Nissho Iwai Corporation vs Mauria Udyog Pvt. Ltd. And Anr. on 30 October 2003

Delhi High Court
Nissho Iwai Corporation vs Mauria Udyog Pvt. Ltd. And Anr. on 30 October, 2003
Equivalent citations: AIR2004DELHI397, 110(2004)DLT620, 2004(74)DRJ41, AIR 2004 DELHI 397, (2004) 2 CURCC 313, (2004) 74 DRJ 41, (2004) 110 DLT 620
Author: R.C. Jain
Bench: R.C. Jain
JUDGMENT

R.C. Jain, J.

1. This appeal is directed against the order of the learned Single Judge dated 13th February, 2002, thereby disposing of an application under Order XXXIX Rules 1 & 2 filed on behalf of the plaintiff-respondent and an application under Order XXXIX Rule 4 CPC filed by the defendant-appellant.

2. The relevant facts which may be noticed for deciding this appeal are that Mauria Udyog Pvt.Ltd., respondent No.1 herein (briefly referred to as the `Indian Company’) has entered into an agreement with M/s.Nissho Iwai Corporation Ltd., Tokyo, Japan, the appellant (briefly referred to as the `Japanese Company’) for the supply of 10,000 MT of “Hot Rolled Steel Sheets in Coil” of the specifications detailed in the proforma invoice bearing No.2430-NW dated 25th April, 2001 @ US$ 262.50 per MT, CFR, Bombay. The mode of payment of the price of goods was through irrevocable, un-confirmed, non-restricted Letters of Credit payable at sight. In pursuance of the aforesaid, the Indian Company opened the following three irrevocable letters of credits with the Corporation Bank (respondent No.2):-

“L.C. No.60621112 for USD 262500 L.C.No.60621131 for USD 525000 L.C.No.60621179 for USD 918750”
3. The Japanese Company shipped the first lot consisting of two consignments of 889.490 MT vide invoice No.DP-2886 dated 13th June, 2001 in US$ 2,40,355.77 and of 64.040 MT vide invoice No.DP-2912 dated 13th June, 2001 for US$ 17,298.34. The Indian Company accepted the bill of exchange for the amount of two invoices and the consignments and thereafter raised certain disputes about the quality/nonforming specifications of the goods so delivered in the first and second lot. The Japanese Company denied that there were any defects either in the quality or specifications and thereafter correspondence ensued between the parties. The third lot was shipped on 7th August, 2001 and the Indian Company sent a communication purporting to reject the goods and refusing to take delivery of the same. However, it appears that without admitting the claim of the respondent whether the material shipped were defective or inferior in quality or not conforming to the specifications, the Japanese Company as a measure of goodwill and in order to maintain good and healthy relationship offered a discount of US$ 1,05,000 if all the shipments including the fourth shipment was also accepted. The Indian Company did not accept the said offer of discount and insisted for more discount and communicated to the Japanese Company that it wanted reduction in all the lots to US$ 2,00,000 which according to the Japanese Company could not be accepted being wholly unjustified and baseless.

4. A stalemate was created and the Indian Company sought to obstruct the payment of the amounts due to the Japanese Company under the LCs. and also alleged that the LC opened by the Bank were in excessive of the document sent by the Japanese Company. The respondent-company then filed a suit against the appellant and the Corporation Bank seeking permanent injunction restraining the appellant from receiving any payment from the Bank/respondent under the said three letters of credits and the bill of exchange accepted by the plaintiff for US$ 2,40,355.77, US$ 17,298.34 and US$ 5,06,525.97 and also restraining the bank from making any payment to the appellant. Along with the suit, an application under Order XXXIX Rules 1 & 2 read with Section 151 CPC was moved by the plaintiff for the same relief and vide an order dated 19th October, 2001, the learned Single Judge granted an ex parte ad interim injunction in favor of the plaintiff-respondent restraining the defendant-bank from making payment to the extent of 50% under the first two letters of credit bearing LC No.60621112 for US$ 2,62,500 and LC No.60621131 for US$ 5,25,000 and the whole of the amount of LC No.60621179 for US$ 9,81,750 under the bills of exchange. The appellant being served filed its reply and an application under Order XXXIX Rule 4 CPC for vacating/modification of the ex parte ad interim injunction order dated 19th October, 2001. Vide the impugned order, the learned Single Judge has confirmed the ex parte ad interim injunction regarding the withholding of 50% payment in respect of the first two LCs. and with regard to the third LC, the order was modified to the extent that the payment to the extent of 75% under the third letter of credit No.60621179 for US$ 9,18,750 shall be released in favor of the appellant. Aggrieved by the said order, the appellant has filed the present appeal.

