Himadri
Chemicals Industries Ltd Vs. Coal Tar Refining Company [2007] Insc 807 (7 August 2007)
Tarun
Chatterjee & P.K.Balasubramanyan
[Arising
out of SLP [C] No. 13775 of 2007] TARUN CHATTERJEE, J.
1.
Application for permission to file special leave petition is allowed. Leave
granted.
2.
This appeal is directed against the judgment and order dated 21st June, 2007
passed by a Division Bench of the Calcutta High Court whereby an appeal
preferred against an order dated 5th June, 2007 of a learned Single Judge of
the same High Court was dismissed and the order of the learned Single Judge was
affirmed. The learned Single Judge by his order dated 5th June, 2007 had
vacated an interim order of status quo granted earlier on an application filed
under Section 9 of the Arbitration and Conciliation Act, 1996 (hereinafter
referred to as the Act) for an order of injunction restraining the
respondent from receiving any payment under a Letter of Credit.
3. At
this stage, we feel it proper to narrate the facts which have given rise to the
filing of this appeal in this Court.
4. The
appellant entered into a contract on 29th May, 2006 with the respondent by
which the respondent had agreed to supply 26,000 metric tones of Extra Hard
Pitch (Reprocessing Grade) (in short goods) to the appellant as per
schedule set out in the contract. In the said contract, one of the terms of
payment was that a Letter of Credit will be opened and accordingly an
irrevocable Letter of Credit was opened by the appellant in favour of the respondent.
Initially, under the said Letter of Credit, payment was to be made at
sight. The document against which payment was to be made, was received
directly by the banker of the appellant and on presentation of the document it
was found by the banker of the appellant that the description of the goods was
not as per the terms of the Letter of Credit. Accordingly, the banker of the
appellant by a Letter dated 11th September, 2006, intimated the aforesaid fact to the appellant and sought advice
whether the appellant was willing to waive the discrepancies indicated in the
Letter dated 11th
September, 2006. In
response to this query of the banker, the appellant waived the discrepancies
and accepted the documents by a letter dated 3rd October, 2006 and also agreed to make the payments in the following
manner:
With
reference to the above and further to your swift message dated 3/10/2006, We are accepting the documents with discrepancy and
the payment will be made after 180 days from today. We accept to make the following
payments. (Emphasis supplied) Total amount against above mentioned three (3)
Bills Euro 2348915.00 Less: Advance payment already Made through Central Bank
of India Kol. Main Office Euro 387788.82 Amount to be paid against the above
three Bills Euro 1961126.18
5.
Before accepting the documents and agreeing to make payments, by a
communication dated 28th September, 2006, the respondent had given the
appellant two options:-
(i) either
to negotiate the document and resolve the quality issue; or
(ii) reject
the shipment document.
6.
Thereafter, correspondence was exchanged between the appellant and the
respondent and the Letter of Credit was amended and payment at sight
was substituted by the words 230 days from the shipment date. On the
basis of the amended Letter of Credit, the payment was, thereafter, payable on
or before 10th April,
2007.
The
amendment of the terms of Letter of Credit was informed to the bankers of the
respondent which was accepted by the respondent as well. The issue regarding
the quality of goods remained undecided although an inspection report was
submitted by SGS India Pvt. Ltd. with the concurrence of the respondent. Inspite
of various steps taken by the appellant and promises made by the respondent, no
effective step was taken to resolve the dispute regarding quality of the goods
and hence the application under Section 9 of the Act was filed by the appellant
to stop release of payment under the Letter of Credit without first resolving
the issue regarding the quality of goods of the second consignment supplied by
the respondent to the appellant. Therefore, in the application for injunction,
it was pleaded that the act of the respondent for not resolving the dispute on
the quality of goods in the second consignment amounted to fraud as the
respondent had dishonestly and with ulterior motive not resolved the dispute as
raised by the appellant and in any event, an order of injunction should be
granted, otherwise, it would not be possible for the appellant to recover the
money released under the Letter of Credit as the respondent is a foreign
company from Iran and has no assets in India.
7. The
respondent raised a plea for vacating the interim order of status quo granted
by the learned Single Judge on the application for injunction filed u/s 9 of
the Act alleging the following facts:- Goods were dispatched to the appellant
by the respondent under two shipments. So far as the first shipment was
concerned, goods were received, documents negotiated and payment released.
