' AJMAL MIAN, C.J.--This is an appeal with the leave of this Court against the judgment dated 21-3- 1997 passed by a learned Single Judge of the Lahore High Court in F.A.O. No.318 of 1996, filed by the respondents against the order dated 29-10-1996 of the learned Civil Judge, 1st Class, Lahore, on the respondents' application filed under Order XXXIX, Rules 1 and 2, C.P.C. Granting ad interim injunction restraining respondents Nos. 3 and 8 from claiming payment or remitting under the Letter of Credit until and unless respondents Nos.3 and 8 furnish Bank guarantee equivalent to the amount of letter of credit, allowing the same as follows:- "10. For the above reasons, this appeal is allowed and the impugned order dated 29-10-1996, restraining payment under the Letter of Credit except on the condition of furnishing of bank guarantee, is set aside and the application of plaintiff-respondent No.1 herein filed under Order 39, Rules 1 and 2, C.P.C. Is hereby dismissed. No order as to costs.
2. Leave to appeal was granted to consider the question, whether the High Court was not justified to interfere with in the discretionary order of the Trial Court, and whether the appellant/plaintiff was estopped from asking for restraint order against payment under the Letter of Credit on the facts and circumstances of the case.
3. The brief facts are that the appellant agreed to purchase certain machinery from respondent No.2, a Belgium firm, and for that purpose opened an irrevocable Letter of Credit through M/s. Allied Bank of Pakistan Limited, which have been arraigned as respondents Nos.6 to 8 in the present appeal through Branch Managers referred to therein, in favour of respondent No.2 (i.e, the seller). It seems that under the terms of the Letter of Credit the payment was to be made in 12 instalments on the dates specified on the bills of exchange drawn by respondent No.2, i.e, the seller, and accepted by the appellant-purchaser. .It appears that the required machinery and other allied articles were duly received and the same were installed. It is the case of the appellant that upon operation of the above machinery it was discovered that the same was defective, resulting in serious losses to the appellant. The appellant, therefore, filed Suit No.375 of 1996 for the recovery of Rs,344.68 million or its equivalent amount in Belgium currency on the ground of breach of specifications and the inferior quality thereof. They also sought permanent injunction against the defendants inter alia for restraining M/s. Allied Bank of Pakistan Limited from releasing or remitting any payment by annual instalments. Alongwith the plaint of the suit the appellant also filed an application under Order XXXIX, Rules 1 and 2, C.P.C., which was allowed by learned Civil Judge, 1st Class, Lahore, through his above order dated 29-10-1996 in the aforesaid terms; against which respondent No.1 bank (which is the holder in due course) sought further injunction restraining the seller and the negotiating bank/respondent No.1 from claiming any amount under the Letter of Credit or the bills of exchange drawn under the Letter of Credit by making payment of the sale price to respondent No.2, the seller, filed F.A.O. No.318 of 1996, which was allowed in the above terms.
Thereupon, the appellant filed a petition for leave to appeal which was granted to consider the above questions.
4. In support of the aforesaid appeal Mr. Gul Zarin Kiani, learned A.S.C. Appearing for the appellant, has vehemently contended that since the order of the learned Civil Judge directing the appellant and M/s. Allied Bank of Pakistan Limited not to remit the balance of the amount under the Letter of Credit/Bills of Exchange without getting the bank guarantee was just and proper, the learned Judge in Chambers was not justified to interfere with the above discretionary order particularly when it was alleged that respondent No.2, the seller, had committed fraud to which respondent No.1 was also a party.
' On the other hand, Mr. Jawwad S. Khawaja, learned Advocate Supreme Court for respondents Nos.1 to 3, has urged that no allegation of fraud or any other misconduct on the part of respondent No.1 was alleged by the appellant in their plaint and since respondent No.1 is the holder in due course of the bills of exchange for consideration drawn under the letter of credit and after having paid the price to the seller, the learned Civil Judge was not justified in burdening the above respondents to furnish bank guarantee for the balance amount to be remitted under the Letter of Credit guaranteed by the Bills of Exchange.
