Delhi High Court
P.V. Beverages Pvt. Ltd. vs Global Beverages Ag And Ors. on 20 February, 2008
Equivalent citations: 2008(1)CTLJ158(DEL), 148(2008)DLT68
Author: Badar Durrez Ahmed
Bench: Badar Durrez Ahmed
JUDGMENT Badar Durrez Ahmed, J.
IA NO.2236/2007 (Under Order 39 Rules 1 & 2 CPC)
1. The entire controversy in this case centres around the letter of credit dated 07.07.2006 bearing No. FLC / RFC 654563 for US $ 38,134.00 which had been opened at the instance of the plaintiff by the defendant No. 2 in favor of the defendant No. 1. According to the plaintiff, the defendant No. 2 is liable to be restrained from making payment to the defendant No. 1 under the said letter of credit in view of the fact that the defendant No. 1 is an unscrupulous seller and that, if such an injunction were not granted, irretrievable injustice would be caused to the plaintiff inasmuch as the plaintiff would have no means to recover the same from the defendant No. 1 since the defendant No. 1 does not have any assets in India.
2. The brief facts are that the plaintiff and the defendant No. 1, which is an Austrian company, entered into a distribution agreement on 09.12.2005. By virtue of the said agreement, the plaintiff was appointed as the distributor of the defendant No. 1's product "Phantom Energy Drink" in respect of the entire territory of India. The agreement, which is an admitted document, was for a definite duration of five years and it was also provided that if the minimum turnover is achieved, then there would be an option for extending the same for the next 10 years. As per Clause II (2), both the parties had agreed that the plaintiff (distributor) shall sell the following minimum quantities of the said product throughout the duration of the agreement:
i) First year = 36 Containers (each container comprises of 86,400, 250 ml)
ii) Second year = 36... containers
iii) Third year = 42... containers
iv) Fourth year = 48... containers
v) Fifth year = 48... containers The price for the said products was also agreed upon as mentioned in the Schedule annexed to the agreement. The payment terms were to be ensured by presenting an abstract bank guarantee of an Indian bank or by establishing an irrevocable confirmed letter of credit of an Indian bank. It was also provided in Clause IX (1) (d) that after termination of the agreement, for whatever reason, the plaintiff (distributor) would be bound to irrevocably offer to the defendant No. 1 for repurchase of the contracted products in its possession on termination thereof at their actual market value at the time they are handed over to the defendant No. 1, but not more than the price paid to the defendant No. 1. It was also provided that this offer may be accepted by the defendant No. 1 within one month of receipt of a detailed list of contract products present. If the defendant No. 1 did not accept such an offer, the plaintiff would have the right to sell the said products at the contracted territory, i.e., India.
3. In paragraph 5 of the plaint, it is alleged that though the aforesaid distribution agreement was executed in December 2005, the first shipment of the Phantom Energy Drink to be delivered to the plaintiff was made in November, 2005 itself. The plaintiff had opened a letter of credit for an amount of US$ 1,05,535 in respect of the shipment of 1,72,800 cans of the said Phantom Energy Drink of 250 ml each. The said consignment was received by the plaintiff and the payment was made under the said letter of credit. It is alleged in the plaint that there was a delay in the supply of the first shipment as a result of which the plaintiff had to incur certain losses on account of having organized an impressive launch of the Phantom Energy Drink in Delhi for the North and East Zones. It is alleged in paragraph 13 of the plaint that the plaintiff had to spend about Rs 25.6 lakhs towards man power for the month of December, 2005 which went waste due to the delays on the part of the defendant No. 1. It was alleged that though the letter of credit for the first shipment was opened on 03.11.2005, the goods were actually shipped by the defendant No. 1 much later and were received by the plaintiff in India only on 03.02.2006 after a delay of more than two months over the agreed transit time of 18-21 days port-to-port. It is alleged that because of this delay in the supply of the Phantom Energy Drink by the defendant No. 1, the plaintiff was put to losses and resulted in an adverse impact on the plaintiff's business. It is further alleged in the plaint that because of these losses on account of delays, the defendant No. 1 had agreed to supply one container of Phantom Energy Drink worth US$ 51,000 free of cost with the third shipment.