5. We have heard Dr.Abhishek Manu Singhvi, learned Senior Advocate representing the appellant and Mr.P.V.Kapur, learned Senior Advocate representing the respondents and have given our thoughtful consideration to their respective submissions.

6. Dr.Singhvi has assailed the impugned order as illegal and erroneous primarily on the ground that the learned Single Judge has failed to appreciate the settled legal position that the Bank Guarantees and letters of Credits are documentary Credits and are independent contracts between the issuing Bank and the beneficiaries and the payment there under cannot be restrained at the behest of the applicant merely on the ground of an alleged breach of contract in relation to which such documentary credits are furnished. In this connection, reliance has been placed on several decisions of the Supreme Court. The first in the series is the decision in the case of M/s.Tarapore & Co., Madras vs. M/s.V.P.Tractors Export, Moscow & Anr., . In that case, the Court held that an Irrevocable Letter of Credit is a mechanism of great importance in international trade and so the autonomy of an irrevocable letter of credit is entitled to protection. Any interference with that mechanism is bound to have serious repercussions on the international trade of the country and the Courts ought not to interfere with the mechanism except under very exceptional circumstances. In view of this legal position, the Supreme Court has set aside the temporary injunction granted by the trial court. The next case relied upon is U.P.Co-operative Federation Ltd. vs. Singh Consultants and Engineers (P) Ltd., . In that case, the Court considered the question as to whether an injunction can be issued restraining a Bank from encashing the bank guarantee in the case of a works contract and Sabyasachi Mukharjee, J. speaking for the Bench held as under:-

“This was not a case in which injunction should be granted. The net effect of the injunction is to restrain the bank from performing the bank guarantee. That cannot be done. One cannot do indirectly what one is not free to do directly. But a maltreated party in such circumstances is not remedyless. The respondent can sue the appellant for damages. There was no apprehension that irretrievable damages would be caused. Nor was any strong prima facie case of fraud in entering into a transaction made out.
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 with. 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 and special equities in the form of preventing irretrievable injustice between the parties. Otherwise the very purpose of bank guarantees would be negatived and the fabric of trading operation will get jeopardised. Upon bank guarantee revolves many of the internal trade and transaction in a country.”
7. A three Judges Bench of the Supreme Court in the case of Dwarikesh Sugar Industries Ltd. vs. Prem Heavy Engineering Works (P) Ltd. & Anr, , observed that numerous decisions of the Apex Court rendered over a span of nearly two decades have laid down and reiterated the principles which the Courts must apply while considering the question whether to grant an injunction which has the effect of restraining the payment of a bank guarantee. It reiterated the legal position enunciated by the Apex Court in the case of U.P. State Sugar Corporation vs. Schumac International Ltd., . The general principles which have been laid down in the aforesaid authority have been stated thus by the Supreme Court:-

