Drive India Enterprise Solutions ... vs Haier Telecom (India) Pvt. Ltd. & ...
2011 Latest Caselaw 244 Bom

                                         (1)                            APPL 801/11

              IN THE HIGH COURT OF JUDICATURE AT BOMBAY
                 ORDINARY ORIGINAL CIVIL JURISDICTION




                                                                                 
Amk
                       APPEAL (L) NO. 801 OF 2011




                                                         
                                  IN
                ARBITRATION PETITION (L) NO. 1261 OF 2011

      Drive India Enterprise Solutions Ltd.               .. Appellant




                                                        
                  Vs.
      Haier Telecom (India) Pvt. Ltd. & Ors.              .. Respondents




                                              
      Mr. I. M. Chagla, Sr. Advocate with Mr. Chirag Balsara with Mr. Sunil
                              
      Gangan i/b RMG Law Associates for the Appellant.
      Mr. Virag Tulzapurkar, Sr. Advocate with Mr. Farid Karachiwala, Mr.
                             
      Bhavin M. and Ms. Pallavi Smriti i/b Wadia Gandy & Co. for Respondent
      No.2.
          

                               CORAM           : MOHIT S. SHAH, C.J. AND
                                                 MRS. ROSHAN DALVI, J.
       



      Date of reserving the Judgment           : 8 December 2011.
      Date of pronouncing the Judgment         : 19 December 2011.





      JUDGMENT

The Appellant/original Petitioner filed Petition under Section

9 of the Arbitration and Conciliation Act, 1996 essentially for restraining

Respondent No.2 (original Defendant No.2) from encashing certain

Standby Letters of Credit (SBLC) issued by Respondent No.3 (original

Defendant No.3).

(2) APPL 801/11

2. The Appellant-Petitioner and Respondent No.1 entered into

agreements dated 05.02.2010 and 15.04.2010 for import and supply of

certain mobile handsets. The Petitioner were to issue certain SBLCs at

the request of Respondent No.1 but in favour of Respondent No.2.

3. Respondent No.1 was to export and supply the mobile

handsets. Purchase orders were placed by the Petitioner and certain

SBLCs were given. It is contended by the Petitioner that Respondent No.

1 did not supply the products in terms of the aforesaid agreements though

the Petitioner made full payment under the contract. The Suit is only in

respect of SBLCs. The SBLCs are issued not in favour of Respondent

No.1. They are issued specifically in favour of Respondent No.2 as the

beneficiary. The Court is, therefore, not concerned with the breach of the

terms of the contract between the contracting parties or the circumstances

under which the SBLCs were issued in favour of Respondent No.2.

4. The obligation of the Petitioner upon the SBLCs are put in

terms of the SBLCs. The Court would, therefore, have to see and

interpret those terms, without more.

5. The SBLCs show Respondent No.2 as the beneficiary.

Under the SBLC Respondent No.3 has to make out payment upon the

(3) APPL 801/11

request of the beneficiary to the extent of Rs.18,07,99,000/-. That is the

only essential term upon which Respondent No.3 has to make payment to

Respondent No.2. Respondent No.1, the exporter is not a party to the

SBLCs. Respondent No.3 unconditionally and irrevocably undertook to

make payment to the beneficiary, Respondent No.2 upon the receipt of

the signed demand under an authenticated swift code by Respondent No.2

without any contestation or protest or delay.

6.

The SBLC is shown to be made 90 days from the date of

shipment. The terms and the description of the agreements are not

specified. The SBLC is especially shown to be independent of the terms

and conditions of the agreements between the Petitioner and Respondent

No.1. The SBLC is expressly made subject to the uniform, customs and

practice for Documentary Credits, (2007 Revision) International

Chamber of Commerce (Publication 600) ("UCP"). The SBLC is issued

by the Petitioner's banker upon the banker of Respondent No.1 who is the

beneficiary. The payment under the SBLC is to be made in a specified

Bank Account.

7. The Petitioner would contend that because the goods are not

shipped despite the payments made, the amount under the SBLC shown

(4) APPL 801/11

not paid in the specified account cannot be encashed. Surprisingly the

Petitioner's banker emailed the banker of Respondent No.1 who are the

beneficiaries on 12.11.2011 also in those terms consequent upon the

demand made by them for invocation of the SBLCs on 26.07.2011. We

have been shown that in fact after the demand, the SBLCs were extended

from time to time until they were refused to be honoured.

