, in our opinion in terms of this performance guarantee the STC is the sole arbiter to decide as to whether the respondent State Bank was liable and obliged to pay any sum payable under this guarantee. In letter dated 24th June, 1977, written by the respondent State Bank to the appellant, the respondent State Bank informed the appellant that the STC had invoked the guarantee and it was incumbent on them to pay STC the guaranteed sum of money. The STC's letter dated 15th June, 1977 to the State Bank Calcutta, Main Branch at I Strand Road, appearing at p. 73 of the Paper Book, inter alia, states as follows :-"the State Bank of India calcutta, Main Branch, 1 Strand Road. Calcutta 700 001. Sub: Invocation of your Guarantee G. L. No. 54/73 dt. 26. 2. 73 for Rs. 49,50,570/-* * * Notwithstanding the foregoing STC maintains that Texmaco failed to perform in an orderly manner its obligations under the aforesaid back to back contract. In view of the foregoing STC hereby calls upon you to make full payment to it of the whole of the guarantee amount of Rs. 21, 51,875/- (Rupees Twenty one lacs fifty one thousand eight hundred and seventy five only) under your aforesaid performance guarantee. "by its letter dated 15th June 1977 addressed to the respondent State Bank the respondent S. T. C. wrote inter alia : "in view of the foregoing S. T. C. hereby calls upon you to make full payment to it of the whole of the guaranteed amount of Rs. 21,51,875/- (Rupees Twenty one lacs fifty one thousand eight hundred and seventy five only) under your aforesaid performance guarantee". At the foot of the said letter the S. T. C. wrote to the appellant as follows :-"as already intimated and stated in our above communication to the State Bank of India. 21,51,875/- (Rupees Twenty one lacs fifty one thousand eight hundred and seventy five only) under your aforesaid performance guarantee". At the foot of the said letter the S. T. C. wrote to the appellant as follows :-"as already intimated and stated in our above communication to the State Bank of India. Calcutta Main Branch, 1-Strand Road, Calcutta, this is once again to place on record that as agreed to by and between you and us S. T. C. contesting the claim or the Community of Yugoslav Railways/ztps for payment to them of the said performance guarantee for Rs. 91,95,000/- furnished to the community of Yugoslav Railways/ztps by virtue of the Export Contract. But, in the event of the claims of the community of Yugoslav Rlys/rudnap being upheld or our aforesaid performance guarantee in favour the community of Yugoslav Railways/ ZTPs being enforced we would enforce payment under your aforesaid performance guarantee. Thanking you and assuring you of our best services at all times". ( 24 ) BY the letter dated 30th August 1977 addressed to the respondent State Bank the S. T. C. again called upon the respondent State Bank to make full payment of the while of the guaranteed amount of Rs. 21,51,875/-under the abovementioned performance guarantee without any further delay. The abovementioned documents clearly show in our opinion, that the S. T. C. had decided that the State Bank was liable to pay the said sum of Rs. 21,51,875/- under the above mentioned performance guarantee executed by the State Bank. It is true that the S. T. C. had been contending before the ZTPs that it was not liable under the export contract to the ZTPs, but the said contention was being made by the S. T. C. for the benefit of the Indian manufacturers including the appellant. Thus it cannot be said that the S. T. C. 's attempt to enforce the performance guarantee was a case of approbation and reprobation. The non-liability of the S. T. C. under the export contract if established would ensure for the benefit of the Indian manufacturers including the appellant and, in fact, the S. T. C. assured the Indian manufacturers that it would enforce the liability under the respective performance guarantee proportionately to make by the ZTP and/or Rundnab. The non-liability of the S. T. C. under the export contract if established would ensure for the benefit of the Indian manufacturers including the appellant and, in fact, the S. T. C. assured the Indian manufacturers that it would enforce the liability under the respective performance guarantee proportionately to make by the ZTP and/or Rundnab. As we have expressed our view on the scope and purport and effect of the performance guarantee earlier in the judgment, it appears to us prima facie that the S. T. C. is entitled to enforce the liability of performance guarantee. It is needless to say that the views expressed by us are only prima facie and tentative for the purpose of deciding this interlocutory matter and all such questions will necessarily have to be finally adjudicated with in the suit. ( 25 ) IT should be noted, however, that it has been stated on behalf of the respondents Nos. 2 and 3 in the affidavit-in-opposition of Sib Sankar Das to the petition filed in the Court of first instance by the appellant for the relief claimed in the said petition that the ZTPs have recovered under the performance guarantee given on behalf of the respondent S. T. C. for the due performance of the export contract a sum of Rs. 39,06,600/- only up to date and according to the S. T. C. the appellant is now liable to pay to the extent of Rs. 19,79,725/- on account of the amount so far recovered from the S. T. C. by the ZTPs. ( 26 ) THE learned Counsel appearing on behalf of the respondents Nos. 2 and 3 as stated in paragraph 6 (e) at page 105 of the affidavit of Shibsankar Das filed on behalf of the respondents Nos. 2 and 3 has assured us that for the present respondent Nos. 2 and/or 3 shall enforce the performance guarantee given by the respondent State Bank of India in favour of S. T. C. to the extent of Rs. 19,79,725/- only. ( 27 ) THIS will not, however, prejudice in any way the right of the respondents No. 2 and/or 3 to enforce the balance amount guaranteed under the above-mentioned performance guarantee in accordance with law. Mr. Chunder also on behalf of the respondent No. 2 and/or 3 has given the same assurances to this Court as was given by Mr. ( 27 ) THIS will not, however, prejudice in any way the right of the respondents No. 2 and/or 3 to enforce the balance amount guaranteed under the above-mentioned performance guarantee in accordance with law. Mr. Chunder also on behalf of the respondent No. 2 and/or 3 has given the same assurances to this Court as was given by Mr. Kacker before the court of the first instance and which had been recorded in the judgment of Sabyasachi Mukharji J. ( 28 ) FOR what has been stated hereinbefore, this appeal must fail and is dismissed. Costs of this appeal will abide by the result of the suit. Certified for two counsel. Operation of this order however shall remain stayed for three weeks. A. N. Sen, J. , I agree. Appeal failed.