HEMAS MARKETING (PVT) LTD. V. CHANDRASIRI AND OTHERS

015-SLLR-SLLR-1994-V2-HEMAS-MARKETING-PVT-LTD.-V.-CHANDRASIRI-AND-OTHERS.pdf


m
Janatha Estate Development Board v. Ceylon Estates
Staffs Union and Another (Kulatunga, J)
181
HEMAS MARKETING (PVT) LTD.
v.CHANDRASIRI AND OTHERS
COURT OF APPEAL.
S.N. SILVA, J. (P/CA),
R. B. RANARAJA, J.
A. (REV.) 1012/93.
C. COLOMBO 3818/SP.
C.A. (REV.) 1013/93.
O.C. COLOMBO NO. 3819/SP.
A. (REV.) 1014/93.
C. COLOMBO NO. 3820/SP.
(TAKEN TOGETHER)
SEPTEMBER 09.1994.
Injunctions – Bank Guarantees – Duty of Bank under guarantees.
In the absence of a prima facie case being made out an injunction should nothave issued restraining payment on the bank guarantees given against dueperformance.
A guarantee is an accessory contract by which the promisor undertakes to beanswerable to the promisee for the debt, default or miscarriage of another person
182
Sri Lanka Law Reports
[199412 Sri LW
whose primary liability to the promisee must exist or be contemplated. BankGuarantees were established as a universally acceptable means of paymentequivalent to cash in trade and commerce, on the basis that the promise of theissuing bank to pay was wholly independent of the contract between the buyerand seller and the issuing bank would honour its obligations to pay regardless ofthe merits or demerits of the dispute between the buyer and the seller.
When a bank has given a guarantee, it is required to honour it according to itsterms and is not concerned whether either party to the contract which underlaythe contract was in default. The whole purpose of such commercial instrumentswas to provide security which was to be readily, promptly and assuredlyrealisable when the prescribed event occurred.
The only exception to the rule is where fraud by one of the parties to theunderlying contract has been established and the bank had notice of the fraud. Amere plea of fraud put in for the purpose of bringing the case within thisexception and which rests on the uncorroborated statements of the applicant willnot suffice.
An injunction may be granted only in circumstances when the court is satisfiedthat the bank should not effect payment.
Par Ranaraja, J: “It is only in exceptional circumstances that courts will inteferewith the machinery of obligations assumed by the banks. They are the lifeblood ofinternational commerce. Such obligations are regarded as collateral to underlyingrights and obligations between merchants at either end of the banking chain.Courts will leave the merchants to settle their disputes under the contracts bylitigation."
Cases referred to:
Edward Owen Engineering Ltd. v. Barclays Bank International Ltd. (1978) 1 All■ ER 976, 981.
Power Curber International Ltd. v. National Bank of Kuwait SAK [1981 ] 3 All ER607.
Siporex Trade SA v. Banque Indo Suez (1986) 2 Lloyd's Law List Reports 146.
a
Harbottie (Mercantile) Ltd. v. National Westminster Bank Ltd. [1977] 2 All ER862.
Botiventer Oil SA v. Chase Manhattan Sank [1984] 1 All ER 351,352.
Indika Traders v. Seoul Lanka Construction (Pvt) Ltd. CA 916/93.
CA
Hemas Marketing (Pvt) Ud. v. Chandrasiri and Others (Ranaraja, J.)183
APPLICATION in revision of the Orders of the District Court of Colombo.
K. Kanag-lswaran, P.C. with K. M. Basheer Ahamed and Ajit Perera for 1stdefendant-petitioner.
D. Wikramanayake with D. Phillips lot plaintiff-respondent.
S. Sivarasa PC. with S. R. de Livera for 2nd defendant-respondent inC.A. 1012/93.
S. A. Parathalingam with L. R. Vitharna for 2nd defendant-respondent inC.A. 1013/93.
Cur. adv. vult.
October 20,1994.
RANARAJA, J.
When these three applications came for hearing on 24.6.94,Counsel for the respective parties agreed that the matters to beargued were substantially the same and that they could be decidedin one order. They also agreed that the issue before this court waswhether the learned District Judge was correct in granting an interiminjunction restraining and/or stopping the 1st defendant receivingand/or demanding any sum of money whatsoever on the bankguarantees marked "E", “F” and “G” and produced in the respectiveapplications.
