Fargo Freight Ltd. (Formerly ... vs Commodities Exchange ...
2000 Latest Caselaw 332 Del

JUDGMENT

Vikramajit Singh, J.

1. This is an application filed on behalf of defendant No. 3 under Order 39, Rule 4, read with Section 151 of the Code of Civil Procedure, 1908, for variation of the interim orders dated July 24, 1996 and August 29, 1996. The application has been preferred in the suit for mandatory and permanent injunction directing the defendants to keep the irrevocable letter of credit issued by defendant No. 3 alive till the culmination of proceedings before the arbitral forum. By a detailed order K. Ramamoorthy J. had granted the injunction in the following words :

"There shall be a direction to the defendants/respondents, their employees, agents, attorneys or any other person either directly or indirectly claiming through the defendants shall keep irrevocable letter of credit, issued by Global Trust Bank, Calcutta No. CA/FLC/011/96, dated May 20, 1996, in the sum of USD 267.000 alive and shall not allow the same to be expired during the pendency of the suit.

The first defendant has taken a very unreasonable stand. Therefore, he shall pay costs of Rs. 10,000 to the Indian Legal Aid and Advice Board, Chamber No. 4, Delhi High Court, New Delhi, within four weeks from today.

I. A. No. 6703 of 1996, filed by the plaintiff under Order 39, Rules 1 and 2, for direction to keep the letter of credit dated June 20, 1996, for payment of demurrage alive, is allowed.

I. A. No. 7515 of 1996, filed on behalf of defendant No. 1 under Order 39, Rule 4 of the Civil Procedure Code for vacation of stay is dismissed."

2. An appeal was preferred against this order but was withdrawn.

3. The present application is predicated on the following facts :

The letter of credit (LC) was opened at the request of defendant No. 1 against a margin amount of Rs. 28.34 lakhs and pledge of 63,600 shares of the Bank of Rajasthan Ltd. with the undertaking by defendant No. 1 to make payment of the balance amount under the said letter of credit. The letter of credit was extended from time to time. That if the presentation is made beyond the time stipulated or without the documents mentioned in the letter of credit the bank is not obliged to honour the commitment made under it ; this position is envisaged under the Uniform Customs and Practices of Documentary Credit. The applicant had opened the letter of credit on the assumption that the entire transaction would be over by August 15, 1996, The letter of credit being an important instrument in international trade has to be taken strictly as per the terms and conditions specified therein. Various sums had been expended by the applicant to foreign banks in connection with the letter of credit and for its extension. If the plaintiff has any case, the court has all the powers to either direct defendant No. 1 to furnish security for the claimed amount like deposit or bank guarantee. It was then prayed that defendant No. 1 be ordered to furnish security for the alleged claim of the plaintiff and/or that the applicant-bank be permitted to deposit the said shares of 63,600 of the Bank of Rajasthan held by the applicant as security together with the amount of Rs. 28.34 lakhs less the amount of Rs. 1,45,102.79 due to the applicant-bank towards its costs and charges.

4. The plaintiff has traversed the application. It is submitted that the applicant has issued an irrevocable stand-by letter of credit and that since no fraud of an egregious nature has been alleged so as to vitiate the entire transaction the liability of the applicant is absolute and that it must honour its contractual commitment to the plaintiff. The applicant was at all times, in accordance with sound and good banking policy and practices, obliged to ensure availability of adequate security unto itself from defendant No. 1. If there was any negligence or lack of due diligence on the part of the applicant, the consequences could not visit the plaintiff. The applicant could have but did not challenge the interim orders passed by this court and acquiesced therein. On the passing of the ex-parte ad interim orders on July 24, 1996 (during the initial currency of the letter of credit) or thereafter the applicant should have exercised any purported rights/remedies against defendant No. 1. The applicant, however, chose to maintain a stoic silence and continued to extend the validity of the letter of credit without any demur protest or objection. In fact, the applicant was well aware of the fraud that had been played upon the plaintiff by defendant No. 1 which precluded the invocation of the stand by letter of credit. This was the deliberate failure of defendant No. 1 the first defendant to procure a certified Reserve Bank of India permit, with the consequence that it was not possible/feasible for the plaintiff to make a claim under the letter of credit prior to August 15, 1996- Amendments to the letter of credit is clearly contemplated by the Uniform Customs and Practice of Documentary Credit. The English award having been converted by this court into a decree in terms of its order dated August 20, 1999, the applicant was obliged, both in law and in fact, to pay over the sum of the stand by letter of credit to the plaintiffs. The applicants are fully aware that defendant No. 1 had disappeared and/or had become defunct.