4. In the meanwhile, the plaintiff had opened the letter of credit for the second shipment on 16.12.2005 for US$ 88,255. The plaintiff had taken the delivery of both the first and second shipments and the payment had also been made after the documents had been retired under the letters of credit. At that point of time, according to the plaintiff, no defect, particularly any leakage, was visible. It is alleged that after the cans had been sent to the market by the plaintiff through its distribution channels from April 2006 onwards, the plaintiff started getting complaints from various retail stores all over India that the Phantom Energy Drink cans had started leaking. According to the plaintiff, this fact was promptly brought to the notice of the defendant No. 1 and the defendant No. 1 had acknowledged that this was a serious issue and had assured the plaintiff that a solution would be worked out. It is alleged in paragraph 20 of the plaint that because of the leakage problem, various retail outlets had refused to take further stocks and had also started asking the plaintiff to take back the unsold stock and clear off their respective warehouses. It is further alleged that on account of this, the plaintiff suffered not only heavy monetary losses, but had also to pay claims against such leakages to their Consignment Sales Agents / Distributors. It is stated that the plaintiff had been discussing the leakage issue with the defendant No. 1 and requested the defendant No. 1 to guarantee that its future supply would be free from defects. It is specifically contended that as the defendant No. 1 appeared to have a positive attitude in resolving the problem, the plaintiff, in good faith, had opened the third letter of credit bearing No. FLC/RFC/654563 dated 07.07.2006 through the defendant No. 2 for the third shipment for an amount of US$ 38,134 in favor of the defendant No. 1 in respect of 72,548 Cans of Phantom Energy Drink of 250 ml each. The said letter of credit is the one with which the present suit is concerned. It is alleged that till the time the third shipment reached the port of delivery, i.e., at the Inland Container Depot (ICD)-Patparganj, the defendant No. 1 had made absolutely no commitment or guarantee that the leakage problem will not recur and the plaintiff would not be made to suffer any losses due to such problem. This, according to the plaintiff, had shaken the confidence of the plaintiff and the plaintiff did not take delivery of the said shipment and advised the defendant No. 1 to recall the third shipment. This advice was sent by the plaintiff purportedly through their e-mail dated 13.11.2006. It may be relevant to point out that the third shipment comprised of two 40 feet containers, one of which was provided by the defendant No. 1 on free of cost basis in order to assuage whatever grievances the plaintiff had with regard to the delayed delivery in respect of the first shipment.
5. The plaintiff has placed its entire reliance on an e-mail of the defendant No. 1 of 13.11.2006 whereby, according to the plaintiff, the defendant No. 1 had unequivocally agreed to take back the entire stock of the plaintiff. It is, therefore, contended that since the defendant No. 1 had agreed to take back the entire stock, there was no question of the payment being made under the letter of credit and, if such a payment was permitted, it would amount to serious injustice and the same would be totally inequitable insofar as the plaintiff is concerned. This is so because, according to the plaintiff, the plaintiff would be liable to make payment for something which it has not accepted. It is in these circumstances that the present suit was filed inasmuch as the due date of the payment under the letter of credit was fast approaching. The due date being 27.02.2007.
