Delhi High Court

Shree Krishna Paper Mills & ... vs Gail (India) Ltd. & Anr. on 18 March, 2015

Author: V. Kameswar Rao

*        IN THE HIGH COURT OF DELHI AT NEW DELHI
                                     Judgment delivered on March 18, 2015
+                              OMP (I) 85/2015
    SHREE KRISHNA PAPER MILLS & INDUSTRIES LTD.
                                              ..... Petitioner
                Through:      Mr.Ravi Gupta, Sr. Advocate with
                              Mr.Ankit Jain, Advocate

                      versus

GAIL (INDIA) LTD. & ANR.
                                                      ..... Respondent
                      Through:      Mr.Sanjay Jain, ASG with Ms.Poornima
                                    Maheshwari,      Ms.Shreya       Sinha,
                                    Mr.Dharmender,        Advocates     for
                                    respondent No. 1

CORAM:
HON'BLE MR. JUSTICE V.KAMESWAR RAO
V.KAMESWAR RAO, J. (Oral)

1. The present petition has been filed by the petitioner seeking the

following reliefs:-

"(a) Restrain the respondent No.1 from invoking the Letters of Credit bearing Nos.6011ILCRE140001 & 6011ILCRE130001 for an amount of Rs.18,08,000/- & Rs.25,00,000/- respectively, issued by Respondent No.2, till the time the disputes are finally adjudicated by an Arbitrator;

(b) Restrain the respondent No.2 from making any payment to respondent No.1 towards invocation of the 'Letters of Credit' bearing Nos.6011ILCRE140001 & 6011ILCRE130001 for an

amount of Rs.18,08,000/& Rs.25,00,000/- respectively, till the time the disputes are finally adjudicated by an Arbitrator;

c) Pass an ex-parte interim order in terms of prayers (a) &(b) above;

And/or Pass such other orders which this Hon'ble Court may deem fit and proper in the facts and circumstances of the case in favour of the Petitioner."

Facts

2. It is the case of the petitioner in the petition that it is engaged in

the business of paper coating at its unit at T-4, Old Industrial Area,

Bahadur Garh District, Jhajjar, Haryana. For the purpose of this business

the petitioner requires Regassified Liquid Natural Gas (RLNG) and

accordingly entered into a Gas Sale Agreement dated December 25,

2008 with the respondent No.1 for supply of RLNG. According to the

petitioner, under the terms of the agreement the respondent No.1 was to

supply the gas at the unit situated at Jhajjar, Haryana. The respondent

No.1 was to supply 59000 MMBTU's to the respondent every year and

in terms of the agreement the petitioner was required to maintain letters

of credit with the respondents. In total the petitioner has provided two

letters of credit for an amount of Rs.43,08,000/-. The petitioner in its

petition would state that under clause 8.1(b)(i) the petitioner prior to the

commencement of each year was to give written notice to the respondent

No.1 of the quantities of the gas which the petitioner required during

each calendar year. It is the petitioner's case that the petitioner had not

been able to utilize the entire gas within its unit, it addressed a

communication dated July 26, 2013 to the respondent No.1 requesting it

to reduce the monthly allotment of gas from 5000 MMBTU to 2000

MMBTU with immediate effect. The said request was followed by

another request on August 22, 2013, whereby the petitioner had

requested the respondent No.1 to reduce the allotment of gas to 1500

MMBTU every month with effect from September 01, 2013. The

petitioner would state that it had received an e-mail dated September 09,

2013 from the respondent No.1 requiring the petitioner to renew the

letters of credit and to further enhance the value of letters of credit to

Rs.65.13 lacs. According to the petitioner, it had specifically vide

communication dated September 11, 2013 informed the respondent No.1

that the letters of credit was on the basis of 5000 MMBTU per month

and it had already informed the respondent No.1 for reduction to 1500

MMBTU per month and hence the value of letters of credit be reduced

accordingly. The petitioner would also state that the respondent No.1

vide its e-mail dated September 20, 2013 had informed the petitioner that

the request of the petitioner for surrender for RLNG gas quantity every

month is being examined and would be decided in terms of the policy of

respondent No.1. According to the petitioner, till date no such decision

has been communicated by the respondent No.1 to the petitioner.