5. Before touching upon the above contentions on merits, we may observe that Mr. Gul Zarin Kiani, learned Advocate Supreme Court appearing for the appellant, was candidly submitted that in the body of the plaint or in the application under Order XXXIX, Rules 1 and 2, C.P.C. Or in the supporting affidavit, no allegation as to fraud or any other misconduct on the part of respondent No.1 was alleged. However, he submitted that an application for amendment of the plaint has been filed in which the amendment is sought of the plaint as to include the above plea of fraud on the part of respondent No.1. Mr. Jawwad S. Khawaja has submitted that his client has not received any copy of such application.
6. Be that as it may, it will not be appropriate on our part to take into consideration the allegations which are now sought to be made through the amendment. Even the amendment application has not yet been allowed. We would, therefore, proceed on the assumption that there is no allegation of fraud or any misconduct on the part of respondent No.1 bank, which is holder in due course of the Bills of Exchange for consideration.
7. Mr. Gul Zarin Kiani, learned Advocate Supreme Court for the appellant, has referred to section 9 of the Negotiable Instruments Act, 1881, particularly the Explanation to the same. Above section 9 lays down that "Holder in due course" means any person who for consideration becomes the possessor of a promissory note, bill of exchange or cheque if payable to bearer, or the payee'or indorsee thereof, if payable to order, before it became overdue, without notice that the title of the person from whom he derived his own title was defective.
' Explanation to the same provides that "For the purpose of this section the title of a person to a promissory note, Bill of Exchange or cheque is defective when he is not entitled to receive the amount due thereon by reason of the provisions of section 58".
' It may be stated that section 58 lays down that "when a promissory note, Bill of Exchange or cheque has been lost or has been obtained from any maker, drawer, acceptor or holder thereof by means of an offence or fraud, or for an unlawful consideration, neither the person who finds or so obtains the instrument nor any possessor or indorsee who claims through such person is entitled to receive the amount due thereon from such maker, drawer acceptor or holder, unless such possessor or indorsee is, or some person through whom he claims was, a holder thereof in due course".
8. On the other hand, Mr. Jawwad S. Khawaja, learned Advocate Supreme Court for respondents Nos. 1 to 3, has referred to section 118 of the aforesaid Act, which provides as under:-- "118. Presumptions as to negotiable instruments.-- Until the contrary is proved, the following presumption shall be made--
(a) of consideration; that every negotiable instrument was made or drawn for consideration, and that every such instrument, when it has been accepted, indorsed, negotiated or transferred, was accepted, indorsed, negotiated or transferred, for consideration;
(b) as to date; that every negotiable instrument bearing a date was made or drawn on such date;
(c) as to time of acceptance; that every accepted bill of exchange was accepted within a reasonable time after its date and before its maturity;
(d) as to time of transfer; that every transfer of a negotiable instrument was made before its maturity;
(e) as to order of endorsement; that the endorsements appearing upon a negotiable instrument were made in the order in which they appear thereon;
(t) as to stamp; that a lost promissory note, bill of exchange or cheque was duly stamped;
(g) that holder is a holder in due course; that the holder of a negotiable instrument is a holder in due course; provided that, where instrument has been obtained from its lawful owner, or from any person in lawful custody thereof, by means of an offence or fraud, or has been obtained from the maker or acceptor thereof by means of an offence or fraud, or for unlawful consideration, the burden of proving that the holder is a holder in due course lies upon him."
9. In our view, prima facie there is nothing uptil now on record from which it can be concluded that either the above Explanation to section 9 of the above Act is attracted to or section 58 thereof. On the contrary, as pointed out hereinabove, there is no allegation in the body of the plaint or in the application filed under Order XXXIX, Rules 1 and 2, C.P.C. Or in the supporting affidavit which may disentitle respondent No.1 from receiving the amount under the Bills of Exchange. There is nothing reliable on record till now from which the presumption attached to the validity of the Bills of Exchange under section 118 of the above Act can be negated.
