Calcutta High Court
Himadri Chemicals Industries Ltd. vs Coal Tar Refining Company on 21 June, 2007
Equivalent citations: AIR2008CAL10, AIR 2008 CALCUTTA 10, 2008 AIHC NOC 118, (2008) 2 BANKCLR 78, (2008) 2 CAL HN 52, 2007 ARBILR(SUPP) 208
Author: Pinaki Chandra Ghose
Bench: Pinaki Chandra Ghose
ORDER
1. This application is filed against an order dated 5th June, 2007 passed by the Hon'ble Single Judge vacating the interim order of status-quo granted by the Court passed on 9th April, 2007. The said order was passed at ad interim stage on the returnable date.
2. The application was filed by the appellant under Section 9 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as "the said Act") for an order of injunction restraining the respondent from receiving any payment under the Letter of Credit dated 27th July, 2006.
3. Facts of the case briefly are as follows:
Under an agreement dated 29th May, 2006 respondent agreed to supply Extra Hard Pitch (hereinafter referred to as "the said goods") to the respondent as per schedule set out in the said agreement. The terms of payment was that a Letter of Credit will be opened by the petitioner in favour of the respondent and the payment was to be made "at sight". Accordingly, the petitioner opened the said irrevocable Letter of Credit in favour of the respondent. The document against which payment was to be made was received directly by the banker of the petitioner and upon presentation of document, it was found by the petitioner's bankers by a letter dated 11th September, 2006 that the description of the goods was not as per Letter of Credit terms. Accordingly, banker sought advice of the petitioner in this regard whether the petitioner was willing to waive the discrepancies. The petitioner by a letter dated 3rd October, 2006 waived the discrepancies and accepted the document. Correspondences were exchanged between the parties and the Letter of Credit was amended and payment "at sight" was substituted to "230 days from the shipment date" and therefore, the payment would be payable on 10th April, 2007. The said amendment was informed to the "respondent's banker and was accepted.
4. By a communication dated 28th September, 2006 respondent gave two alternative options, either to have document negotiated amicably and to take care of the quality issue or have the rejected shipping goods documents and to take legal steps immediately. It appears that the petitioner accepted the, first option and amended the said Letter of Credit. According to the petitioner, various correspondences were exchanged between the parties to solve the quality of the goods in question. No step has been taken by the respondent to resolve the issue effectively. Accordingly, it was submitted on behalf of the petitioner that the acts on the part of the respondent amounts to fraud and the petitioner will suffer irreparable injury if the injunction is refused by the Court.
5. The case of the respondent that the goods were dispatched under the two shipments. First shipment of the goods have been received, documents were negotiated and payments were released. It appears that in respect of 2503 metric tones of the said goods, the documents were negotiated and payments were released. For the balance 10,000 metric tones, the documents have not been negotiated and payments were not released. It is further the case of the respondent that in spite of the said discrepancies which have been waived by the petitioner and the petitioner further accepted to make payments by the said communication dated 3rd October, 2006.
It further appears that the injunction was prayed restraining to honour the Letter of Credit. It also appears that the Letter of Credit is an independent contract.
6. It is also appeared that an Admiralty Suit has also been filed by the petitioner before this Court on November, 2006 and at the instance of the petitioner in the said Suit the defendant No. 1 was given liberty to furnish a Bank Guarantee for a sum of Rs. 21,86,68,540/- being the sum claimed by the petitioner on account of damages to the credit of the said suit and further the said Bank Guarantee has been furnished.
7. Learned Senior Advocate appearing on behalf of the petitioner contended that the statements made in the petition filed before the Court under Section 6 of the said Act, are to be taken as true and correct at this stage. Accordingly, it is submitted that particulars of fraud have been stated in the petition. Accordingly, the Court shall come to the conclusion on the basis of such pleading prima facie the petitioner is entitled to get benefit on the basis that fraud perpetrated on the petitioner and further the equity lies in favour of the petitioner which entitled the petitioner to have an injunction in their favour.
8. On the contrary, it is submitted on behalf of the respondent by Mr. Mukherjee and the following decisions were cited by him in support of the case since it is submitted by Mr. Mukherjee that the Letter of Credit is a separate contract and cannot be restrained by an order of injunction to honour the same.
9. Mr. The following decisions were cited at Bar:
I) In the decision (Pundlik v. State of Maharashtra and Ors.) where the said case has no application in the facts and circumstances of this case.
II) In the decision (Mayar H.K. Ltd. and Ors. v. Owners & Parties, Vessel M. V. Fortune Express and Ors.) where the Hon'ble Supreme Court has held that essentially whether the plaint discloses the cause of action is a question of fact which has to be gathered on the basis of averments made in the plaint in its entirety taking those averments to be corrected.