Therefore, there could not be any dispute in respect of the goods relating to
the first shipment. By the second shipment, the respondent had dispatched
12,503 metric tones of goods to the appellant which arrived at Calcutta from Iran by a vessel called M.V. Iran Takhti. Out of the aforesaid
12,503 metric tones of goods so dispatched and arrived at Calcutta, documents relating to 2503 metric
tones of goods were negotiated by the Central Bank of India, Calcutta and payment released. However, for the balance 10,000 metric
tons, documents were not negotiated and no payment was released. It was further
alleged by the respondent that there was no reason for not negotiating the
documents or effecting release of the payment as payments for part consignment
as noted hereinabove were already released. It was also the case of the
respondent in support of its contention for vacating the interim order of
status quo that despite discrepancies raised by the appellant, by its
communication dated 3rd October, 2006, the appellant had agreed to accept the
documents with discrepancy and make payments in respect of the goods for which
disputes were raised by the appellant regarding the quality of such goods. It
was further the case of the respondent that the defective quality of goods in respect
of which order of injunction of the Letter of Credit was sought could not also
be the reason for grant of injunction as it was related to a payment dated 29th
May, 2006 which was also the subject matter of an arbitration proceeding and
the claim, if any, could be recovered in the said arbitration proceeding.
According to the respondent, since the Letter of Credit was an independent
contract and the appellant could not satisfy any breach of the terms of the
Letter of Credit, no order of injunction could be passed by the court for
stopping the respondent from realizing the payment relating to the price of the
goods supplied. The respondent further stated that the appellant could not make
out any case of fraud for which an order of injunction restraining the
respondent from realizing the payment by encashing the Letter of Credit could
be granted and therefore the application for injunction must be rejected.
8. As
noted herein earlier, the order of status quo was passed by the learned Single
Judge of the High Court on the application for injunction filed under Section 9
of the Act at the instance of the appellant on 9th April, 2007, and by the said
order, the interim order of status quo was granted till 30th April, 2007 and
the same was extended from time to time from 23rd April 2007 till 17th May,
2007.
Thereafter
the matter was directed to appear on 16th May, 2007 and heard by the learned
Single Judge on 17th
May, 2007 and interim
order of status quo was extended till 25th June, 2007. As noted herein earlier, the
learned Single Judge by order dated 5th June, 2007 vacated the interim order of
status quo granted earlier against which an appeal was preferred by the
appellant before a Division Bench of the High Court of Calcutta which dismissed
the appeal and affirmed the order of the learned Single Judge vacating the
interim order of status quo.
9. We
have heard the learned counsel for the parties and carefully examined the
orders of the learned Single Judge as well as that of the Division Bench. We
have also examined in detail the application for injunction, the original
contract, the Letter of Credit as amended and the other documents on record.
Having noted salient facts and materials on record, let us now consider whether
the Division Bench was justified in affirming the order of the learned Single
Judge vacating the interim order of status quo in the matter of stopping the
payment in terms of the Letter of Credit. But before dealing with this aspect
of the matter, let us consider the principles for grant or refusal to grant
injunction in the matter of release of payment in terms of a Letter of Credit
or a Bank Guarantee.
10.
The law relating to grant or refusal to grant injunction in the matter of
invocation of a Bank Guarantee or a Letter of Credit is now well settled by a
plethora of decisions not only of this court but also of the different High
Courts in India. In U.P. Ltd. [(1997) 1 SCC 568],
this court considered its various earlier decisions. In this decision, the
principle that has been laid down clearly on the enforcement of a Bank
guarantee or a Letter of Credit is that in respect of a Bank Guarantee or a
Letter of Credit which is sought to be encashed by a beneficiary, the bank
giving such a guarantee is bound to honour it as per its terms irrespective of
any dispute raised by its customer. Accordingly this Court held that the courts
should be slow in granting an order of injunction to restrain the realization
of such a Bank Guarantee. It has also been held by this court in that decision
that the existence of any dispute between the parties to the contract is not a
ground to restrain the enforcement of Bank guarantees or Letters of Credit.
However this court made two exceptions for grant of an order of injunction to
restrain the enforcement of a Bank Guarantee or a Letter of Credit.
(i)
Fraud committed in the notice of the bank which would vitiate the very
foundation of guarantee;
(ii) injustice
of the kind which would make it impossible for the guarantor to reimburse
himself.
11.
Except under these circumstances, the courts should not readily issue
injunction to restrain the realization of a Bank Guarantee or a Letter of
Credit. So far as the first exception is concerned, i.e. of fraud, one has to
satisfy the court that the fraud in connection with the Bank Guarantee or
Letter of Credit would vitiate the very foundation of such a Bank Guarantee or
Letter of Credit. So far as the second exception is concerned, this court has
held in that decision that it relates to cases where allowing encashment of an
unconditional bank guarantee would result in irretrievable harm or injustice to
one of the parties concerned. While dealing with the case of fraud, this court
in the case Consultants and Engineers (P) Ltd. (1988) 1 SCC 174 held as
follows:
The fraud must be of an egregious nature such as to vitiate the entire
underlying transaction. While coming to a conclusion as to what constitutes
fraud, this court in the above case quoted with approval the observations of
Sir John Donaldson, M.R. in Bolivinter Oil SA V/s. Chase Manhattan Bank (1984)
1 All ER 351 at p. 352 which is as follows, The wholly exceptional case
where an injunction may be granted is 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 must be clear both as to the fact of fraud and as to the
banks knowledge.