10. Mr. Gul Zarin Kiani, learned Advocate Supreme Court for the appellant, has referred to the following case-law in support of his above submissions:--
(i) An unreported order dated 26-6-1998 passed on C .M . A . No.519 of 1998 in Civil Appeal No.879 of 1998 by this Court, which appeal was directed against the order of a learned Single Judge of the Lahore High Court directing that the amount of instalments due under the Letter of Credit be paid to the appellant on the condition of furnishing a bank guarantee was 'modified as the quantum of amount.
(ii) Messrs U.D.L. Industries Ltd. v. Hongguang Electron. Tube Plant and others PLD 1997 Karachi 553; in which a learned Single Judge of the High Court of Sindh allowed the encashment of a Letter of Credit subject to furnishing bank guarantee by the defendants on an application under Order XXXIX, Rules 1 and 2, C.P.C. After having found that the whole transaction was vitiated by fraud on the part of the seller.
(iii) Pan Ocean Enterprises (Pvt.) Limited v. Thai Rayon Company Limited and 5 others PLD 1990 Karachi 395; ' In the above case a learned Single Judge of the High Court of Sindh after having found prima facie that the bill of lading contained wrong statements of facts particularly about the dates of shipping, vessels in which the goods were loaded and that there was transshipment, and all this was in violation of the terms of Letter of Credit, restraining defendants Nos. 1 and 6 from claiming payment under the Letter of Credit in question and defendants Nos. 4 and 5 from making any payment thereunder until and unless defendants Nos.1 and 6 furnished bank guarantee equivalent to the amount of Letter of Credit.
(iv) Messrs Kohinoor Trading (Pvt.) Ltd. v. Mangrani Trading Co. And 2 others 1987 CLC 1533; ' in which a Division Bench of the High Court of Sindh to which one of us (Ajmal Mian, C.J.) was a party, maintained the order of a learned Single Judge declining to issue a restraint order against the bank from releasing the amount under a Letter of Credit and observed as follows as to the law governing the grant of an ad interim injunction restraining the bank from honouring its commitment under a Letter of Credit: ' The above cases cited by Mr. Nasim Farooqui and the passages from the Book referred to by him indicate that generally an irrevocable Letter of Credit cannot be dishonoured by a bank but there may be exceptions to the above general rule, for example, where it is proved that the bank knows that any demand for payment already made or which may thereafter be made will clearly be fraudulent but the evidence on the question of fraud as to the bank's knowledge must be clear, or when there is challenge to the validity of the Letter of Credit. In the present case respondent No.3 Bank was to remit L/C amount to their counterpart in Switzerland on the basis of the commitment made by them. The appellants obtained the documents from respondent No.3 without any protest and without pointing out that there was any breach as to the terms of the L/C. It is also apparent that though the alleged survey report (which according to the learned counsel for the respondents 1 and 2 is an ex parte carried out after several weeks from the date of the delivery) indicates that the packing of the goods were allegedly found in damaged condition, the appellants had taken the delivery of the goods from the carrier without any protest. The question, whether the goods were despatched by respondent No.2 in accordance with the description given in the Letter of Credit or whether there was any breach as to he quality would be an issue at the trial. In our view, under an irrevocable Letter of Credit payment cannot be stopped on the ground that there was some breach on the part of the vendor as to the quality of the goods. An irrevocable Letter of Credit is a negotiable document in the commercial world which is negotiated inter alia inter se between the banks and, therefore, the Court cannot lightly cause its dishonouring by one bank to another, unless prima facie a sufficiently grave cause is shown. If we were to accept the contention of Mr. Nasim Farooqui it will gravely impair reliability and sanctity of an irrevocable Letter of Credit and will lead to commercial uncertainty. An irrevocable Letter of Credit is open in favour of a foreign exporter through a bank, which in turn makes commitment to a foreign bank, which in turn makes the payment generally against the bill of lading and other necessary documents after the shipment of the goods."
(v) The State Trading Corporation of India Ltd., v. Jainsons Clothing Corporation and another (AIR 1994 SC 2778).
