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Sai Wardha Power Generation Limited Vs. Western Coalfields Limited and Ors. - (High Court of Bombay) (25 Jan 2018)

Fraud should be of an egregious nature, vitiating the entire underlying transaction and bank should have knowledge of such a fraud



The Appellant is a company engaged in the business of generation and sale of electricity and for that purpose, it had entered into agreements with the Respondent No. 1- Western Coalfields Ltd. (WCL) for purchase of coal to be utilised in its power plants for generation of electricity. The Respondent No. 1-WCL is a subsidiary of Respondent No. 2-Coal India Limited and it is engaged in the business of mining and sale of coal. The entire coal available in the county is under the control and dispensation of Respondent No. 2 and as per the policy of the Government of India, supply and sale of coal is done via coal linkages granted in two categories i.e. coal linkages at notified price and coal linkages at cost plus price.

By instant appeal, the Appellant claims that, the trial Court has committed an error in refusing to grant temporary injunction claimed by it for restraining encashment of unconditional bank guarantees, despite the fact that, it had made out a case for such injunction on the well established twin grounds of fraud committed by Respondent No. 1 on the Appellant and irretrievable damage that, the Appellant would suffer in the absence of such injunction.

The Bank should have knowledge of such fraud claimed by the Plaintiff and that it's obligation to honour the demand of encashment has nothing to do with any dispute between the seller and buyer with regard to any alleged breach of contract between them. The position of law is that, not only should the fraud be of an egregious nature, it should be held to be vitiating the entire underlying transaction and the Bank should have knowledge of such a fraud. In the instant case, the allegations levelled by the Appellant (Plaintiff) against the Respondents (Defendants) are such that a full dress trial would be required to prove such allegations. The dispute whether the supply of coal was from cost plus mine and whether Scheme area of the mine includes a cost plus area or not, are disputes that would have to be resolved upon further evidence and trial before the Court below. The allegations of fraud made by the Appellant in the present case are based on its interpretation about the manner in which the fuel supply agreements should have been operated. The material on record does not prima facie, make out a case of fraud of egregious nature on the part of the Respondents and the said material does not demonstrate that the entire underlying transaction, i.e. the fuel supply agreements, stood vitiated by fraud on the part of the respondents. Ultimately, at the completion of the trial, the Appellant may be able to prove that the interpretation of clauses of the agreement by the Respondent No. 1- WCL was not correct or that the agreements were not operated in the manner in which they ought to have been operated. But, this alone would not lead to the conclusion that, there is enough material on record to show that prima facie a fraud of egregious nature has been committed by the Respondents in the present case to vitiate the agreements in question.

As regards the aspect of irretrievable damage, there is insufficient material on record to show that any exceptional or irretrievable loss will be suffered by the Appellant, if the Respondent No. 1- WCL is not restrained by temporary injunction from encashing the unconditional bank guarantees. In the facts of the present case, it would not be impossible for the Appellant whatsoever to recover the amount from the Respondent No. 1 by way of restitution if the Appellant ultimately succeeds in the suit. In fact, in respect of unfair price structure under the fuel supply agreements, the Appellant has already succeeded before the authorities under the Competition Act, 2002 and before the Supreme Court, an arrangement of price fixation and supply of coal has been worked out, during pendency of the appeal. Therefore, even the case on the aspect of irretrievable damage is not made out by the appellant.

In the plaint before the trial Court, the Appellant has specifically pleaded that, the scope and width of proceedings initiated by it under the provisions of the Competition Act, 2002 and the grievances made in the suit filed before the trial Court are totally different. Therefore, any grievance in respect of alleged unfair price fixation under the said agreements by the Respondents abusing their dominant position, cannot be made a factor for considering the contentions raised on behalf of the Appellant on the question of irretrievable damage that might be suffered by the appellant on account of refusal to restrain the Respondent No. 1-WCL from encashing the bank guarantees.

It is significant in the present case that, the fact of short lifting of coal has not been denied by the Appellant and encashment of unconditional bank guarantees is sought by the Respondent No. 1- W.C.L., towards compensation for such short lifting. Therefore, as per the settled law, since the prayer for temporary injunction restraining a Bank from encashing unconditional bank guarantee can be granted in very narrow set of circumstances wherein fraud and irretrievable damage is proved, High Court found that, the Appellant in the present case has failed to prove that, it is entitled for grant of temporary injunction. Hence, there is no error committed by the trial Court in rejecting the application for temporary injunction by the impugned order. The appeal is dismissed.


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