6. On 27.02.2007, when the suit came up for admission and the present application was taken up for hearing for the first time, my learned predecessor granted an ex parte ad interim injunction in favor of the plaintiff and restrained the defendant No. 2 from making payment to the defendant No. 1 under the said letter of credit dated 07.07.2006. The said order dated 27.02.2007 clearly recorded that the attention of the court had been invited to the controversy about the quality of the goods insofar as the third consignment (which was in issue) was concerned. There was a reference to the e-mail dated 18.10.2006 of defendant No. 1 where the defendant No. 1 purportedly stated that they would try to buy back the containers as soon as possible. A reference was also made to the e-mail dated 13.11.2006 of the plaintiff wherein the plaintiff is said to have expressed its decision not to accept the stock and to advise its bankers to return the documents in view of the past problems. The e-mail of 13.11.2006 of the defendant No. 1 stating that it was planning to buy the stock sent to the plaintiff was also considered. The communication dated 31.01.2007 of the defendant No. 1 indicating that the proposal made by the defendant No. 1 as per the e-mails dated 18.10.2006 and 13.11.2006 were still valid was also considered. Finally, the court considered the submission of the learned Counsel for the plaintiff that if the amount under the letter of credit was remitted to the defendant No. 1, the plaintiff would have no means to recover the same since there are no assets of the defendant No. 1 within the country. It is in these circumstances that the ex parte ad interim injunction was granted in favor of the plaintiff as indicated above.
7. The learned Counsel appearing on behalf of the defendant No. 1 submitted that it is an admitted position that the relationship between the plaintiff and the defendant No. 1 is governed by the Distribution Agreement dated 09.12.2005. Under the said agreement, the plaintiff was required to attain certain minimum quantities of sales in India. There was a dispute between the parties with regard to the quantity of sales and this can be easily discerned from the admitted correspondence which is on record. The learned Counsel referred to a letter dated 02.01.2007 which had been addressed by the defendant No. 1 to the plaintiff wherein, it was asked of the plaintiff as to how it would salvage its position and how it planned to fulfill its obligations towards the defendant No. 1 in the year 2007 which required it to achieve the target of 36 containers. It was stated in the said letter that as against the minimum sale of 36 containers, the plaintiff had only ordered 6 containers and one container had been sent free of cost additionally.
8. The learned Counsel appearing on behalf of the defendant No. 1 then drew my attention to the letter dated 20.01.2007 (Exhibit P-32) wherein various issues were addressed. The plaintiff had sought to give the reason for the non-attainment of the minimum quantity of 36 containers by attributing the same to the delay caused by the defendant No. 1. This would be apparent from the following extract:
The above facts would establish the genuine efforts of PVB, the huge amounts invested by PVB, and PVB's ability to distribute the Phantom products throughout India through its distribution chain to achieve the targets in terms of the Distribution Agreement. Yet, if the Phantom product was not moving off the retail shelf at the expected pace, it was due to lack of GB's support and for reasons beyond PVB's control. GB was fully aware of the real reasons and has expressly acknowledged the precarious position in which PVB was placed. GB's contributions to such position are:
Right from day one GB's supply chain management failed miserably resulting in long delayed arrival of GB Supplied Goods. L/C for PVB's first order was opened on 03.11.2005 and the goods shipped by GB was received by PVB here on 03.02.2006 after a delay of more than 2 months from the agreed transit time of 18-21 days port to port. This delayed supply of Phantom product by GB had a serious adverse impact on PVB. For instance, PVB lost the advantage of the spade work it had done to kick start the launch, but also prejudiced PVB's goodwill creating efforts. Due to the delay PVB suffered heavy losses due to expenses incurred towards idle Sales man-power and also towards Man hours with its media partner, Dentsu. GB had in acknowledgement of its faults expressly agreed to compensate PVB for the loss of Rs. 25.6 lakhs. It was in this context that GB offered to send one container of Phantom product on FOC basis as partial compensation. GB did not do any favor to PVB by offering this free container, as has been projected in the GB letter.
The second order was placed and L/C opened by PVB in December, 2005. Just as in the case of the first shipment, the second shipment was also delayed by more than one months despite the GB obligation of 18-21 days port-to-port shipment. It is also relevant to point out that in respect of both the shipments, GB also acted in breach of its obligations provided in the GB Minutes and the LC terms by resorting to transshipment.
All these delays in the arrival of GB supplies of the Phantom product have had a very adverse effect on the market and the trade as PVB could not meet the supply dates promised to its distribution channel partners.