8. The learned Judge in the impugned Judgment has refused to

consider the terms of the contract between the Petitioner and Respondent

No.1 with regard to the delivery of the goods which aspect has been

challenged by the Petitioner. The refusal to consider that aspect is correct

as the Court in a Suit for an injunction against the invocation of SBLCs is

required to be guided only in terms of the SBLCs. The SBLCs are clear

and unambiguous. They have been extended from time to time. They

have to be honoured as per the demand. They have to be paid as per the

express terms contained therein without protest. Since they are

independent of the terms and conditions of the agreement, the Court is

not concerned with those terms.

9. The SBLC is expressly made subject to the uniform, customs

and practice for Documentary Credits, (2007 Revision) International

(5) APPL 801/11

Chamber of Commerce (Publication 600) ("UCP"). Clause 14 (h) of the

UCP has been brought to our notice. It runs thus :

h. If a credit contains a condition without stipulating the document to indicate compliance with the condition, banks will deem such condition as not stated and will disregard it.

10. The SBLC stipulates payment within 90 days from the date

of shipment, but it does not stipulate any documents indicating the date of

shipment. In this case no document was required to be presented for

filing of SBLC e.g. any bill of lading. The banker is enjoined to

disregard such condition. The learned Judge has correctly considered the

applicability of the UCP whilst interpreting the SBLC.

11. It is settled position in law that SBLCs, as much as bank

guarantees, are required to be honoured as per their terms and no Court

may interfere with the due compliance thereof except in the case of

established egregious fraud or irretrievable loss, harm and injustice. [See.

Dwarikesh Sugar Industries Ltd. Vs. Prem Heavy Engineering

Works (P) Ltd. & Anr. (1997) 6 SCC 450 and Himadri Chemicals

Industries Ltd. Vs. Coal Tar Refining Company AIR 2007 SC 2798].

12. Fraud is not even alleged by the Petitioner; irretrievable

(6) APPL 801/11

injustice is. The injustice is in the non delivery of the goods despite the

claim of having made full payment. This contention itself is merely

stated without being substantiated. In fact it is not even required to be

stated or substantiated in this Suit since neither the issuing bank nor the

Court itself is required to go into those aspects. Assuming that there is no

delivery or even short delivery or defective delivery, the law with regard

to the SBLCs, as much as bank guarantees, is that those aspects are alien

to the issues in a Suit in respect of invocation of such documents.

13. There is an arbitration contemplated by the parties. The

arbitration agreement is invoked. In the arbitration the rights of the

parties to the contract with regard to the delivery of the goods and the

payment of the price would be decided and determined. The SBLC is

quite different. The very fact that there is an arbitration provided in the

contract between the parties is the umbrella to guard against the injustice

claimed. There is, therefore, no "irretrievable injustice"; it would be

retrieved in arbitration. That is precisely why a separate guarantee for the

demand by way of a SBLC or a bank guarantee is given. Hence such

SBLC is independent of the contract. Consequently even the term of the

SBLC determining the mode of payment e.g. being 90 days from the date

of the shipment is inconsequential when the description of the document

(7) APPL 801/11

is not supplied. The banker would not know and would not be concerned

with the date of shipment. The banker, who has issued the SBLC or

given the bank guarantee, would only be required to reimburse the

amount upon a demand being made to the issuing bank. It need hardly be

mentioned that commercial trade, more specially international trade,

would collapse if banks or even Courts are required to go into each of the

breaches of the contracting parties before honouring the SBLCs which

are in the nature of guarantees for the payment.

14. Mr. Chagla on behalf of the Petitioner drew our attention to

the Judgment in the case of Larsen and Toubro Ltd. Vs. Maharashtra

State Electricity Board & Ors. AIR 1996 SC 334 to show the Court can

intervene in certain cases. In that case bank guarantees were given, one

of them being a performance guarantee. The Petitioner therein had

commissioned a plant. The plant was completed. After taking trial and

performance test it was taken over by the Respondent. A take-over

certificate was issued. The plant was alleged not to have performed to the

satisfaction of the Respondent. The arbitration clause in the contract

between the parties was invoked. During the pendency of the arbitration

several bank guarantees given by the Respondent to the Petitioner were

invoked. The learned Single Judge of this Court refused to interfere and

(8) APPL 801/11

restrain the bank from making payment upon bank guarantee after

considering, what is now settled law, emanating from and after the

Judgment in the case of Svenska Handelsbanken Vs. M/s. Indian

Charge Chrome (1974) 1 SCC 502. The Supreme Court issued no

injunction against the enforcement of all but one of the bank guarantees

which was the performance guarantee. Only in respect of that one bank

guarantee the Supreme Court issued limited injunction. In paragraph 11

at page 338 of the Judgment the Supreme Court observed that since the

plant was completed and was taken over by the Respondent, the

guarantee would enure only till the successful completion of the trial

operations and the plant is taken over. That event having ensued, the

invocation of the bank guarantee was not encashable on its terms and

hence in order to prevent irretrievable injustice an injunction only in

respect of that bank guarantee was issued "on that score". The Supreme

Court specifically observed that all other bank guarantees stood on a

different footing. They were unequivocal and unconditional. There was

no fraud or irretrievable injustice made out and issued no injunction in

respect of those bank guarantees.