III) In the decision (U.P. Co-operative Federation Ltd. v. Singh Consultants and Engineers (P) Ltd.) where the Hon'ble Supreme Court has specifically held that the commitments of Banks must be honoured free from interference by the Courts. An irrevocable commitment either in the form of confirmed bank guarantee or irrevocable letter of credit cannot be interfered (sic). In order to restrain the operation either of irrevocable letter of credit or of confirmed letter of credit or of bank guarantee, there should be serious dispute and there should be good prima facie case of fraud between the parties. Otherwise the very purpose of bank guarantees would be negatived and the fabric of trading operation will get jeopardized. Upon bank guarantee revolves many of the internal trade and transactions in a country.
IV) In the decision (United Commercial Bank v. Bank of India and Ors.) where the Hon'ble Supreme Court has specifically held 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. A banker issuing or confirming an irrevocable credit usually undertakes to honour drafts negotiated, or to reimburse in respect of drafts paid, by the paying or negotiating intermediate banker and the credit is thus in the hands of the beneficiary binding against the banker. A letter of credit constitutes the sole contract with the banker and a bank issuing or confirming a letter of credit is not concerned with the underlying contract between the buyer and the seller. Duties of a bank under a letter of credit are created by the document itself, but in any case it has the power and is subject to the limitations which are given or imposed by it, in the absence of the appropriate provisions in the letter of credit. The Court cannot grant an injunction under Order 39, Rules 1 and 2 unless there is a bona fide prima facie contention between the parties or serious questions are to be tried. The plaintiff must establish that they would be put to irreparable loss unless an interim injunction was granted.
V) In the decision reported in 1958 (1) All ER 262 (Malas and Anr. (Trading as Hamzeh Malas and Sons) v. British Imex Industries Ltd.) wherefrom it appears that the dispute was regarding quality of goods sold. In the said decision it also appears that by a contract between the buyers and the sellers the buyers agreed to buy a quantity of reinforcement steel rods from the sellers. Delivery was to be in two instalments and payment was to be effected by the opening in favour of the defendant of two confirmed letters of credit with the bank in London in respect of each instalment. The letters of credit were duly opened by the buyers and the sellers realized the. first. The buyers on receiving the first instalment of the goods considered that they were not of the quality specified in the contract and they applied for an injunction restraining the sellers from dealing with the second letter of credit. In the exercise of the Court's discretion the injunction would not be granted, because the opening of a confirmed letter of credit constituted a bargain between the banker and the seller of goods which imposed on the banker an absolute obligation to pay, irrespective of any dispute between the buyer and the seller in regard to the quality of the goods, and in the present case it would be wrong to interfere with the commercial practice established on that principle.
VI) In the decision (Tarapore & Co., Madras v. Tractoroexport. Moscow) the Hon'ble Supreme Court held that an irrevocable letter of credit has a definite implication. It is a mechanism of great importance in international trade. Any interference with that mechanism is bound to have serious repercussions on the international trade. Except under very exceptional circumstances, the Courts should not interfere with that mechanism. Opening of a confirmed letter of credit constitutes a bargain between the banket 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. The letter of credit is independent of and unqualified by the contract of sale or underlying transaction.
VII) In the decision reported in 1975 (1) All ER 1071 (Discount Records Ltd. v. Banclays Bank Ltd. and Anr.) the court would only interfere with bankers irrevocable credits if a sufficiently grave cause were shown.
(VIII) In the decision (Kamini Ferrous Ltd. v. Neelam International Pvt. Ltd.) the Court held that the invocation of the letter of credit cannot be mixed up with the other dispute between the parties.
10. After analyzing the facts of the case and after perusing the materials on record and after hearing the submissions on behalf of the parties, in our opinion, the petitioner has not been able to make out a strong case in their favour who have an injunction in the matter. Accordingly, we must come to the conclusion that following the decisions of the Courts that a letter of credit constitutes the sole contract with the banker and a bank issuing or confirming the letter of credit is not concerned with the underlying contract between the buyer and the seller.
11. In the facts and circumstances of the present case as it appears from the fact that the two options were given to the petitioner either to negotiate, or to refuse by the respondent and the petitioner agreed to amend the letter of credit with the consent of the banker and substituted to 230 days from the date which was duly accepted by the bank. Hence, in our opinion, the bank has failed to make out a case to have an injunction in the matter and we are unable to find out a strong prima facie case in favour of the petitioner from the pleadings.
12. Hence, we come to the conclusion that no interim order can be passed in the facts and circumstances of the case and the petitioner has failed to make out a case to that effect. Accordingly, we uphold tire order passed by the Hon'ble First Court and dismiss this application.
By consent of the parties the appeal is also disposed of on the above terms.
13. Later part:
It is submitted by Mr. Mukherjee that no undertaking was filed before us on behalf of the respondent. We did not (sic) junction order or status quo order earlier and the observation made at the ad interim stage shall not stand in the way to decide the matter finally by the Hon'ble First Court.