The 1st and 2nd plaintiffs-respondents who are husband and wifewere partners in the business known as “Erandis”. They institutedaction No. 3818/sp in the District Court, Colombo, against the 1stdefendant-respondent, Hemas Marketing (Pvt) Ltd. to recover a sumof Rs. 6 million and interest thereon, for unlawfully and wrongfullyacting in violation of the agreement marked “B” entered into by them.By that agreement, Erandis were nominated as the agent for the re-distribution for the products of Hemas listed in annexure 1 thereto, inthe areas given in annexure 11. The goods were to be issued up tothe value of the credit limit determined on the basis of securityprovided by Erandis. The complaint of Erandis appears to be thatHemas without taking steps to terminate the agreement as provided inclause 14 therein, by letter dated 17.8.93 (which date it is submitted byHemas should read as 17.8.93), delivered on 17,9.93, had requested
184
Sri Lanka Law Reports
[1994] 2 Sri LR.
Erandis to transfer the balance stocks in their stores to Ranveli Traders.Clause 14 provides for the termination of the contract by either party bygiving one months clear notice to the other. Erandis also prayed for anenjoining order and interim injunction restraining the Hemas fromdemanding and/or receiving any money on the bank guarantee “E"from 2nd defendant Seylan Bank. Actions Nos: 3818/sp and 3820/spwere for injunctive relief restraining Hemas from demanding and/orreceiving any money on bank guarantee “F" and "G" from therespective 2nd defendant banks.
Hemas filed objections admitting the agreement with Erandis andrelied on clauses 12 and 13 therein to justify their action. Theseclauses permitted Hemas to make alternative arrangementsregarding the distribution of their goods in the event Erandis were notin a position to comply with the provisions of the agreement. Thecause for Hemas taking the steps they did, was that Erandis wereunable to pay for the goods supplied by Hemas on schedule. At adiscussion held on 9.8.93 between the parties, on several chequesissued by Erandis being dishonoured by the banks, a settlement,which was subsequently confirmed by letter dated 10.8.93, wasarrived at whereby Erandis agreed to pay a total sum ofRs. 2,058,826.72, outstanding at that date, in instalments over theperiod 14.8.93 to 1.10.93. Pursuant to this settlement Hemas issuedto Erandis goods to the value of Rs. 238,682.00 on 11.8.93. In termsof the settlement these purchases were to be paid within a period ofone month. Admittedly, up to 17.9.93, Erandis had paid only a sum ofRs. 256,312.22 in terms of the settlement. Three cheques forRs. 201,831.14, Rs. 298,882.89 and Rs. 205,889.98 respectively hadbeen returned dishonoured. Hemas have filed a statement ofaccounts marked X3, which shows that a sum of Rs. 2,069,852.21was due to them from Erandis as at 30.9.93. Thus it is the position ofHemas that Erandis had failed to abide by the conditions of thesettlement of 9.8.93 and therefore they were within their rights whenthey made other arrangements to distribute their products throughRanweli Traders. They do not concede that there was a termination ofthe agreement *B” between the parties.
The learned District Judge in three orders given in the respectiveactions on 9.12.93 has concluded that Hemas had terminated the
CA
Hemas Marketing (Pvt) Ltd. v. Chandrasiri and Others (Ranaraja, J.)185
agreement "B" without giving 30 days notice and that they actedunreasonably in so doing, “within a few days of the settlement on9.8.93", despite the fact that Erandis had paid a sum ofRs, 286,312.22 on 14.8.93. He also concluded that the bankguarantees were not payable on demand and in any event, nodemand could be made as Hemas had not established that anymoney was due to them from Erandis.
It is clear that the learned District Judge has not based his orderson a proper consideration of the pleadings, documents and writtensubmissions before him. The main issue that was before the Judgewas whether Erandis had established a prima facie case. It issignificant that none of the orders refers to the claim of Rs. 6 millionby Erandis against Hemas. In the plaints there is no reference to thetermination of agreement "B". What is stated is that Hemas acted inviolation of the terms of the agreement in requesting Erandis to handover the stocks in their custody to Ranveli Traders. Hence thequestion of 30 days notice did not arise. Admittedly, Erandis had paidonly a sum of Rs. 286,312.22 to Hemas between 9.8.93 and 17.9.93.It is not denied that three other cheques issued by Erandis had beendishonoured during this period. It is also admitted that Erandis hadinstructed their bank to stop payments on cheques issued by them.This is a clear breach of the settlement arrived at between the partieson 9.8.93. A total sum of Rs. 2,069,852.21 was due to Hemas as at30.9.93. This is not disputed. This sum is far in excess of the threebank guarantees which totalled Rs. 1,100,000.00. The Plaints filed inthe three actions did not disclose the basis on which the loss of Rs. 6million claimed by Erandis was quantified. In the circumstances,there was no material sufficient to establish a prima facie case beforecourt on which the interim injunctions could have issued.