' In the above case the Indian Supreme Court allowed an appeal against a restraint order against the encashment of a bank guarantee and enunciated law in respect thereof in the following terms:- "9. The grant of injunction is a discretionary power in equity jurisdiction. The contract of guarantee is a trilateral contract which the bank has undertaken to unconditionally and unequivocally abide by the terms of the contract. It is an act of trust with full faith to facilitate free flow of trade and commerce in internal or international trade of business. It creates an irrevocable obligation to perform the contract in terms thereof. On the occurrence of the events mentioned therein the Bank guarantee becomes enforceable. The subsequent disputes in the performance of the contract does not give rise to a cause nor is the Court justified on that basis, to issue an injunction from enforcing the contract, i.e, bank guarantee. The parties are not left with no remedy. In the event of the dispute in the main contract ends in the party's favour he/it is entitled to damages or other consequential reliefs.
10. It is settled law that the Court, before issuing the injunction under Order 39, Rules 1 and 2, C.P.C.
Should prima facie be satisfied that there is triable issue strong prima facie case of fraud or irretrievable injury and balance of convenience is in favour of issuing injunction to prevent irremedial injury. The Court should normally insist upon enforcement of the bank guarantee and the Court should not interfere with the enforcement of the contract of guarantee unless there is a specific plea of fraud or special equities in favour of the plaintiff. He must necessarily plead and produce all the necessary evidence in proof of the fraud in execution of the contract of the guarantee, but not the contract either of the original contract or any of the subsequent events that may happen as a ground for fraud."
(vi) Syndicate Bank, v. Vijay Kumar and others, AIR 1992 SC 1066. ' in which the Indian Supreme Court allowed the appeal of the appellant bank against a restraint order passed in respect of two F.D.Rs, over which the bank had lien in respect of the liability of the judgment-debtor. However, the case was remanded in the following terms:-- "However, in the view taken by us above namely that the Bank has a general lien over the two F.D.Rs, we set aside the order of the High Court directing the appellant-Bank to deposit an amount of Rs,35,000. The High Court shall, however, consider the objections raised by the Bank, namely that no amounts are due to the judgment-debtor, in the light of the above principles laid down by us and then decide whether there is any amount left for being attached by the decree-holder in execution of his decree. With the above directions the appeal is accordingly allowed. ' In the circumstances of the case, there will be no order as to costs."
(vii) General Electric Technical Services Company Inc. v. M/s. Punj Sons (P) Ltd. And another AIR 1991 SC 1994.
' In the above case the Indian Supreme Court allowed the appeal against the judgment of the High Court and reiterated the principle of law relating to unconditional bank guarantee and unconditional bond in the case of U.P. Cooperative Federation Ltd. v. Singh Consultants and Engineers (P) Ltd. (1988) 1 SCC 174 as under:-- "Almost all such cases have been considered in a recent judgment of this Court in U.P. Cooperative Federation Ltd. v. Singh Consultants and Engineers (P) Ltd., (1988) 1 SCC 174, wherein Sabyasachi Mukherji, J., as he then was, observed (at p.189): 'that is order to restrain the operation either of irrevocable Letter of Credit or of confirmed Letter of Credit or of bank guarantee. There should be good prima facie case of fraud and special equities in the form of preventing irretrievable injustice between the parties. Otherwise, the very purpose of bank guarantee would be negatived and the fabric of trading operations will get jeopardised'. It was further observed that the Bank must honour the bank guarantee free from interference by the Courts. Otherwise, trust in commerce internal and international would be irreparably damaged. It is only in exceptional cases that is to say in case of fraud or in case of irretrievable injustice, the Court should interfere.
' In the concurring opinion one of us (K. Jagannatha Shetty, J.) has observed that whether it is a traditional bond or performance guarantee, the obligation of the Bank appears to be the same. If the documentary credits are irrevocable and independent, the Bank must pay when demand is made. Since the Bank pledges its own credit involving its reputation. It has no defence except in the case of fraud. The Bank's obligations of course should not be extended to protect the unscrupulous party, that is, the party who is responsible for the fraud. But the banker must be sure of his ground before declining to pay. The nature of the fraud that the Court talk about is fraud of an ' egregious nature as to vitiate the entire underlying transaction'. It is fraud of the beneficiary, not the fraud of somebody else."