“The law relating to invocation of such bank guarantees is by now well settled. When in the course of commercial dealings an unconditional bank guarantee is given or accepted, the beneficiary is entitled to realize such a bank guarantee in terms thereof irrespective of any pending disputes. The bank giving such a guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer. The very purpose of giving such a bank guarantee would otherwise be defeated. The courts should, therefore, be slow in granting an injunction to restrain the realization of such a bank guarantee. The courts have carved out only two exceptions. A fraud in connection with such a bank guarantee would vitiate the very foundation of such a bank guarantee. Hence if there is such a fraud of which the beneficiary seeks to take advantage, he can be restrained from doing so. The second exception relates to cases where allowing the encashment of an unconditional bank guarantee would result in irretrievable harm or injustice to one of the parties concerned. Since in most cases payment of money under such a bank guarantee would adversely affect the bank and its customer at whose instance the guarantee is given, the harm or injustice contemplated under this head must be of such an exceptional and irretrievable nature as would override the terms of the guarantee and the adverse effect of such an injunction on commercial dealings in the country. The two grounds are not necessarily connected, though both may coexist in some cases.”
8. In a recent authority, Federal Bank Ltd. vs. V.M.Jog Engineering Ltd. & Ors., , the Apex Court considered the question of granting injunction to restrain the encashment of bank guarantees or letters of credits with reference to the uniform customs and practices for documentary credits (UCP), observed as under:-

“The Uniform Customs and Practices for Documentary Credits (UCP for short) has been formulated by the International Chamber of Commerce. The UCP provides that `General provisions and Definitions and the Articles following are to apply to all documentary credit and binding upon all parties thereto unless otherwise expressly agreed’. The UCP states that it shall be deemed incorporated into each documentary credit if there are words in the Credit indicating that such credit was issued subject to Uniform Customs and Practices of Documentary Credits. In the absence of incorporation, the UCP will not apply but it can be taken into account as part of mercantile customs and practices and most of it is also treated as part of common law, barring a few differences. If an express term in the contract contradicts of UCP terms, the contract prevails.
It is settled that Courts ought not to grant injunction to restrain encashment of Bank guarantees or Letters of credit. Two exceptions have been mentioned — (i)fraud and (ii) irretrievable damage. If the plaintiff is prima facie able to establish that the case comes within these two exceptions, temporary injunction under Order 39 Rule 1 CPC can be issued. The contract of the Bank guarantee or the Letter of Credit is independent of the main contract between the seller and the buyer. This is also clear from Arts. Of the UCP (1983 Revision). In case of an irrevocable Bank guarantee or letter of Credit the buyer cannot obtain injunction against the Banker on the ground that there was a breach of the contract by the seller. The Bank is to honour the demand for encashment if the seller prima facie complies with the terms of the Bank Guarantee or Letter of credit, namely, if the seller produces the documents enumerated in the Bank Guarantee or Letter Credit. If the Bank is satisfied on the face of the documents that they are in conformity with the list of documents mentioned in the Bank Guarantee or Letter of Credit and there is no discrepancy, it is bound to honour the demand of the seller for encashment. While doing so it must take reasonable care. It is not permissible for the Bank to refuse payment on the ground that the buyer is claiming that there is a breach of contract. Nor can the Bank try to decide this question of breach at that stage and refused payment to the seller. Its obligation under the document having nothing to do with any dispute as to breach of contract between the seller and the buyer.”
9. An analysis of the aforesaid pronouncements brings out the legal position that the Courts should not interfere in the encashment of the bank guarantees and letters of credits except where an applicant has been able to make out a case of patent fraud. Even in the case of an alleged fraud, such a party has the legal recourse to proceed against the defrauder. Mr.P.V.Kapur, learned senior Advocate representing the Indian Company has not disputed the legal position but on the strength of the material brought on record e.g. mostly the correspondence exchanged between the parties during the relevant period, emphatically urged that in the instant case is infact a case of fraud inasmuch as the goods supplied by the Japanese Company were not conforming to the specifications inasmuch as certain content of silicon was found in the material besides the goods were also lacking in quality and craftsmanship so much so that pin-holes could be noticed in the steel sheets used for the manufacture of gas cylinders, as a result of which the respondent had to suffer heavy losses because the cylinders so manufactured out of the material supplied by the appellant were meant for export and they faced rejection of the goods on account of the said defects. On behalf of the appellant, it is pointed out that the dispute raised by the respondent about the quality of goods is wholly baseless and the material supplied by them was in strict compliance with JIS standard specifications which were agreed between the parties and the respondent after having taken delivery of the same and having consumed the same by manufacturing the cylinders, wanted to exploit the situation by making unreasonable demands by drastic reduction of price on wholly unjustified and baseless grounds.