Learned President’s Counsel for the 1st defendant-petitionersubmitted that the learned District Judge was in error when he issuedthe interim injunctions. He cited several authorities in support. Theprinciples which emerge from these authorities could be summarisedas follows. Bank guarantees are not guarantees as understood in thecommon law. A guarantee is an accessory contract by which thepromisor undertakes to be answerable to the promisee for the debt,
166
Sri Lanka Law Reports
[1994] 2 Sri LR.
default or miscarriage of another person whose primary liability to thepromisee must exist or be contemplated. (Halsbury's Law of England(4th Ed) Vol. 20). Bank guarantees like letters of credit andperformance bonds are a “new creature" of the commercial world, (perLord Denning Edward Owen Engineering Ltd. v. Barclays BankInternational Ltd.™. They were established as a universally acceptablemeans of payment equivalent to cash in trade and commerce, on thebasis that the promise of the issuing bank to pay was whollyindependent of the contract between the buyer and the seller and theissuing bank would honour its obligations to pay regardless of themerits or demerits of the dispute between the buyer and the seller.(Power Curber Internatbnal Ltd. v. Natbnal Bank of Kuwait<21)- When abank has given a guarantee, it is required to honour it according to itsterms and is not concerned whether either party to the contract whichunderlay the contract was in default. (Edward Owen – {supra)). Thewhole purpose of such commercial instruments was to provide securitywhich was to be readily, promptly and assuredly realisable when theprescribed event occurred. No bank is obliged to give such aguarantee unless they wished to and no doubt when they did so theyproperly exacted commercial terms and protected themselves bysuitable cross indemnities. Siporex Trade SA v Banque Indo Suez131. Itis only in exceptional circumstances that courts will interefere with themachinery of obligations assumed by the banks. They are the lifebloodof international commerce. Such obligations are regarded as collateralto underlying rights and obligations between merchants at either end ofthe banking chain.. Courts will leave the merchants to settle theirdisputes under the contracts by litigation.The courts are not concernedwith the difficulties to enforce such claims, These are risks whichmerchants take Harbottle (Mercantile) Ltd. v. National WestminsterBank Ltd.w. If court interferes with a bank's undertaking it willundermine its greatest asset – its reputation for financial andcontractual probity. Sir Donaldson MR. – Boliventer Oil SA v. ChaseManhattan Bank(S). The only exception to that rule is where fraud byone of the parties to the underlying contract has been established andthe bank had notice of the fraud. (Edward Owen – supra, Boliventer -supra). A mere plea of fraud put in for the purpose of bringing the casewithin this exception and which rests on the uncorroborated statementsof the applicant will not suffice. An injunction may be granted only in
CA
Hemas Marketing (Pvt) Ltd. v. Chandrasiri and Others (Ranaraja, J.)187
circumstances when the court is satisfied that the bank should noteffect payment. (S. N. Silva, J. – Indika Traders v. Seoul LankaConstruction (Pvt) Ltd.)<6>.
On the face of guarantees *F" and “G" they are payable ondemand. The guarantee X5 for Rs. 500,000/- issued by Seylan Bankgives the undertaking to pay the beneficiaries that sum in the eventthe principal fails or neglects to pay the said sum of money on thedue date under the credit agreement between the beneficiary andthe principal. It is clear that Erandis had failed to pay the sums dueon goods delivered by Hemas on credit as at 17.9.93. This satisfiesthe condition in the guarantee. The court in any event did not have toconcern itself with the merits or demerits of the beneficiary's claim asthere was no fraud alleged.
An allegation has been made that the three defendant banks wereacting in collusion with Hemas to enable the latter to receive thesums due on the three guarantees. There is no material to supportthis allegation.
The fact that Seylan Bank had not objected to the interim injunctionissuing does not preclude this court from discharging the interiminjunctions which have been improperly granted. (Harbottle – supra).
The orders of the District Judge dated 9.12.93 in the three actionsDC 3818/sp, 3819/sp and 3820/sp are accordingly set aside. Theapplications Nos. CA 0112/93, CA 1013/93 and CA 1014/93 areallowed with costs.
S. N. SILVA, J. -1 agree.
Applications allowed.