(viii) Centax (India), Appellant v. Vinmar Impex Inc. And others AIR 1986 SC 1924.
' In the above case the Indian Supreme Court, while dismissing the appeal and maintaining the order of the High Court declining to restrain the Bank from making payment, reiterated the principle governing the grant or refusal of injunction in respect of payment under the Letter of Credit as follows:-- "This case is really an extension of the principles laid down by this Court in United Commercial Bank's case. The main point in controversy in that case was whether the Court should in a transaction between a banker and banker grant an injunction at the instance of the beneficiary of an irrevocable Letter of Credit, restraining the issuing bank from recalling the amount paid under reserve from the negotiating bank, acting on behalf of the beneficiary against a document of guarantee/indemnity at the instance of the beneficiary. In dealing with the nature of a banker's obligation under an irrevocable Letter of Credit, the Court observed: 'In view of the banker's obligation under an irrevocable Letter of Credit to pay, his buyer-customer cannot instruct him not to pay. In Hamzeh Malas v. British Imex Industries Ltd., (1958) 2QB 127, the plaintiffs, the buyers, applied for an injunction restraining the sellers, the defendants, from drawing under the credit established by the buyer's bankers. This was refused. Jenking, U stating at p.129 that: ' the opening of a confirmed Letter of Credit constitutes a bargain between the banker and the vendor of the goods which imposes on the banker an absolute obligation to pay.... And that this was not a case in which the Court ought to exercise its discretion and grant the injunction.
' The Court held that the same considerations should apply to a bank guarantee, and added "
(ix) United Commercial Bank, v. Bank of India and others, AIR 1981 SC 1426; ' In the above case the Indian Supreme Court allowed an appeal against the judgment of the High Court and held that the Courts should refrain from granting injunction to restrain the performance of the contractual obligations arising out of Letter of Credit or a bank guarantee between one bank and another by reiterating as follows:-- "A bank which gives a performance guarantee must honour that guarantee according to its terms.
In R.D. Harbottle (Mercantile) Ltd. v. National Westminster Bank Ltd., (1977) 3 WLR 752, Kerr, J.
Considered the position in principle. We would like to adopt a passage from his judgment at p.761: 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 disputes under the contracts by litigation or arbitration as available to them or stipulated in the contracts. 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 level. They must be allowed to be honoured, free from interference by the Courts. Otherwise trust in international commerce could be irreparably damaged.
(x) M/s. Tilokchand Motichand and others v. H.B.Munshi, Commissioner of Sales Tax, Bombay and another.
' In this case also the Indian Supreme Court re-affirmed its view that in international trade irrevocable Letters of Credit are very important and the Court should refrain from interfering with the autonomy of an irrevocable Letter of Credit is entitled to protection.
(xi) M/s. Synthetic Foams Ltd. v. Simplex Concrete Piles (India) (Pvt.) Ltd. AIR 1988 Delhi 207; ' in which a learned Single Judge of the Delhi High Court granted an ad interim 'injunction restraining the encashment of a bank guarantee and after having found prima facie that the beneficiaries/defendants had invoked the bank guarantee by suppression of material facts but where there allegations of fraud in so far as they had not disclosed that the contract had been cancelled by the defendants due to increase in price and technical reasons without any fault or mistake of, the plaintiff.
(xii) M/s. Banerjee & Banerjee v. Hindusthan Steel Works Construction Ltd. And others (AIR 1986 Calcutta 374): ' In the above case a learned Single Judge of the Calcutta High Court observed that suppression of material facts by beneficiary while seeking enforcement of bank guarantees will entail special equity in favour of principal debtor to stop payment by Bank on the basis of demand letters in respect of the bank guarantees and the Letters of Credit.
(xiii) National Oils & Chemical Industries, Delhi v. Punjab & Sindh Bank Ltd., Delhi and another (AIR 1979 Delhi 9): ' In the aforesaid case a learned Single Judge of the Delhi High Court held that the principle of independence of Bank's obligation under the Letters of Credit was not to be extended to protect unscrupulous sellers and that in the case before him there was good ground for an ad interim injunction.