9. A reading of the aforesaid extract of the said letter, prima facie, leads to the conclusion that the container which was supplied free of cost was, even as per the understanding of the plaintiff, by way of partial compensation for the delays that were caused by the defendant No. 1. They were not connected with the alleged leakage problem with the cans supplied by the defendant No. 1. It is pertinent to note that this letter clearly discloses that even after the leakage problem had been discovered, the plaintiff had opened the letter of credit in question and sought for the third shipment of the Phantom Energy Drinks. By way of this letter, the plaintiff indicated that the defendant had not given any explanation regarding the cause of the quality problem and how it proposed to counter such problem till date. Consequently, the defendant No. 1 was requested to take back the third shipment lying at Delhi as allegedly promised in its e-mail dated 13.11.2006.
10. The learned Counsel for the defendant No. 1 thereafter referred to various other communications between the parties to indicate that the main cause for concern between the parties was initially the alleged delay on the part of the defendant No. 1. The question of leakage was also an issue which required to be addressed, but that could be easily addressed within the terms of the distribution agreement. The learned Counsel for the defendant No. 1 submitted that in case the plaintiff was able to establish the exact extent of the cans which had the leakage problem, then the defendant No. 1 would be in a position to take appropriate action in that regard. But that was a decision which was entirely within the terms of the distribution agreement between the parties and had nothing to do with the letter of credit. The learned Counsel for the defendant No. 1 submitted that the proposals given by the defendant No. 1 on 18.10.2006 and 13.11.2006 which were regarded as valid as indicated in the e-mail dated 31.01.2007 have to be viewed in the correct perspective. He submitted that by the e-mail dated 18.10.2006, the defendant No. 1 had offered to buy the first container for the price indicated therein, but the said e-mail also carried the following sentence:
We also have to cancel the contract, I guess by October 31st.
11. He submitted that the plaintiff never agreed to the cancellation of the contract and, therefore, this offer was never accepted. With regard to the e-mail dated 13.11.2006 (Exhibit P-28), the learned Counsel for the defendant No. 1 submitted that the only sentence that is being relied upon by the plaintiff reads as under:
We know how serious this problem is, we are planning to buy your stock !!
12. With regard to this sentence, the learned Counsel for the defendant No. 1 submitted that this was in continuation of what was stated in the e-mail of 18.10.2006 and in the context of cancellation / termination of the distribution agreement which itself, as indicated in Clause IX (1) (d), provided for the option of the defendant No. 1 to buy back the stocks available with the plaintiff. According to the learned Counsel for the defendant No. 1, this sentence in no way amounted to an admission on their part that the goods were defective or that they were in any way liable as indicated by the plaintiff in the averments made in the plaint. There are certain other letters referred to by the learned Counsel for the defendant No. 1 which need not be set out at this stage. However, the last letter that was written on behalf of the defendant No. 1 prior to the filing of the suit was 24.02.2007 wherein Mr Udo Wagner of the defendant No. 1 had clearly stated that the statement made in the plaintiff's e-mail of 22.02.2007 that the latter had indicated that he would be recalling the "dox" (documents) pertaining to the L/C of the third shipment was an untrue statement and he condemned the same strongly. It is further stated in the said e-mail of 24.02.2007 on behalf of the defendant No. 1 that once the plaintiff had established the letter of credit in terms of the contract, there was no reason, logic or purpose in instructing their bank against enforcing payment due to the defendant No. 1, particularly when the goods had arrived in India long back. The letter further stated:
I am writing this to make point straight and plain.