10. This Court having considered the material brought on record can at best observe that a dispute has arisen between the parties as to the quality of the material supplied by the appellant and the same can only be settled after a full fledged inquiry/trial. The important question, however, is as to whether such a dispute can ipso facto be termed as a fraud on the part of the supplier of the goods thereby dis-entitling them to receive the price of the goods so supplied. In our opinion, the answer would be a plain `No’ because at this stage it is difficult to hold that the material so supplied was infact defective or did not conform to the specifications or if it was so what was the extent and nature of the defect. In any case, we are informed that the petitioner has now amended its suit by incorporating the relief of recovery of damages/compensation. The issue can appropriately be considered and answered by the civil court only after the parties have gone to trial. Thus, looking at the matter from all possible angles, it cannot be said that the LOCs. in question would be vitiated by fraud or any irretrievable damage would be suffered by the respondent entitling them an injunction. Therefore, we are of the considered opinion that the plaintiff-respondent No.1 failed to make out a prima facie case so as to entitle them of any restraint order against the payment of the LOCs. either in full or in part.

11. Mr.P.V.Kapur, learned Senior counsel appearing for the respondent has emphatically urged that once the defect in the quality of material supplied by the appellant was brought to their notice, they themselves had offered a discount of US$ 1,05,000 and, therefore, it will be wholly unjust if the appellant is allowed to take away the entire amount of LCs. It is also pointed out that the respondent will suffer irretrievable harm and injury in case the appellant are allowed payment of all the LOCs. as the appellant is a foreign company and it may be very difficult, if not impossible, for the respondent to realize the amount of damages which might be decreed against them. It is not disputed from the side of the appellant that they had offered a discount of US$ 1,05,000 as a co-operation amount, if all the shipments including the fourth shipment was accepted by the respondent and that all the four shipments have now been accepted by the respondent subject to certain understanding/settlement reached in a meeting held on 7th January, 2002. On the face of this factual position, can the impugned order withholding 50% amount of the first two LCs. and 25% amount of the third LC be justified. Having regard to the amount of the three LCs., it would mean withholding of almost 40% of the price of goods supplied by the appellant. This appears to be unjust as it tends to operate harshly on the appellant. It is a well settled legal position that one who seeks equity, must be willing to do equity. Though we have taken a view that having regard to the settled legal position, the respondent was not entitled to any injunction as prayed for by them in the suit or their application but in view of the subsequent developments that the plaintiff-respondent has now staked a claim for damages against the appellant as also in view of the fact that at one stage the appellant itself had offered some discount, may be as a co-operation amount to the respondent, this Court is of the opinion that it will meet the ends of justice if, without prejudice to the pleas and contentions of the parties in the suit and as a special case, the interest of the respondent is safeguarded so as to find some money handy and available to the plaintiff in case they succeed in their claim for damages. This can be done by directing respondent No.2-bank to deposit the balance 25% amount of the third LOC No.60621179 for US$ 9,18,750 dated 23th June, 2001 in Court. The amount so deposited by the bank will await the outcome of the suit and shall not be allowed to be withdrawn by either party without permission of the Court. The Bank would of course release the balance payment of 50% of the LOCs. Nos.60621112 and 60621131 to the appellant forthwith.

12. In the result, this appeal succeeds and is hereby allowed. The impugned order is hereby modified to the extent that the respondent-bank is directed to make the payment of the remaining 50% amount of the two LCs. No.60621112 for US$ 2,62,500 and 60621131 for US$ 5,25,000 to the appellant forthwith and to deposit the withheld 25% amount of third LC No.60621179 for US$ 9,18,750 in the Court within a period of two weeks. The amount so deposited by the bank shall be subject to the outcome of the suit and shall not be withdrawn by any of the parties without the permission of the Court. The amount so deposited by the Bank shall be put in a fixed deposit with a nationalised bank for a period of six months to begin with. Needless to mention that observations made hereinabove are tentative and shall not tantamount to expression of opinion on the merits of the case.