(xiv) Braja Kishore Dikshit v. Purna Chandra Panda (AIR 1957 Orissa 153); ' in which a learned Single Judge of the Orissa High Court construed inter alia section 9 of the Negotiable Instruments Act, 1881, and held that in order to be a holder in due course, three conditions are necessary, namely:
(i) That the endorsee becomes the holder in due course when it is for consideration;
(ii) he can be an indorsde before the amount mentioned in the promissory note 'became payable; and
(iii) without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title.
(xv) (Vatakkam Chirayil Parkum) Kurundaliammal v. T.P.E.N. Kunhi Kalman and others (AIR 1930 Madras 141): ' In the above case, a learned Single Judge of the Madras High Court, while construing section 9 of the Negotiable Instruments Act, held that unless a person proves that he is a holder in due course within the meaning of section 9, he could not have any higher or superior rights against the drawer than the intermediate holders themselves would have, and that, the person knows of the defect of title of the intermediate holders and it is enough to disentitle that person to the benefits of a holder in due course.
11. On the other hand, Mr.Jawwad S.Khawaja, learned Advocate Supreme Court appearing for respondents Nos.1 to 3, besides referring the cases mentioned at Serial numbers (v), (xi) and (xiv) of para. 10 already referred to by Mr.Gul Zarin Kiani and discussed hereinabove and need not be repeated, has relied upon the following treatises and the case-law.
(i) The Law of Bankers' Commercial Credits by the late H. C. Gutteridge and Maurice, 1984 Edition.
' In the above treatise the authors dealt with the effect of irrevocable Letter of Credit as follows:-- "The effect of an irrevocable credit is to substitute the issuing Bank for the buyer as the person who undertakes to 'buy' the shipping documents, and this is an undertaking which is absolute in the sense that so long as the documents of title to the goods which the seller tenders to the Bank are in order, in the sense of being those prescribed in the credit, the bank must accept them regardless of any controversy between the seller and the buyer as to whether the contract of sale has been performed."
(ii) Documentary Credits by Raymond Jack, 1993 Edition.
' In the aforesaid treatise the author under the caption "the autonomy of the credit" has made the following observations as to the basic rule that the Court will not interfere to prevent the operation of credit:- "The basic rule -- the autonomy of the credit. --The basic rule is that the Court will not interfere to prevent the operation of a credit on the ground of matters which are extraneous to the credit itself.
This is but one aspect of the autonomy principle. In Hamzeh Malas & Sons v British Imex Industries Ltd. The plaintiff buyers considered that the goods supplied as the first instalment under a two- instalment contract were seriously defective and sought to prevent the defective sellers from presenting documents in respect of the second instalment under the confirmed credit which the buyers had arranged to be opened as the means of payment. The injunction was refused. In giving the leading judgment in the Court of Appeal Jenkins, LJ. Stated: ' 'We have been referred to a number of authorities, and 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 an absolute obligation to pay, irrespective of any dispute there may be between the parties as to whether the goods 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.
' There is this to be remembered, too. A vendor of goods selling against a confirmed Letter of Credit is selling under the assurance that nothing will prevent him from receiving the price. That is of no mean advantage when goods manufactured in one country are being sold in another. It is, furthermore, to be observed that vendors are often reselling goods bought from third parties. When they are doing that, and when they are being paid by a confirmed Letter of Credit, their practice is - - and I think it was followed by the defendants in this case-- to finance the payments necessary to be made to their suppliers against the Letter of Credit. That system of financing these operations, as I see it, would break down completely if a dispute as between the vendor and the purchaser was to have the effect of "freezing", if I may use that expression, the sum in respect of which the Letter of Credit was opened."
(iii) Frey & Sons, Incorporated v. E.R. Sherburne Company and The National City Bank of New York App. Div. Vol. CCCIII, November 12, 1920.
