Letter of Credit is an irrevocable obligation and Court would only pass an injunction in a case of egregious fraud or irretrievable injustice: High Court of Delhi
It is only in exceptional cases that the courts will interfere with the machinery of irrevocable obligations assumed by banks. They are the life-blood of international commerce. Letter of Credit is an irrevocable obligation undertaken by the issuing bank. Therefore, the courts have recognized only two exceptions to the aforesaid principle where courts would pass an injunction in respect of payments under an LC i.e. in cases of ‘egregious fraud and irretrievable injustice’. ‘Egregious fraud’ has to be a fraud of the kind which goes to the very root of the matter. These were stated by High Court of Delhi, consisting Justice Amit Bansal in the case of Satish Kansal vs. Synergy Tradeco NV &amp; Anr. [CS(COMM) 29/2022] on 17.01.2022. The facts of the case are that sale orders for certain goods/materials were placed by the plaintiff on 13th September, 2021 and 5th October, 2021 with the defendant no.1 and Letters of Credit (LCs) were drawn for the same on defendant no.2. On 2nd December, 2021 and 18th December, 2021, when the goods/materials, which was a subject matter of LCs were received by the plaintiff, they were found to be defective. Reliance was placed on the e-mails to contend that the defendant no.1 acknowledged the fact that the goods supplied by him to plaintiff were defective. By way of the present application under Order XXXIX Rule 1 &amp; 2 of the Code of Civil Procedure, 1908 (CPC), the plaintiff seeks restraint order against payments to the defendant no.1 of amounts covered under the Letter of Credit (LC). The Counsel for the plaintiff contended that the description of goods/materials supplied by the defendant no.1 did not match the description mentioned in the LCs as also the partial shipment was not allowed in terms of the LCs. Therefore, it was submitted that fraud has been played upon the plaintiff by the defendant no. 1. It was further contended that irretrievable injustice would be caused if the aforesaid amounts under the LCs are remitted to the defendant no.1. The Counsel for the defendants submitted that the case pleaded by the plaintiff is not that of egregious fraud and irretrievable injustice. The case of the plaintiff is that out of the four containers supplied by the defendant no.1 to the plaintiff, of which, only two containers had defective goods. Therefore, at best, the case made out by the plaintiff was with regard to breach of contract and not fraud. It was further submitted by the counsel that Articles 5, 16(a), (c) and (f) of the Uniform Customs And Practices For Documentary Credits (UCP 600), which are rules agreed upon by the International Chamber of Commerce that apply to financial institutions for issuing LCs, says that honouring of LCs in terms of the conditions contained in the LCs is essential for the continuation of international trade and commerce. It was therefore, contended that SBI, Antwerp has already added its confirmation to the LCs and therefore, SBI, Antwerp has become liable to pay the defendant no.1 and consequently, to draw upon the account of defendant no.2 for the amounts under the LC.
 IN THE HIGH COURT OF DELHI AT NEW DELHI Date of decision: 17th January 2022. CS(COMM) 29 2022 SATISH KANSAL Plaintiff Through: Mr. Abhishek Aggarwal Advocate SYNERGY TRADECO NV & ANR. Defendants Through: Mr. Ajay Monga with Mr. Ateev Mathur and Mr. Amol Sharma Advocates for HDFC Bank R 2. HON BLE MR. JUSTICE AMIT BANSAL VIA VIDEO CONFERENCING] AMIT BANSAL J.IA No.719 2022(for exemption) Allowed subject to all just exceptions. The application is disposed of. IA No.720 2022(u S. 12A of the Commercial Courts Act 2015) For the reasons stated in the application the same is allowed. IA No.718 2022(u O.XXXIX R.1&2 CPC) By way of the present application under Order XXXIX Rule 1 & 2 of the Code of Civil Procedure 1908the plaintiff seeks restraint order against payments to the defendant no.1 of amounts covered under the Letter CS(COMM) 29 2022 of Credit No.027LC01212850007 dated 12th October 2021 and LC No.027LC01212600008 dated 24th September 2021 which are due for payments on 17th January 2022 and 28th January 2022 respectively. Notice in the said application was issued on 14th January 2022 and parties were asked to file short submissions. Short submissions have been filed on behalf of the defendant no.2 HDFC Bank. None appears on behalf of the defendant no.1. The case of the plaintiff is that sale orders for certain goods materials were placed by the plaintiff on 13th September 2021 and 5th October 2021 with the defendant no. 1 and Letters of Creditdrawn on the defendant no.2 HDFC bank were opened on 24th September 2021 and 12th October 2021 in the sum of US$ 1 50 877.05 and US$ 49 589.39. On 2nd December 2021 and 18th December 2021 when the goods materials which was a subject matter of LCs were received by the plaintiff they was found to be defective. Reliance is placed on the e mails dated 23rd December 2021 and 16th January 2022 to contend that the defendant no.1 has acknowledged that the goods supplied by the defendant no.1 to plaintiff were defective. Counsel for the plaintiff relies upon Clauses 43P and 45A of the LC dated 24th September 2021 to