2020 (4) TMI 876 - HC - Indian Laws

Restraint on negotiating/encashing the Letters of Credit - Section 56 of the Indian Contract Act 1972 - HELD THAT - The Letters of Credit are an independent transaction with the Bank and the Bank is not concerned with underlying disputes between the Petitioners who are buyers and the Respondent No. 1 who is the seller - The Force Majeure clause in the present contracts is applicable only to the Respondent No. 1 and cannot come to the aid of the Petitioners. The contract terms are on Cost and Freight basis (CFR) and the Respondent No. 1 has complied with its obligations and performed its part of the contracts and the goods have been already shipped from South Korea. The fact that the Petitioners would not be able to perform its obligations so far as its own purchasers are concerned and/or it would suffer damages is not a factor which can be considered and held against the Respondent No. 1. List the Petitions as per CMIS date.

Summary

Issues:
1. Application under section 9 of the Arbitration and Conciliation Act seeking directions to restrain the Respondent-Bank from negotiating/encashing Letters of Credit.
2. Termination of contracts due to COVID-19 pandemic and lockdown, invoking Section 56 of the Indian Contract Act, 1972.
3. Interpretation of Force Majeure clause in the contracts.
4. Consideration of contractual obligations and performance under Cost and Freight basis (CFR) contracts.
5. Impact of lockdown on contractual obligations and payments.
6. Relevance of legal precedents in the current case.

Analysis:
1. The Petitioners sought relief under section 9 of the Arbitration and Conciliation Act to prevent the Respondent-Bank from negotiating/encashing Letters of Credit due to contract termination amidst the COVID-19 pandemic and lockdown, citing frustration, impossibility, and impracticability under Section 56 of the Indian Contract Act, 1972.

2. The contracts involved the supply of steel products from South Korea to Mumbai, subject to Force Majeure and Governing Law & Arbitration clauses. The Force Majeure clause allowed termination or delay of the contract in case of events beyond the seller's control, while the Governing Law & Arbitration clause specified dispute resolution mechanisms.

3. The court held that the Letters of Credit were independent transactions with the Bank, not affected by underlying disputes between the parties. The Force Majeure clause applied only to the seller, providing no relief to the Petitioners.

4. Emphasizing the Cost and Freight basis of the contracts, the court noted that the seller had fulfilled its obligations by shipping the goods from South Korea. The Petitioners' inability to perform their obligations or incurring damages did not impact the seller's compliance.

5. Despite the lockdown and essential service declarations for steel distribution, the court ruled that the lockdown's temporary nature did not excuse the Petitioners from their contractual payment obligations to the seller. The court rejected the argument that the lockdown could justify non-payment.

6. Legal precedents cited by the Petitioners were deemed irrelevant to the current case, as they did not support the Petitioners' claims and were distinguishable based on factual differences. The court dismissed the application for ad-interim reliefs, directing the listing of Petitions as per CMIS date for further proceedings.