13. The learned Counsel appearing on behalf of the defendant No. 1 submitted that whatever disputes were there between the plaintiff and the defendant No. 1, they were disputes under the distribution agreement and had nothing to do whatsoever with the letter of credit. He submitted that no injunction of the letter of credit could have been granted as no special equities arose, there was no allegation of fraud and no irretrievable injustice would be caused to the plaintiff if the injunction was not granted. He submitted that it is well-settled that a bank guarantee or a letter of credit cannot be restrained except under a clear case of established fraud and irretrievable injustice. In the present case, there was no fraud whatsoever. The irretrievable injustice that has been pleaded by the plaintiff is that it would be difficult for them to recover the amount of letter of credit since the defendant No. 1 does not have assets within India. He submitted that this is not a case of irretrievable injustice. Referring to the decision of the Supreme Court in the case of U.P. State Sugar Corporation v. M/s. Sumac International Ltd. , he submitted that mere apprehension that the other party will not be able to pay, is not enough. At page 1648 of the said report, this is exactly what the Supreme Court has held. The Supreme Court was clearly of the view that such an apprehension would not be enough to injunct a letter of credit or a bank guarantee. It must be certain that the plaintiff would be unable to get the payment from the defendant in case he succeeds.
14. The learned Counsel for the defendant No. 2, which is the issuing bank of the letter of credit, supported the contentions advanced on behalf of the learned Counsel for the defendant No. 1 and submitted that the letter of credit is an independent and separate contract from the distribution agreement. Whatever disputes the parties may have under the distribution agreement cannot be transferred to the contract between the defendant No. 2 and the defendant No. 1 under the letter of credit. He further submitted that when the letter of credit was opened on 07.07.2006, the plaintiff had already received the first and second consignments and the plaintiff had admittedly been aware of the problem of leakages, yet it went ahead and opened the letter of credit which was an irrevocable and unconditional letter of credit. He submitted that as per banking practices recognised internationally, an unconditional letter of credit cannot be injuncted unless there is a case of an established fraud and irretrievable injustice. Neither of these situations arise in the present case and, therefore, the injunction ought not to have been granted and the same ought to be vacated.
15. In rejoinder, the learned Counsel for the plaintiff submitted with reference to the e-mails dated 18.10.2006 and 13.11.2006 that the defendant No. 1 had agreed to buy back the stock. This being the position, the payment under the letter of credit would amount to enriching the defendant No. 1 unjustly. He submitted that the position of the defendant No. 1 was that of an unscrupulous seller and the courts could clearly interfere to prevent such an unscrupulous seller from enriching itself at the cost of the plaintiff. For this proposition, he placed reliance on the decision of the Bombay High Court in the case of Daiichi Karkaria Private Ltd., Bombay v. Oil & Natural Gas Commission, Bombay and Anr. .
16. I have considered the arguments advanced by the counsel for the parties. In a recent decision in the case of M/s Fair Deal Agencies and Anr. v.Inner Mongolia Muwang Animal By-Product Company Limited and Ors., delivered on 07.02.2008, I had occasion to consider the nature of a letter of credit. It would be fruitful to refer to certain portions of the said decision. They read as under:
10. In Tarapore & Company v. V/O Tractoroexport and Anr. , the Supreme Court had observed that an irrevocable letter of credit had a definite implication and that it was independent of, and unqualified by, the contract of sale or other underlying transactions. The letter of credit was a mechanism of great importance in international trade and that any interference with that mechanism was bound to have serious repercussions. In U.P. Cooperative Federation Ltd.v. Singh Consultants and Engineers (P) Ltd. , the Supreme Court quoted with approval the article of Paul R. Verkuil which set out the salient features of a letter of credit. The said article indicated that the letter of credit is a contract. The issuing party, usually a bank, promises to pay the 'beneficiary', traditionally a seller of goods, on demand if the beneficiary presents whatever documents may be required by the letter. They are normally the only two parties involved in the contract. The bank which issues a letter of credit acts as a principal, not as an agent for its customers and engages its own credit. The letter of credit thus evidences an irrevocable obligation to honour the draft presented by the beneficiary upon compliance with the terms of the credit. In U.P. Coop Federation Ltd (supra), the Supreme Court further explained the importance of the letter of credit as a means of doing business where the buyer and seller were separated by geography. The words used by the Supreme Court are as under:
45. The letter of credit has been developed over hundreds of years of international trade. It was most commonly used in conjunction with the sale of goods between geographically distant parties. It was intended to facilitate the transfer of goods between distant and unfamiliar buyer and seller. It was found difficult for the seller to rely upon the credit of an unknown customer. It was also found difficult for a buyer to pay for goods prior to their delivery. The bank's letter of credit came into existence to bridge this gap. In such transactions, the seller (beneficiary) receives payment from issuing bank when he presents a demand as per terms of the documents. The bank must pay if the documents are in order and the terms of credit are satisfied. The bank, however, was not allowed to determine whether the seller had actually shipped the goods or whether the goods conformed to the requirements of the contract. Any dispute between the buyer and the seller must be settled between themselves. The Courts, however, carved out an exception to this rule of absolute independence. The Courts held that if there has been "fraud in the transaction" the bank could dishonour beneficiary's demand for payment. The Courts have generally permitted dishonour only on the fraud of the beneficiary, not the fraud of somebody else.