5. The applicant has relied on a decision of the Supreme Court in Raunaq International Ltd. v. IVR Construction Ltd., . The following paragraphs were relied upon ;

"The same considerations must weigh with the court when interim orders are passed in such petitions. The party at whose instance interim orders are obtained has to be made accountable for the consequences of the interim order. The interim order could delay the project, jettison finely worked financial arrangements and escalate costs. Hence the petitioner asking for interim orders, in appropriate cases should be asked to provide security for any increase in cost as a result of such delay, or any damages suffered by the opposite party in consequence of an interim order. Otherwise public detriment may outweigh public benefit in granting such interim orders. Stay order or injunction order, if issued, must be moulded to provide for restitution.

Dealing with interim orders, this court observed in Assistant Collector of Central Excise v. Dunlop India Ltd. : that an interim order should not be granted without considering the balance of convenience, the public interest involved and the financial impact of an interim order. Similarly, in Ramnihlal N. Bhutta v. State of Maharashtra , the court said that while granting a stay the court should arrive at a proper balancing of competing interests and grant a stay only when there is an overwhelming public interest in granting it, as against the public detriment which may be caused by granting a stay. Therefore, in granting an injunction of stay order against the award of a contract by the Government or a Government agency, the court has to satisfy itself that the public interest in holding up the project far outweighs the public interest in carrying it out within a reasonable time. The court must also take into account the cost involved in staying the project and whether the public would stand to benefit by incurring such cost.

Therefore, when such a stay order is obtained at the instance of a private party or even at the instance of a body litigating in public interest, any interim order which stops the project from proceeding further, must provide for reimbursement of costs to the public in case ultimately the litigation started by such an individual or body fails. The public must be compensated both for the delay in implementation of the project and the cost of escalation resulting from such delay. Unless an adequate provision is made for this in the interim order, the interim order may prove counterproductive."

6. I am unable to appreciate the justification or occasion for applying these observations to the facts of the present case. The plaintiff has initiated litigation to safeguard its rights which are based on a letter of credit in its favour. In the case of Raunaq International Ltd. v. IVR Construction Ltd., , the observations relied upon by learned counsel for the applicant were expressed in the context of a public interest litigation and a challenge to the legal propriety of a tender floated by the Maharashtra State Electricity Board. In the present case, there is a direct contract between the plaintiff and the applicant, the enforcement of which is the subject-matter of the suit. All considerations pertaining to third parties, such as defendant No. 1 are entirely extraneous to the invocation of the letter of credit.

7. Learned counsel for the applicant had submitted that while there would be no difficulty in making payment of the sum of Rs. 28.34 lakhs already received by the applicant as margin money, the pledged shares of the Bank of Rajasthan had suffered a debacle in value. It was because of this that the applicant was left without sufficient collateral funds to make payment against the letter of credit. It is the drastic depreciation in the value of its shares that is sought to be transferred by the applicant to the plain-tiff. This is impermissible in law and in equity. Firstly, the plaintiff is not concerned in any manner with the nature and extent of the collateral obtained by the applicant. If the court is to enter upon this controversy, international trade would come to a grinding halt, inasmuch as every beneficiary would have to conduct an independent inquiry into the credit-worthiness of the security provided to the bank issuing the letter of credit. This is the duty of the bank concerned. Otherwise the very purpose and efficacy of a letter of credit would be extinguished. Secondly, there were no restraint orders against the applicant-bank from encashing or liquidating the securities taken by it from defendant No. 1 as consideration for the issuance of the bank guarantee. The injunctory orders were only for keeping the letter of credit alive. If there was any doubt, orders from the court could have been prayed for. This vexed situation would not have arisen had the pledged shares retained their value or had depreciated only marginally. The bank would then, apprehending that this security may vanish, have immediately liquidated these shares. Negligence, if any, is surely to be found in the camp of applicant-bank. It should have been vigilant in keeping a track of the share value of the Bank of Rajasthan. It is wholly unreasonable to expect the plaintiff, or any other beneficiary of the letter of credit, to have detailed knowledge of the collateral/security furnished to the bank issuing the letter of credit, and to keep a close watch on its value. The applicant-bank could have approached the court directly to deposit the entire value of the letter of credit immediately on gaining knowledge of the interim orders passed by this court. This would have obviated and avoided any of the loss which has allegedly been caused to the bank. The submissions put forward by the plaintiff is cogent. In these circumstances, the application is dismissed.

8. As extracted above, K. Ramamoorthy J. had also imposed costs because of the unreasonable stand taken by the defendants. I was inclined, for the same reasons, to impose punitive costs on the applicant. However, I have desisted from doing so since the applicant-bank, for reasons attributable only to its own negligence, has already suffered substantial loss.

The application is dismissed.