3. Despite sending the letters of credit for an amount of

Rs.25,00,000/-, the respondent No.1 still insisted upon the petitioner to

send the letters of credit for an amount of Rs.65.13 lacs which compelled

the representative of the petitioner to meet the officers of the respondent

No.1 and explain them the entire situation. The petitioner would state

that the officers had assured the representative that they would expedite

the decision on the request of the petitioner for reduction in the quantity

of the gas per month and called upon the petitioner to maintain the letters

of credit which was earlier existing i.e. Rs.43.08 lacs till the reduction in

allocation of gas per month is finalized. On such assurance, the petitioner

arranged for another letters of credit for remaining amount of Rs.18.08

lacs. The petitioner's case is also that it had given a tentative requirement

of 18000 MMBTU per annum but the respondent No.1 had prepared its

own schedule for allocation of the gas to the petitioner.

4. Having not heard from the respondent No.1, the petitioner

addressed a communication dated June 26, 2014 requesting the

respondent No.1 to reduce the gas supply from 1500 MMBTU to 800

MMBTU per month. Unfortunately, without deciding the issue of

reduction in gas allocation the respondent No.1 in an illegal and mala

fide manner issued a communication dated February 28, 2015 and

demanded an amount of Rs..1.62 Crores from the petitioner herein. It is

the case of the petitioner that while making a demand for the said

amount the respondent No.1 had not even referred to its request for

reduction of gas supply. In fact, the petitioner had disputed the said

amount by taking a stand that no amount is due and payable to the

respondent No.1 for the calendar year 2014. In this regard the

petitioner's case is that it has utilized 8613.621 MMBTU gas for which

an amount of Rs.87,07,595/- already stands paid to the respondent No.1.

The respondent No.1 still vide its e-mail dated March 05, 2015 insisted

upon the payment of Rs.1,62,11,232.65/- and have threatened that if the

said amount is not paid by March 11, 2015 the respondent No.1 shall

invoke letters of credit. The request of the petitioner to keep the payment

in abeyance has been refused by the respondent No.1 threatening the

invocation of letters of credit and accordingly the petitioner has filed the

present petition.

5. Mr.Ravi Gupta, learned Senior Counsel for the petitioner would

submit that when a request for reduction of allocation of gas is under

consideration, the respondent could not have invoked the letters of

credit. In this regard he has taken me through the various

communications exchanged between the parties. He has referred to

various provisions of the contract to state that there is no power to

terminate the contract by the petitioner. He would refer to Article

14(b)(i), as the only clause wherein a penalty has been prescribed in the

eventuality, the buyer's annual intake is less than 90%. The difference

between the quantity taken and 90% shall be calculated and deficiency

thereof needs to be paid by the buyer. According to him, the penalty

under 14(b)(i), which is in the nature of damages, could only be

demanded if the loss is proved by the respondent No.1. He would also

state that in terms of Article 19.3, in the eventuality the petitioner fails to

take gas as agreed by it the respondent No.1 was within its right to

terminate the contract. Unfortunately the respondent No.1 has not

terminated the contract, but has kept the same alive and made a demand

for Rs.1.62 Crores in terms of the letter dated February 28, 2015. He

would rely upon the judgment of this Court in the case of Taxmaco Ltd.

vs. State Trading Corporation of India 2006 (4) RAJ. 269 (Delhi) to

contend, merely because the petitioner has not taken/consumed the gas

as it had agreed would not enable the respondent No.1 to impose penalty

which is in the nature of damages being barred by Section 73 & 74 of the

Contract Act. On similar proposition, he would rely upon the judgment

of this Court in Lalit Kumar Bagla vs. Karam Chand Thapper & Bros.

(CS) Ltd. 2013 (IX) AD (Delhi) 24.

6. Mr.Sanjay Jain, learned Additional Solicitor General of India

assisted by Ms.Poornima Maheshwari, Advocate, who had appeared on

advance notice would contend that the gas which is being supplied to the

petitioner is being imported from outside India. The RLNG is one of the

inputs used for paper coating. When the agreement was executed

between the parties, the RNLG was the only viable material available.

According to him, the Gas Sale Agreement entered between the parties

stipulate that in the beginning of the year the purchaser must commit the

amount of gas, it would take from the respondent No.1. He would also

state that there is nothing in the agreement to stipulate the amount of gas

to be taken in a year can be reduced before the end of the calendar year.

He would also state that since the respondent No.1 has a back to back

agreement with the original supplier, the commitment made by the

purchaser should be adhered to. He would state that the demand now

made for Rs.1.62 Crores by the respondent No.1 is 1/3rd of Rs.4.24

Crores which the petitioner was liable to pay for the year 2014. He

would state that Article 14(b)(i) is clear and it encompasses in itself a

situation of this nature and the demand is not illegal. In the end he would

state that the respondent No.1 has invoked the letters of credit for

Rs.43,08,000/- even though the amount has not yet been credited in the

account of the respondent No.1.