11. Article 3 of The Uniform Customs & Practices for Documentary Credits (1983) also makes it clear that credits (Letters of Credit), by their nature are separate transactions from the sales or other contract(s) on which they may be based and banks are in no way concerned with or bound by such contract(s), even if any reference whatsoever to such contract(s) is included in the Credit (Letter of Credit). It is further provided that consequently, the undertaking of a bank to pay, accept and pay draft(s) or negotiate and / or to fulfill any other obligations under the Credit, is not subject to claims or defenses by the applicant resulting from his relationship with the issuing bank or the beneficiary. These circumstances make it abundantly clear that whether the goods were to be delivered at Delhi, whether the freight charges were paid by the plaintiff at Delhi and whether the agent which organized the alleged transaction between the plaintiff and the defendant No. 1 resided at Delhi are of no consequence to the contract which is evidenced by the letter of credit. The letters of credit in question are entirely separate contracts which have no connection with anything that has happened in Delhi....
17. From the above, it is abundantly clear that the letter of credit is a separate and independent contract and has nothing to do with the underlying contract between the plaintiff and the defendant No. 1. The dispute in the present case arises entirely under the underlying contact, i.e., the distribution agreement between the plaintiff and the defendant No. 1. According to the defendants, they do not admit that the goods are defective and that the offer of buying back the stock was made in view of the express condition contained in the distribution agreement itself which would flow upon termination of the contract. It is further clear that no fraud has been alleged by the plaintiff. It may be pointed out that the learned Counsel for the plaintiff did refer to paragraph 28 of the plaint which does contain the word "fraud", but that is the only place where the word "fraud" appears in the entire plaint. A reading of the said paragraph would also indicate that the word "fraud" has been used incidentally. In any event, the averments made in the plaint, to my mind, do not constitute fraud on the part of the defendant No. 1. There is a dispute with regard to the delayed shipment on the part of the defendant No. 1; there is a dispute with regard to the quality of goods. None of these can be termed as fraud and, that too, fraud of an egregious nature which is the requirement for carrying out an exception to the usual practice of not injuncting any bank guarantees or letters of credit.
18. Insofar as the question of irretrievable injustice is concerned, the position has been made clear by the Supreme Court that mere apprehension that the plaintiff would not be able to recover the money from the defendant No. 1 would not be sufficient for invoking this exception. The plaintiff must establish and must show that the plaintiff would certainly not be able to recover the amount of the letter of credit. The defendant No. 1 is located in Austria which is not a war-torn country as was the case in Itek Corporation v. The First National Bank of Boston 566 Fed Supp 1210 which has been referred to in U.P. State Sugar Corporation (supra).
19. Consequently, in my view, the plaintiff has not been able to bring its case within the exception of "fraud and irretrievable injustice" and, therefore, the plaintiff would not be entitled to the injunction that it has sought. The result being that the ex parte ad interim injunction which had been granted on 27.02.2007 stands vacated.
This application is dismissed.