contend the description of goods materials supplied by the defendant no.1 did not match the description mentioned in the LCs as also the partial shipment was not allowed in terms of the LCs. Therefore it is submitted that fraud has been played upon the plaintiff by the defendant no. 1. It is further contended that irretrievable injustice would be caused if the aforesaid amounts under the LCs are remitted to the defendant no.1. CS(COMM) 29 2022 Counsel appearing on behalf of the defendant no.2 HDFC bank submits that the case pleaded by the plaintiff is not that of egregious fraud and irretrievable injustice. The case of the plaintiff is that out of the four containers supplied by the defendant no.1 to the plaintiff only two containers have defective goods. Therefore at best the case made out by the plaintiff is with regard to breach of contract and it is not the case of It is further submitted that SBI Antwerp has already added its confirmation to the LCs and therefore SBI Antwerp has become liable to pay the defendant no.1 and consequently draw upon the account of the defendant no.2 for the amounts under the LC No. 027LC01212850007. The acceptance of the documents was conveyed by the defendant no. 2 HDFC bank to SBI Antwerp on 27th November 2021 stating that the documents in accordance with the LC. In respect of second LC No. 027LC01212600008 it is stated that the documents have been accepted by the defendant no.2 HDFC bank and in view thereof the defendant no.2 HDFC bank would be liable to pay the advising bank namely Belfius 11. Reliance is placed on the judgments of the Supreme Court in United Commercial Bank Vs. Bank of India & Ors. 2 SCC 766 and Millennium Wires P Ltd Vs. State Trading Corp. of India Ltd. 14 Bank. SCC 375. 12. Reliance is also placed on Articles 5 16(a) andof the Uniform Customs And Practices For Documentary Credits which are rules agreed upon by the International Chamber of Commerce that apply to financial institutions for issuing LCs to contend that honouring of LCs in CS(COMM) 29 2022 terms of the conditions contained in the LCs is essentially for the continuation of international trade and commerce. It is further contended that the plaintiff has approached the Court at the last minute and has not even paid the requisite Court Fees. I have heard the counsels for the parties. The law with regard to judicial interference in payments under LCs has been summarised by the Supreme Court in United Commercial Bank Vs. Bank of India Ltd. v. National Westminster Bank Ltd. Kerr J. considered the position in principle. We would like to adopt a passage from his judgment at page 761: It is only in exceptional cases that the courts will interfere with the machinery of irrevocable obligations assumed by banks. They are the life blood of international commerce. Such obligations are regarded as collateral to the underlying rights and obligations between the merchants at either end of the banking chain. 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 as available to them or stipulated in the contracts. The courts are not concerned with their difficulties to enforce such claims CS(COMM) 29 2022 these are risks which the merchants take. In this case the plaintiffs took the risk of the unconditional wording of the guarantees. The machinery and commitments of banks are on a different level. They must be allowed to be honoured free from interference by the courts. Otherwise trust in international commerce could be irreparably damaged. The observations of Kerr J. have been cited with approval by Lord Denning M. R. in Edward Owen Engineering Ltd. v. Barclays Bank International Ltd.” 14. The judgment in Harbottlewas also referred to and followed by the Supreme Court in Millenium WiresBanks must be allowed to honour their guarantees without interference except in clear cases of notice of fraud to the bank. The merchants take risk which are not to be imposed on the banks. Such interference will deter trust in international commerce. CS(COMM) 29 2022 12. It would suffice to say here that injunctions against the negotiating banks for making payments to the beneficiary must be given cautiously as constant judicial interference in the normal practices of market can have disastrous consequences as it affects the trustworthiness of the Indian banks and markets. It is a settled position of law that contracts in respect of Bank Guarantees and LCs are independent of the main contract between the parties. Therefore even if there is a breach of the main contract between the parties that cannot be a ground for injuncting payments under the Bank Guarantees LCs. Letter of Credit is an irrevocable obligation undertaken by the issuing bank to honour the same if the documents in terms of the said LC are submitted by the beneficiary. It is normal practice in international trade that LCs are issued by the buyers through their banks in favour of the seller through the seller’s banks more particularly when buyer and seller are in different jurisdictions countries. LCs are the bedrock on which international trade and commerce is based. The goods are supplied by the seller to the buyer on the strength of the LCs provided by the buyer in favour of the seller which functions as an assurance that once the goods are shipped and the documents in respect thereof are presented by the seller the payment would be assured. The courts should be loathe to interfere with the mechanism of LCs as it would have an impact on the efficacy and functioning of international trade. 