15. Mr. Chagla relied upon the Judgment of the Court of Appeal

of the Singapore Court in the case of Kumagai-Zenecon Construction

(9) APPL 801/11

Pte Ltd (in liquidation) & Anr. Vs. Arab Bank Plc (Low Hua Kin,

third party) [1997] SGCA 41 to contend that in a similar matter

invocation of the bank guarantee upon the required documents being

produced was not allowed. That was a case of a shareholder's dispute.

Two companies were wound up, one being the subsidiary of another. A

person contracted to purchase the shares of the company at a fair price to

be fixed by independent valuers or at cost, whichever is higher. A Letter

of Credit (LC) was to be issued for the payment. One of the terms of the

LC was the payment would be made to the company or the liquidators

upon the High Court Judgment and the order of the Court of Appeal. The

valuation report was not a part of the documents described and

enumerated upon which the amount under the LC was to be disbursed.

The liquidators demanded a specified amount under the LC. They

annexed the aforesaid two documents to the invocation letter. The

purchasers of the shares disputed the payment instructing the bank not to

make the payment demanded. The bank rejected the liquidators' demand

upon the contention that the letter of invocation was not in compliance of

the LC for the amount demanded.

In para 13 of the Judgment learned Single Judge of the Singapore

High Court who construed the LC observed that the established legal

principles and the functions and operations of a LC could not lead an

(10) APPL 801/11

absolute pre-ordained result. The terms of credit in each case would have

to be examined and construed to determine what was required in a

particular credit. It may be clarified that the learned Judge accepted that

what had to be construed was the "terms of credit and nothing else". In

para 14 of the Judgment the Court of Appeal accepted that as the right

approach and observed :

"What a letter of credit calls for depends on its terms and the

basic question is one of the construction of those terms."

The Court also observed that :

"The letter of credit was by far different from standard or usual letters of credit in commercial transactions, eg sale of goods, under which banks undertake to honour drafts for stated amounts drawn thereunder accompanied by certain

stipulated documents."

The Court appreciated that in that unique LC due to unusual

negotiations between the parties the crucial term under clause 2 required

specified documents being two High Court Judgments to show what was

granted by the Court to the party invoking the LC under the dispute. The

Court observed that since it is not the usual bank undertaking to pay the

amount stated in the documents but had to pay pursuant to the Judgment

under the Court order, which could be varied and negated in Appeal, the

bank could not simply receive the documents but had to check their

(11) APPL 801/11

correctness. That itself was a clear part of the credit without ambiguity.

In the said Judgment also clause 13 (c) of the UCP, which is

analogous to clause 14 (h) of the UCP shown to us was invoked and

considered. It was contended that the valuation report of the fair price on

which the shares were to be purchased, which was not a part of the LC,

could not have been considered under clause 13(c) (the present clause

14(h)). Since the valuation report was not a part of the LC, it could not

have been examined by the bank. It was thus held to stand excluded by

implication because of the express wording of the LC. It was observed

that only way the bank could ascertain the amount which was demanded

and required to be paid as the fair valuation of the shares was under the

Judgment of the Court with reference to the valuation report. The

operation of the LC, therefore, gave rise to "some irreconcilable

inconsistency" between the express terms of the two clauses of the LC.

Consequently it was held that by reason of the inconsistency the clause in

the LC which directed the bank not to examine the document not

stipulated in the LC had to be ignored. For want of valuation of the

shares, the rejection of the LC by the bank, when it was invoked, was

held valid.

We do not see how the analogy in respect of such unique LC could

be applied to commercial transactions. The payment of the value of the

(12) APPL 801/11

share did not require as much expediency as a commercial contract would

merit. No after-effects of the non payment under the LC could be

perceived until after the valuation was done and the amount was paid

thereunder. Commercial contracts stand on a wholly different pedestal.

Contracts for payment of price for supply of goods are run - of - the -

mill. The Judgment of the Singapore High Court is wholly inapplicable

to commercial contracts.

16.

In the result we find that the impugned order is correct and

the LC drawn in favour of Respondent No.2 would have to be honoured

by Respondent No.3. Consequently the Appeal is dismissed.

CHIEF JUSTICE

ROSHAN DALVI, J.