Delhi High Court
M/S Era Infra Engineering Ltd. vs M/S Emerald Mineral Exim (P) Ltd. & ... on 26 August, 2009
Author: Shiv Narayan Dhingra
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Date of Reserve: August 19, 2009
Date of Order: August 26, 2009
+OMP 631/2008
% 26.08.2009
M/s Era Infra Engineering Ltd. ...Petitioner
Through: Mr. Manoj Kumar Singh, Advocate
Versus
M/s. Emerald Mineral Exim (P) Ltd. & Anr ...Respondents
Through: Mr. Adhip Iyer with Ms. Mandira Mitra, Advocates
JUSTICE SHIV NARAYAN DHINGRA
1. Whether reporters of local papers may be allowed to see the judgment?
2. To be referred to the reporter or not?
3. Whether judgment should be reported in Digest?
JUDGMENT
1. By this petition under Section 9 of the Arbitration & Conciliation Act,
1996, the petitioner has sought relief that respondent no.1 should be
restrained from encashing or taking any action in encashing the Letter of
Credit (LC) bearing numbers:
a. No.0071 LC 127908 issued on 26th July 2008 for the amount of
Rs.1,72,36,799/-.
b. No.0071 LC 134508 issued on 28th August 2008 for the amount
of Rs.2,18,85,962/-.
c. No.0071 LC 138008 issued on 12th September 2008 for the
amount of Rs.2,44,34,760/-.
2. The petitioner has based this petition on an agreement dated 11 th July
2008 entered between petitioner and respondent No.1. The respondent no.2
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is the bank with whom the LC was opened. It is not in dispute that the bank
was not a party to the agreement between petitioner and respondent No.1.
LCs were opened by petitioner with respondent No.2 at the persuasion of
respondent no.1 so that respondent No.1 could start procurement of goods in
terms of the agreement. Respondent no.1 in order to secure the interest of
petitioner offered to issue back-to-back cheques to the petitioner and issued
the same with the result that petitioner opened with these LCs wherein the
beneficiary was respondent no.1 and the bank was State Bank of India, SSI
Branch, Bhuvanpur. These LCs were irrevocable in favour of beneficiary i.e.
respondent no.1. The petitioner wants an injunction in respect of these LCs to
be issued by the Court on the ground that the respondent no.1 had not
complied with the terms and conditions of the basic agreement dated 11th July
2008.
3. The short question involved in this petition is whether respondent no.1
can be restrained from encashing the LCs opened in its favour by respondent
no.2. An LC is an independent contract between the bank and the beneficiary.
It is the admitted case of the petitioner that the letter of credit opened by
respondent no.2 was irrevocable. The LC does not contain the arbitration
clause under which the disputes under the LC can be referred to any
arbitrator. Since the LC is an independent contract, even if it was opened at
the instance of petitioner, the rights of respondent no.1 under the LC flow
from LC. The LC opened by respondent no.2 provides for payment of
guaranteed amount without any contest, demur or protest and without any
reference to the petitioner. Under these circumstances, the provisions of
Section 9 cannot be invoked by the petitioner to stifle the normal commercial
transaction. It is petitioner‟s own case that the petitioner was given post-
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dated cheques by respondent no.1 in lieu of opening of LC by petitioner. It is
the petitioner „s own case that the material which was to be procured by
respondent no.1 was received through shipment and in fact respondent no.1
on presentation of document as required under LC had received the payment.
4. The position regarding use of Section 9 in respect of LC was made clear
by the Supreme Court in Federal Bank Ltd. v. V.M. Jog Engineering Ltd. AIR
2000 SC 3166 and it was further restated by this Court in Impex Trading
Gmbh v Annunay Fab. Ltd. & Ors 2008(1) ARBLR 50 (Delhi). It is now settled
law that in case of any irrevocable bank guarantee or Letter of Credit, the
buyer cannot be granted an injunction against the bank on the ground that
there was a breach of contract by the seller. The bank, who issued the bank
guarantee or with whom the letter of credit is opened, has no authority to
dishonour the bank guarantee or the letter of credit if the party complies with
the terms and conditions of the bank guarantee or letter of credit. Where the
bank is satisfied about the documents presented to it and finds them in
conformity with the documents mentioned in the letter of credit, the bank is
bound to honour the demand made by the seller of encashment of letter of
credit. The bank cannot refuse payment on the ground that the buyer is
claiming that there was a breach of contract. The bank cannot decide the
question of breach and refuse payment to the seller. The banking practices
are uniform throughout the world and banks follow uniform code. Under
Article 4A of UCP 600-Uniform Customs & Practice for Documentary Credits
(2007 Revision) the obligations of banks towards beneficiary are as follows:
"a. A credit by its nature is separate transaction from
the sale or other contract on which it may be based.
Banks are in no way concerned with or bound by
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such contract, even if any reference whatsoever to
it is included in the credit. Consequently, the
undertaking of a bank to honour, to negotiate or to
fulfill any other obligation under the credit is not
subject to claims or defences by the applicant
resulting its relationships with the issuing bank or
the beneficiary."
5. In United Commercial Bank v Bank of India and Ors. AIR 1981 SC 1426,
the Supreme Court held, "Courts ought not to grant injunctions restraining
the performance of the contractual obligations flowing out of a Letter of
Credit or a Bank Guarantee between one bank and another. The Supreme
Court further observed, "The banker owes a duty to the buyer to ensure that
the documents tendered by the sellers under a credit are complied with those
for which the credit calls and which are embodied in terms of paying of
negotiating bank and the bank issuing or confirming a letter of credit is not
concerned with the underlying contract between buyer and the seller".
6. In view of my above discussion, I find no merits in this petition. The
petition is hereby dismissed. No orders as to costs.
August 26, 2009 SHIV NARAYAN DHINGRA J.
rd
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