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CASE NO.: Appeal (civil)  3522 of 2007

PETITIONER: Himadri Chemicals Industries Ltd

RESPONDENT: Coal Tar Refining Company

DATE OF JUDGMENT: 07/08/2007

BENCH: Tarun Chatterjee & P.K.Balasubramanyan

JUDGMENT: JUDGMENT [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 \021the Act\022) 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 \023goods\024) 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 \023at sight\024. 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

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discrepancies and accepted the documents by a  letter dated 3rd October, 2006 and also agreed to  make the payments in the following manner:  

\023With 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\024

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 \023at  sight\024 was substituted by the     words \023230 days  from the shipment date\024. 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

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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

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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.  State Sugar Corporation Vs. Sumac International  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

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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  of U.P. Coop. Federation Ltd. Vs. Singh  Consultants and Engineers (P) Ltd. (1988) 1 SCC  174 held as follows:  

\023 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, \023 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 bank\022s 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 bank\022s 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.\024                                (Emphasis  supplied)

12.   In Svenska Handelsbanken Vs. Indian Charge  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  court in the case of U.P. Coop. Federation Ltd Vs.  Singh Consultants and Engineers (P) Ltd.  [(1988)  1 SCC 174].

13.     So far as the second exception is concerned,  this court in U.P. State Sugar Corporation Vs.  Sumac International Ltd. [(1997) 1 SCC as  considered herein earlier, at para 14 on page 575  observed as follows :  

\023On 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

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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.\024 (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

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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

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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

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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.