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2015 Supreme(Kar) 277
HIGH COURT OF KARNATAKA
A.V. CHANDRASHEKARA, J.
Rawther Spices Private Limited – Appellant
Versus
The Jammu & Kashmir Bank Ltd. & Another Respondent
M.F.A. No. 8489 of 2014 (CPC)
Decided On : 07-01-2015
For the Appellant:K. Diwakara, Advocate.
For the Respondents:R2, K.G. Raghavan, Sr. Adv for G.S. Srinivas, Advocate.
The independence of the formation of the letter of credit from the underlying contract and the obligation of the bank to honor the letter of credit irrespective of the performance of the contract.
Headnote:
Fraud - Injunction - Order 39 Rule 1 and 2 of CPC - UCP latest version
Fact of the Case:
The plaintiff filed a suit seeking declaration that the Letters of Credit issued in favor of the defendant are vitiated by fraud and for permanent injunction to restrain the defendant from encashing the letters of credit. The application under Order 39 Rule 1 and 2 of CPC was filed during the pendency of the suit and contested by the defendant.
Finding of the Court:
The court found that the plaintiff failed to demonstrate the existence of a prima facie case and balance of convenience in their favor. The court also noted that the formation of the letter of credit is independent of the agreement between the parties, and the bank is obliged to honor the letter of credit irrespective of the performance of the contract.
Issues: The main issue was whether the court was justified in dismissing the application filed under Order 39 Rule 1 and 2 of CPC.
Ratio Decidendi: The court emphasized that the party seeking equitable relief of injunction must make out the existence of a prima facie case, demonstrate balance of convenience, and show irreparable hardship. It also highlighted the independence of the letter of credit formation from the contract between the parties.
Final Decision: The appeal was dismissed, and the order passed by the lower court was confirmed. Each party was ordered to bear their own costs.
1. The matter is taken up for final disposal with the consent of both the learned counsel, after admitting the appeal.
2. The order dated 17.12.2014 passed by the Court of I Addl. City Civil & Sessions Judge, Bangalore on I.A.1 filed under Order 39 Rule 1 and 2 of CPC in O.S.8247/2014 is called in question in this appeal.
3. The appellant herein is the plaintiff in an original suit bearing O.S.8247/2014. Respondent No.2 is the contesting defendant in the suit. Respondent No.1 is the Jammu & Kashmir Bank which has issued as many as 21 Letters of Credit in favour of respondent No.2, supplier of pepper to the plaintiff. According to the plaintiff, the defendant No.2 has supplied about 700 MT of pepper to the plaintiff and in this regard as many as 21 Letter of Credit has been executed by respondent No.1 in favour of respondent No.2. According to the plaintiff, about 30% of the supply so made by the respondent No.2 is substandard and as a result of the same fraud has been played upon by the defendant No.2 on the plaintiff and in this regard suit has been filed seeking declaration to the effect that the Letters of Credit so executed in favour of respondent No.2 by the defendant No.1 are vitiated by fraud and for permanent injunction to restrain defendant No.2 from encashing the letter of credit from defendant No.1.
4. During the pendency of the suit, application came to be filed under Order 39 Rule 1 and 2 of CPC supported by an affidavit sworn to by the plaintiff. The said application came to be contested by filing detailed objection. The learned Judge has chosen to dismiss the application on the ground that balance of convenience does not lie in favour of the plaintiff. It is this order which is called in question on various grounds as set out in the appeal memo.
5. Heard the learned counsel for the parties at length. Copies of all the documents produced by the parties in the trial court, have been produced before this Court. Perused the same.
6. After hearing the learned counsel for the parties, the point that arises for consideration before this Court is :
"Whether the learned Judge is justified in dismissing the application filed under Order 39 Rule 1 and 2 of CPC ?"
7. A party seeking equitable relief of injunction must first make out the existence of prima facie case as reiterated by this Court in the case of Gowrishankara Swamigalu v/s. Shri Siddaganga Mutt reported in ILR 1989 KAR 1701. Mere existence of prima facie case is not sufficient to grant the equitable relief of injunction. The party seeking equitable relief of injunction must also demonstrate that balance of convenience lies in his/her favour and irreparable hardship would be caused in the event of non granting of injunction.
8. 'Prima facie' means party seeking equitable relief of injunction must have an arguable case both on facts and law. The letter of credit and bank guarantee stands on the same footing. Injuncting either letter of credit or bank guarantee is an exceptional to the general law.
9. In the case of U.P Co-Operative Federation Ltd vs. Singh Consultants & Engineers (P) reported in 1988 (1) SCC 174 Hon'ble Apex Court has dealt with the aspect of invoking bank guarantee. It is made clear that bank guarantee can be invoked only when clear case of fraud is made out in formation of bank guarantee or letter of credit or irretrievable injustice is caused to the party. This decision has been followed in various decision of the Apex Court. It is further held in the said decision that bank guarantee is independent of the contract that has been entered into between the parties. This aspect has been reiterated in greater force in the subsequent decision rendered in the case of Himadri Chemicals Industries Ltd. v. Coal Tar Refining Company Reported in 2007 (8) SCC 110.
10. What is reiterated in the said decision is that While dealing with an application for injunction in the course of commercial dealings, and when an unconditional Bank Guarantee or Letter of C