7. Having heard the learned counsel for the parties, I note that it is

the case of the petitioner in the petition that the respondent No.1 has not

invoked the letters of credit. The petition was filed on an apprehension

that the letters of credit may be invoked. Mere apprehension cannot be a

ground for the petitioner to seek an injunction. Since it has been

contended by Mr.Sanjay Jain, ASG that the respondent No.1 has invoked

the letters of credit, this Court thought it fit to examine the issue of

invocation of the letters of credit by the respondent No.1. Before I

proceed to examine the issue, I may only state here that the submissions

advanced by Mr.Ravi Gupta, learned Senior Counsel for the petitioner

are primarily on the merits of the dispute. The agreement does stipulate

dispute resolution through arbitration and the parties, more particularly

the petitioner must invoke the said remedy.

8. The law on invocation of the bank guarantees or letters of credit is

well settled. The Supreme Court in Federal Bank Ltd. Vs. V.M.Jog

Engineering Ltd. and Ors., (2001) 1 SCC 663 observed that the Court

ought not to grant injunction, to restrain invocation of bank guarantees or

letters of credit. The Supreme Court carved out two exceptions to this

rule, viz. fraud and irretrievable damage. It further observed that the

contract of bank guarantee or letter of credit is independent of the main

contract between the seller and the buyer. In case of an irrevocable bank

guarantee or letter of credit, the buyer cannot obtain injunction against

the final payment on the ground that there was a breach of the contract

by the seller. The bank is to honour the demand for encashment if the

seller, prima facie, complies with the terms of the bank guarantee or the

letter of credit namely, if the seller produces the documents enumerated

in the bank guarantee or the letter of credit. If the bank is satisfied on the

basis of the documents that they are in conformity with the list of

documents mentioned in the bank guarantee or the letter of credit and

there is no discrepancy, it is bound to honour the demand of the seller for

encashment. It is not permissible for the bank to refuse the demand on

the ground that the buyer is claiming that there is a breach of contract.

The obligation of the bank under the documents has nothing to do with

any dispute as to breach of contract between the seller and the buyer.

The Supreme Court also observed that in order to obtain injunction

against the issuing bank that it is necessary to prove that the bank had

knowledge of fraud. The Supreme Court relied on the observations of

Kerr, J. in R.D. Harbottle (mercantile) Ltd. Vs. National Westminster

Bank Ltd. (1978) QB 146:(1977) 2 All England Reporter 862 to state

that irrevocable Letters of Credit are "lifeblood of international

commerce" and also observed as under:

"Except possibly in clear cases of fraud of which the banks have notice, the Courts will leave the merchants to settle their disputes under the contracts by litigation or arbitration........Otherwise, trust in international commerce could be irreparably damaged."

Denning M,R, .stated In Edward and Owen Engineering Ltd. v. Barclays Sank International Lid. (1978) Q.B. 159 that 'the only exception is where there is a clear fraud of which the bank had notice": Browne, LJ. said in the same case : "but it is certainly not enough to alleged fraud, it must be established" and in such circumstances, I should say, very clearly established", in Bolvinter Oil S.A.v. Chase Manhattan Bank, (1984) 1 All E.R, 351 at P. 352, it was said 'where it is proved that the Bank knows that any demand for payment already made or which may thereafter be made, will clearly be fraudulent. But the evidence must be clear both as to the fact of fraud and as to the bank's knowledge. It would certainly not be sufficient that this rests Upon the uncorroborated statement of the customer,, for irreparable damage can be done to a bank's credit in the relatively brief time "before the injunction is vacated". Thus, not only must 'fraud' be clearly proved but so far as the Bank is concerned, it must prove that it had knowledge of the fraud. In United Trading Corp. S.A. v. Allied Ards Bank, (1985) 2 Lloyds Rep, 554, it was stated that there must be proof of knowledge of fraud on the part of the Bank at any time before payment".

9. In the present case, the only allegation of fraud averred by the

petitioner is that the demand made by the respondent No.1 without

taking the decision on the request made by the petitioner is fraudulent

and mala fide. Such an action would not constitute fraud. The petitioner

has not pleaded irreparable damage or special equities. Nor it is the case

of the petitioner that the invocation is not in terms of the letters of credit.

I note that the letters of credit is irrevocable and it covers delayed

payments, penalty, overdraw, taxes, duties and changes therein etc.

10. Insofar as the judgments relied upon by the learned Senior

Counsel for the petitioner are concerned, in Taxmaco (supra) this Court

was considering the objections filed under Section 30 & 33 of the

Arbitration Act, 1940 against the award of the Arbitrator, which is not