17. Merely because there is a dispute between the buyer and the seller with regard to the contract of supply of goods that cannot be ground for interfering with the LC. Therefore the courts have recognized only two exceptions to the aforesaid principle where courts would pass an injunction CS(COMM) 29 2022 in respect of payments under an LC in cases of ‘egregious fraud and irretrievable injustice’. It has repeatedly been held by the courts that ‘egregious fraud’ has to be a fraud of the kind which goes to the very root of the matter. 18. Applying the aforesaid principles in my opinion no case for interference with the LCs has been made out by the plaintiff. Admittedly in the present case the documents have been duly presented by the defendant no.1 to its bankers who in turn have sought acceptance from the defendant no.2 HDFC bank and such acceptance has been conveyed to the bankers of the defendant no.1 by the defendant no.2 HDFC bank. 19. E mails relied upon by the plaintiff refer to the fact that the defendant no.1 is looking into the issues raised by the plaintiff with regard to the goods materials and have assured the plaintiff that they will get back on the said issue. There is no admission on part of the defendant no.1 that the goods materials supplied were defective. Even as per the plaintiff the goods were in conformity in two out of the four containers. It may be relevant to note that in Millenium Wires the Supreme Court was seized of a case where the goods were not even shipped by the supplier to the buyer. Therefore injunction cannot be granted in respect of payments under the LCs based on the said e mails. 20. This Court is in agreement with the submission of the counsel for the defendant no.2 HDFC bank that at best the plaintiff has made out a case for breach of contract and in the event the grievance of the plaintiff is not remedied by the defendant no.1 the plaintiff would have recourse of filing appropriate legal proceedings against the defendant no.1. CS(COMM) 29 2022 I am of the view that grave prejudice shall be caused to the reputation of the defendant no.2 HDFC bank if it is prevented from honouring its obligations as per the norms of the international banking system. Reference may also be made to Articles 5 and 34 of the UCP 600 which is set out “UCP 600 Article 5 Documents v. Goods Services or Performance Banks deal with documents and not with goods services or performance to which the documents may relate. UCP 600 Article 34 Disclaimer on Effectiveness of Documents A bank assumes no liability or responsibility for the form sufficiency accuracy genuineness falsification or legal effect of any document or for the general or particular conditions stipulated in a document or superimposed thereon nor does it assume any liability or responsibility for the description quantity weight quality condition packing delivery value or existence of the goods services or other performance represented by any document or for the good faith or acts or omissions solvency performance or standing of the consignor the carrier the forwarder the consignee or the insurer of the goods or any other A perusal of Articles 5 and 34 of the UCP 600 clearly provides that banks assume no accountability and responsibility for the defectiveness or falsification of the goods or documents. CS(COMM) 29 2022 the LCs. In view of the above I am of the considered view that no case is made out by the plaintiff for grant of interim injunction to restrain payment under 23. Accordingly the present application is dismissed. CS(COMM) 29 2022 24. Let the plaint be registered as a suit. Issue summons in the plaint. Counsel appears for the defendant no.2 and accepts summons. 26. Summons be issued to the defendant no.1 through all permissible modes. Summons shall indicate that the written statement be filed by the said defendant within thirty days of the receipt of the summons. Defendant no.2 shall also file written statement within thirty days from today. Along with the written statements the defendants shall also file an affidavit of admission denial of the documents of the plaintiff without which the written statements shall not be taken on record. 27. Liberty is given to the plaintiff to file replication if any within fifteen days from the receipt of the written statements. Along with the replication filed by the plaintiff an affidavit of admission denial of the documents of the defendants be filed by the plaintiff. 28. The parties shall file all original documents in support of their respective claims along with their respective pleadings. In case parties are placing reliance on a document which is not in their power and possession its detail and source shall be mentioned in the list of reliance which shall be also filed with the pleadings. If any of the parties wish to seek inspection of any documents the same shall be sought and given within the timelines. CS(COMM) 29 2022 JANUARY 17 2022 30. List before the Joint Registrar on 16th March 2022 for completion of service and pleadings. Thereafter the matter may be listed before the Court. AMIT BANSAL J CS(COMM) 29 2022 