It
would certainly not normally be sufficient that this rests on the
uncorroborated statement of the customer, for irreparable damage can be done to
a banks Credit in the relatively brief time which must elapse between the
granting of such an injunction and an application by the bank to have it
charged. (Emphasis supplied) Chrome [(1994) 1 SCC 502], it has also been
held that a confirmed Bank Guarantee/irrevocable Letter of Credit cannot be
interfered with unless there is established fraud or irretrievable injustice
involved in the case. In fact, on the question of fraud, this decision approved
the observations made by this Singh Consultants and Engineers (P) Ltd. [(1988)
1 SCC 174].
13. So
far as the second exception is concerned, Sumac International Ltd. [(1997) 1
SCC as considered herein earlier, at para 14 on page 575 observed as follows :
On
the question of irretrievable injury which is the second exception to the rule
against granting of injunctions when unconditional bank guarantees are sought
to be realized the court said in the above case that the irretrievable injury
must be of the kind which was the subject matter of the decision in the Itek Corpn.
Case (566 Fed Supp 1210). In that case an exporter in USA entered into an agreement with the Imperial
government of Iran and sought an order terminating its
liability on stand by letter of credit issued by an American Bank in favour of
an Iranian Bank as part of the contract. The relief was sought on account of
the situation created after the Iranian revolution when the American Government
cancelled the export licences in relation to Iran and the Iranian government
had forcibly taken 52 American citizens as hostages. The US Government had
blocked all Iranian assets under the jurisdiction of United States and had cancelled the export
contract. The court upheld the contention of the exporter that any claim for
damages against the purchaser if decreed by the American courts would not be
executable in Iran under these circumstances and
realization of the bank guarantee/letters of credit would cause irreparable
harm to the Plaintiff. This contention was upheld. To avail of this exception,
therefore, exceptional circumstances which make it impossible for the guarantor
to reimburse himself it he ultimately succeeds, will have to be decisively
established. Clearly, a mere apprehension that the other party will not be able
to pay, is not enough. In Itek case, there was certainty on this issue.
Secondly, there was good reason, in that case for the Court to be prima facie
satisfied that the guarantors i.e. the bank and its customer would be found
entitled to receive the amount paid under the guarantee. (Emphasis
supplied)
14.
From the discussions made hereinabove relating to the principles for grant or
refusal to grant of injunction to restrain enforcement of a Bank Guarantee or a
Letter of Credit, we find that the following principles should be noted in the
matter of injunction to restrain the encashment of a Bank Guarantee or a Letter
of Credit :-
(i)
While dealing with an application for injunction in the course of commercial
dealings, and when an unconditional Bank Guarantee or Letter of Credit is given
or accepted, the Beneficiary is entitled to realize such a Bank Guarantee or a
Letter of Credit in terms thereof irrespective of any pending disputes relating
to the terms of the contract.
(ii)
The Bank giving such guarantee is bound to honour it as per its terms
irrespective of any dispute raised by its customer.
(iii)
The Courts should be slow in granting an order of injunction to restrain the
realization of a Bank Guarantee or a Letter of Credit.
(iv)
Since a Bank Guarantee or a Letter of Credit is an independent and a separate
contract and is absolute in nature, the existence of any dispute between the
parties to the contract is not a ground for issuing an order of injunction to
restrain enforcement of Bank Guarantees or Letters of Credit.
(v)
Fraud of an egregious nature which would vitiate the very foundation of such a
Bank Guarantee or Letter of Credit and the beneficiary seeks to take advantage
of the situation.
(vi)
Allowing encashment of an unconditional Bank Guarantee or a Letter of Credit
would result in irretrievable harm or injustice to one of the parties
concerned.
15.
Keeping these principles in mind and applying the same on the facts of this
case, we can only draw this conclusion that no good ground has been made out by
the appellant to interfere with the impugned order. As noted herein above,
there are two exceptions when courts can grant an order of injunction in favour
of an aggrieved party in the matter of encashment of a Bank Guarantee or a
Letter of credit. Condition Nos. (v) and (vi), as noted herein above, are two
such exceptions. For this reason, let us first deal with the case of fraud
pleaded by the appellant in their application for injunction. The particulars
of fraud have been pleaded in paragraph 45 of the application for injunction
filed by the appellant in the High Court.