' In the above case the Appellate Court Division maintained the order declining to grant an ad interim injunction restraining the bank from making paymerit to the holder of a bill of exchange by observing as under:-- "We are of opinion that the facts appearing in the opinion of that case did not warrant the granting of an injunction. Interests of innocent parties who may hold drafts upon the Letter of Credit should not be made to suffer by reason of rights that may exist between the parties to the contract of sale in reference to which the Letter of Credit was issued. It would be a calamity to the business world if for every breach of a contract between buyer and seller a party may come into a Court of equity and enjoin payment on drafts drawn upon a Letter of Credit issued by a bank which owed no duty to the buyer in respect of the breach. The parties should be remitted upon their claim for damages, to an action at law.
' We think the order should be affirmed, with ten dollar cost and disbursements."
(iv) Hamzed Malas & Sons v. British Imex Industries Ltd. (2 Queen's Bench Division 127.)
In the above case the Court of Appeal England maintained the order of Donovn, J. Declining to restrain the bank at the behest of a Jordanian firm which purchased from the defendant, a British firm, a large quantity of reinforced steel rods and observed as follows:-- "We have been referred to a number of authorities, and it seems to be plain enough that the opening of 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."
(v) Discount Records Ltd. v Barclays Bank Ltd. And another (1975) 1 All ER 1071.
' In the above case Megarry, J. Of Chancery Division declined to grant interlocutory injunction restraining the payment under the Letter of Credit and made the following observations as to the ground of fraud:--- "The complaint alleged fraud, and of course, no established fraud, but merely an allegation of fraud. The defendants, who were not concerned with that matter, have understandably adduced no evidence on the issue of fraud. Indeed, it seems unlikely that any action to which Promodise was not a party would contain the evidence required to resolve this issue. Accordingly, the matter has to be dealt with on the footing that this is a case in which fraud is alleged but has not been established. I should also add that on the facts required to be assumed in the Sztejn case (1941) 31 NYS 2d 63 the collecting bank there was not a holder in due course, who would not be defeated by the fraud, but was merely an agent for the fraudulent seller."
(vi) B.S. Aujla Company (Pvt.) Ltd: v. Kaluram Mahadeo Prosad and others AIR 1983 Calcutta 106; in which a Division Bench of the Calcutta High Court, while setting aside the order of granting an ad interim injunction in respect of Letter of Credit made the following observations:-- "The Courts usually refrain from granting injunction to restrain the performance of the contractual obligations arising out of the Letter of Credit or a bank guarantee between one banker and another. If such temporary injunctions are to be granted in a transaction between a banker and a banker restraining a bank from recalling the amount due when payment was made under reserve to another bank or in terms of the letter of guarantee or credit executed by it, the whole banking system in the country would fail. It is only in exceptional cases that the Courts would interfere with the machinery of irrevocable obligations assumed by bankers. The Supreme Court emphasised further that these were the life-blood of the international commerce. The machinery and commitments of banks were on a different level. These must be allowed to be honoured free from interferences by the Courts, otherwise trust in international commerce could be irreparable damages. Certain observations in certain English Courts which were followed were referred. We shall have to refer to these decisions to which our attention was also drawn."
(vii) Sirafi Trading Establishment v. Trading Corporation of Pakistan Ltd. 1984 CLC 381.
' In the above case a learned Single Judge of the High Court of India declined to grant an ad interim injunction restraining the bank from honouring the bank guarantee and observed as follows:-- "14. From the discussion as above, I find that the bank guarantee furnished would be governed by the same principles of law, which are applicable to payments by the banks against confirmed Letters of Credit. Thus an absolute obligation is imposed upon the bank which executes the guarantee to banker the same according to its terms. There may be exceptions to the general rule in special cases or in cases of fraud to the knowledge of the bank, where the Court may preclude banks from fulfilling their obligation to third parties."
(viii)Messrs Allied Industries Hub (Pvt.) Ltd. v. Messrs China National Metals and Mineral Import and Export Corporation and another (1989 WILD 2027).
' In the above case a learned Single Judge of the High Court of Sindh, while declining an application under Order XXXVIII, Rule 5, C.P.C. For attachment before judgment and also an application under Order XXXIX, Rules 1 and 2, C.P.0 for restraining the defendant bank from remitting the amount under the Letter of Credit, held that the allegation that the defendant had no assets in Pakistan and no relevance to the case of irrevocable Letter of Credit had a definite implication as that was a mechanism of great importance in international trade. It was further held that except under very exceptional circumstances the Court should not interfere with the said mechanism through an interlocutory order.
