2007 (8) TMI 704 - SC - Indian Laws

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? Whether 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?

Issues Involved:
1. Whether the interim order of status quo vacated by the learned Single Judge should be reinstated.
2. Whether an injunction should be granted to restrain the respondent from receiving payment under a Letter of Credit due to alleged fraud.
3. Whether the appellant would suffer irretrievable harm or injustice if the Letter of Credit is encashed.

Issue-wise Detailed Analysis:

1. Interim Order of Status Quo:
The appeal was directed against the judgment and order dated 21st June, 2007, by a Division Bench of the Calcutta High Court, which dismissed the appeal against the order of the learned Single Judge dated 5th June, 2007. The learned Single Judge had vacated an interim order of status quo regarding an injunction restraining the respondent from receiving any payment under a Letter of Credit. The Supreme Court examined whether the Division Bench was justified in affirming the order of the learned Single Judge vacating the interim order of status quo.

2. Injunction to Restrain Payment under Letter of Credit:
The appellant entered into a contract with the respondent for the supply of 26,000 metric tones of goods, with payment to be made via an irrevocable Letter of Credit. Discrepancies in the goods' description led to the appellant's banker seeking advice on whether to waive these discrepancies. The appellant waived the discrepancies and agreed to make payments. However, the appellant later filed an application under Section 9 of the Arbitration and Conciliation Act, 1996, for an injunction to stop the release of payment under the Letter of Credit, alleging fraud by the respondent in not resolving the quality dispute of the goods supplied.

The Supreme Court reiterated the principles for granting or refusing an injunction in the matter of invocation of a Bank Guarantee or a Letter of Credit. The Court referred to the U.P. State Sugar Corporation Vs. Sumac International Ltd. case, which established that the bank must honor the guarantee as per its terms, irrespective of any dispute between the parties. The Court noted two exceptions for granting an injunction: (i) Fraud committed in the notice of the bank which would vitiate the very foundation of the guarantee; (ii) Irretrievable harm or injustice to one of the parties concerned.

The Court scrutinized the allegations of fraud and concluded that the facts pleaded did not constitute fraud of an egregious nature that would vitiate the entire underlying transaction. The alleged fraud was limited to a part of the consignment, which could not justify an injunction on the entire Letter of Credit.

3. Irretrievable Harm or Injustice:
The Court examined whether allowing the encashment of the Letter of Credit would result in irretrievable harm or injustice to the appellant. The Court found that the appellant had not demonstrated exceptional circumstances that would make it impossible for the guarantor to reimburse himself if he ultimately succeeded. The appellant's apprehension that it would be impossible to recover the amount from the respondent, a foreign company with no assets in India, was not sufficient to meet this exception.

Furthermore, the appellant had already filed an Admiralty Suit and the respondent had furnished a Bank Guarantee for the sum claimed by the appellant. This provided adequate protection to the appellant, negating the claim of irretrievable injury.

Conclusion:
The Supreme Court concluded that no good ground had been made out by the appellant to interfere with the impugned order. The principles for granting an injunction to restrain the encashment of a Bank Guarantee or a Letter of Credit were not met. The appeal was dismissed, with the Court clarifying that the findings were not to be taken as final for the disposal of the application for injunction by the High Court. There was no order as to costs.

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