From a
close scrutiny of the facts pleaded in the said paragraph of the application
for injunction, in our view, it cannot be held that such facts have constituted
fraud for which an order of injunction in the matter of encashment of Letter of
Credit could be passed by the courts. The facts pleaded in paragraph 45 of the
application for injunction would only show that although the respondent had
agreed to remove the defects in the goods by saying that it shall take steps to
reduce the ash content of the goods to 0.3 % before the payment date of the
Letter of Credit as extended, but they deliberately and with ulterior motive
had not fulfilled their intention to do so. It is not in dispute that the
particulars of the fraud prima facie were restricted to 10,000 metric tones of
the goods supplied by the respondent in respect of which documents were not
negotiated by the appellant. The entire consignment which was admittedly
shipped by M.V.Iran Takhti was 12,503 metric tones out of which 2503 metric
tones were negotiated and payments released by the Central Bank of India.
Admittedly,
as noted herein above, a case of fraud was alleged only in respect of a part of
the consignment of the second shipment. It has been rightly held by the High
Court that this could not constitute fraud as fraud must be in respect of the
whole consignment and not in respect of a part of the same. In this view of the
matter, we are, therefore, in agreement with the High Court that the pleadings
made relating to fraud in paragraph 45 of the application for injunction were
not sufficient nor any strong prima facie case of fraud could be made out in
the petition which would warrant a continuance of the order of status quo.
16.
That apart, as noted herein earlier, in the matter of invocation of a Bank
Guarantee or a Letter of Credit, it is not open for the bank to rely upon the
terms of the underlying contract between the parties.
17. In
view of the discussions made herein above and in view of the admitted fact that
in respect of 2503 metric tones of goods out of 12503 metric tones of goods in
the second consignment, documents were admittedly negotiated and payments were
released and further in view of the communication dated 3rd October, 2006 by
the appellant to the banker that it had agreed to accept the discrepancies
raised in respect of the goods and also agreed to make payment of the same, we
are not satisfied that a case of fraud even prima facie has been made out by the
appellant for grant of injunction. It is difficult to conceive that the
appellant having accepted a part of the second consignment and having directed
to release payments in respect of the same, would be defrauded by the
respondent in respect of the balance quantity of goods which had arrived at Calcutta in the second shipment. In any view
of the matter, in our view, the defective quality of goods in respect of which
an order of injunction of the encashment of the Letter of credit was sought
could at all be a reasonable ground for grant of injunction as it was related
to payment dated 29th May, 2006 which was the subject matter of the arbitration
proceeding and the claim, if any, can be recovered in the said arbitration
proceeding.
18.
Let us now consider the other exception, namely, case where allowing encashment
of an unconditional Bank Guarantee or a Letter of Credit would result in an
irretrievable harm or injustice to one of the parties concerned. In our view,
irretrievable injury was not caused to the appellant by a refusal to grant an
order of injunction restraining the encashment of the Letter of Credit for two reasons
:-
(i)
Exceptional circumstances have not been made out by the appellant which would
make it impossible for the Guarantor to reimburse himself if he ultimately
succeeds.
Only a
case of apprehension has been shown in the application for injunction to the
extent that if ultimately, the application for injunction is allowed, it would
be impossible to recover the amount encashed on the basis of the Letter of
Credit because the respondent is a Foreign Company in Iran which has no assets in India. In our view, this cannot come
within the second exception indicated above.
(ii)
Admittedly in this case, the appellant has already filed an Admiralty Suit No.
14 of 2006 in the original side of the Calcutta High Court claiming damages in
respect of the same set of goods. In the said suit filed in the month of
November 2006, the respondent was given liberty to furnish a Bank Guarantee for
a sum of Rs. 21,86,68,540/- being the sum claimed by the appellant on account
of damages to the credit of the said suit and a Bank Guarantee to the extent of
this amount has already been furnished by the respondent. Such being the
position, the question of irretrievable injury even prima facie which would
lead to injustice and harm the appellant cannot at all be conceived of since
the appellant has been duly protected by the furnishing of Bank Guarantee. In
our view, only because the respondent has no assets in India would not lead us to hold that the
appellant was entitled to an injunction on the ground that he would suffer an
irretrievable injury. In this view of the matter, we echo the finding of the
High Court in refusing to grant an order of injunction in favour of the
appellant and hold that the High Court was fully justified in doing so.
19.
For the reasons aforesaid, we do not find any merit in this appeal. The appeal
is thus dismissed.
We
may, however, make it clear that whatever findings have been arrived at by us
in this appeal or by the High Court while dealing with the prayer for grant of
an interim order of injunction, shall not be taken to be final as to the
disposal of the application for injunction by the High Court. There will be no
order as to costs.
Back
Pages: 1 2