(ix) Sevenska Handelsbanken v. M/s. Indian Charge Chrome and others (1995 PSC 1276).
' In the above case the Indian Supreme Court reiterated its view that an ad interim injunction cannot be granted in respect of Letter of Credit as follows:-- "53. On the question whether the High Court should, in a transaction between a banker and a banker, grant an injunction at the instance of beneficiary of an irrevocable Letter of Credit restraining the issuing bank acting on behalf of the beneficiary against a document of guarantee at the instance of the beneficiary this Court held that: (SCR headnote) (SCC p.'784, para.41): 'The High Court was wrong in granting the temporary injunction restraining the appellant bank from recalling the amount paid to the respondent bank. Courts usually refrain from granting injunction to restrain the performance of the contractual obligations arising out of a Letter of Credit or a bank guarantee between one bank and another . If such temporary injunctions were to be granted in a transaction between a banker and a banker, restraining a bank from recalling the amount due when payment is made under reserve to another bank or in terms of the letter of guarantee or credit executed by it, the whole banking system in the country would fail' ."
12. From the above-cited case-law and the celebrated treatises on the subject, it appears that the effect of an irrevocable Letter of Credit is to substitute the issuing bank for the buyer as to the person who undertakes to buy the shipping documents and this undertaking is absolute in the sense that so long as the documents of title to the goods which the seller tenders to the bank are in accordance with the terms of the contract, the bank is under an obligation to accept the same regardless of any dispute between the seller and the buyer as to the quality of the goods or otherwise. Any dispute between the seller and the purchaser is extraneous in such a case. On the basis of the above legal position an elaborate commercial system has been built up on the footing that bankers' confirmed credits are of that character which do not call for interference by a Court of law. The above system would break down completely if a dispute as between the seller and the purchaser was to have the effect of freezing the sum in respect of which the Letter of Credit was opened.
' It is only in exceptional cases that the Court will interfere with the machinery of irrevocable obligation assumed by banks for the reason that they are the life blood of international commerce.
The above exceptional cases include, where it is proved that any demand for payment already made or will thereafter be made will clearly be fraudulent or when there is a challenge to the validity of a Letter of Credit on a ground akin to fraud or concealment of material facts.
It may be observed that holder in due course of a Bill of Exchange executed in respect of a Letter of Credit stands on a higher pedestal than a simpliciter beneficiary under a Letter of Credit. It may be stated that the interest of innocent parties, who may hold drafts upon Letter of Credit, should not be made to suffer by a reason of rights that may exist between the parties to the contract in reference to which the Letter of Credit was issued. It would be a sad day in the business world, if for every breach of contract between the buyer and the seller, a party may come to a Court of equity and enjoin payment on drafts drawn upon a Letter of Credit issued by a bank which owes no duty to the buyer in respect of the breach.
The same principles are applicable to a Bank Guarantee. A contract of Bank Guarantee is a trilateral contract under which the bank has undertaken to unconditionally and irrevocably abide by the terms of the contract. It is founded on an act of trust with full faith to facilitate free growth of trade and commerce in internal or international trade or business. It, like a Letter of Credit, creates an irrevocable obligation to perform the contract in terms thereof. A Bank must honour a Bank Guarantee free from interference by the Courts otherwise trust of any commerce, internal and international, would be irreparably damaged. If a Bank Guarantee is unconditional and irrevocable, the Bank concerned must pay when demand is made unless the Bank has pledged its own credit involving its reputation. Generally, it has no defence except in case of fraud.
13. No doubt in some of the above cases, particularly decided by learned Single Judges of the High Court of Sindh, the condition to furnish a bank guarantee or any other security for the entire amount or part thereof in respect of the Letter of Credit involved was imposed but from the facts of the case it appears that prima facie the Court found an element of fraud or the breach of the terms of the Letter of Credit. The above cases have no application to the case in hand.
' The upshot of the above discussion is that the appeal is dismissed, with no order as to costs.