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2002 Supreme(All) 435
IN THE HIGH COURT OF ALLAHABAD
G. P. Mathur and Vineet Saran, JJ.
SUPER HOUSE LEATHER LTD. - Appellant
Versus
SAGGITTARIANS INTERNATIONAL LTD. - Respondents
F. A. F. O. 155 Of 2002
Decided On : 03/21/2002
Pankaj Bhatiya, S.K.GUPTA
Banks must honor irrevocable commitments, such as letters of credit, free from interference by the courts, except in cases of fraud or irretrievable injustice.
Headnote:
Injunction - Letter of Credit - Order XLIII, Rule 1 (r) C. P. C. - O. S. No. 423 of 2001 - Order XXXIX, Rules 1 and 2, read with Section 151, C. P. C. - Inland Irrevocable Documentary Credit - I. L. C. No. 35 of 2000 - United Commercial Bank v. Bank of India and others, AIR 1981 SC 1426 - U. P. Cooperative Federation Ltd. v. Singh Consultants and Engineers (P.) Ltd., (1988) 1 SCC 174 - General Electric Technical Services Company Inc. v. Punj Sons (P.) Ltd. and another, AIR 1991 SC 1994 - Suenska Handelshanken v. Indian Charge Chrome and others, (1994) 1 SCC 502 - Itek Corporation v. The First National Bank of Boston etc. 566 Fed. Supp. 1210 - State of Maharashtra and another v. National Construction Company, Bombay and another. 1996 (1) AWC 529 (SC) : JT 1996 (1) SC 156 - Hindustan Steelworks Construction Ltd. v. Tarapore and co. and another. JT 1996 (6) SC 295 ; Larsen and Toubro Limited v. Maharashtra State electricity Board and others. JT 1995 (7) SC 18 - Oil and Natural Gas Corporation Ltd. v. S. B. I., Overseas Branch, Bombay, (2000) 6 SCC 385
Fact of the Case:
The plaintiff filed a suit seeking a permanent injunction to restrain the defendant from encashing a letter of credit. The plaintiff also moved an application for an interim injunction, which was rejected by the court. The plaintiff alleged that the defendant committed fraud and did not supply the machine as per the contract.
Finding of the Court:
The court found that the plaintiff failed to make out a case for an interim injunction as there was no irreparable injury, and the balance of convenience did not lie in favor of the plaintiff. The court held that the bank could not be restrained from making payment to the defendant under the letter of credit.
Issues: The main issue was whether the bank could be restrained from honoring the letter of credit and making payment to the defendant.
Ratio Decidendi: The court relied on various precedents to establish that banks must honor irrevocable commitments, such as letters of credit, free from interference by the courts, except in cases of fraud or irretrievable injustice. The court emphasized that the duty of a bank under a performance guarantee is created by the document itself, and once the documents are in order, the bank must honor the same and make payment.
Final Decision: The appeal was dismissed under Order XLI, Rule 11, C. P. C. as the court found no merit in the plaintiff's case.
( 1 ) THIS appeal has been preferred by the plaintiff under Order XLIII. Rule 1 (r ). C. P. C. against the order dated 29. 1. 2002 of Civil Judge (Sr. Division) by which the application No. 5c moved by the plaintiff for grant of interim Injunction was rejected.
( 2 ) THE plaintiff M/s. Super House Leather Ltd. filed O. S. No. 423 of 2001, impleading saggittarlans International Ltd. , Calcutta and Punjab National Bank as defendant Nos. 1 and 2. The only relief claimed in the suit is that a decree for permanent injunction be passed in favour of the plaintiff and against the defendants whereby defendant No. 1 be restrained to encash the letter of Credit from defendant No. 2 (bank) and the defendant No. 2 be restrained from making payment of Letter of Credit No. 35 of 2000, dated 12. 10. 2000 to defendant No. 1.
( 3 ) THE case of the plaintiff, in brief, is that in pursuance to a concluded contract between the parties, the defendant No. 1 had supplied one TOE LASTING MACHINE on 27. 10. 2000 and as per the terms of the contract, the plaintiff had opened a Letter of Credit bearing No. 35 of 2000 dated 12. 10. 2000, with the Punjab National Bank (defendant No. 2 ). The machine was installed in the premises of the plaintiff on 27. 11. 2000 but It did not function and the engineers of defendant No. 1 could not succeed in repairing the same and it was making no production. The case of the plaintiff further was that the defendant No. 1 played fraud and, consequently, it had instructed defendant No. 2 not to make any payment to defendant No. 1.
( 4 ) ALONG with the suit, the plaintiff also moved an application under Order XXXIX, Rules 1 and 2, read with Section 151, C. P. C. , praying that an ad interim injunction be granted in favour of the plaintiff and against the defendants and thereby the defendant No. 1 be restrained to encash the letter of Credit from defendant No. 2 (bank) and also the defendant No. 2 (bank) be restrained not to make payment of Letter Credit No. 35 of 2000, dated 12. 10. 2000 to defendant No. 1 till the final disposal of the suit. The injunction application was opposed by both the defendants. The defendant No. 1 filed a counter-affidavit wherein, it was pleaded that the case of the plaintiff that the machine did not work was false and in fact, the plaintiff used the machine for a different kind of work and the damage caused to the same had been repaired by its engineers. The plea of fraud raised by the plaintiff was specifically denied and a further plea was raised that the contract had been settled outside Kanpur and, therefore, the Court at Kanpur had no territorial Jurisdiction to entertain the suit. The defendant No. 2 also filed counter-affidavit opposing the Injunction application. A specific plea was raised that the bank is under a legal obligation to make payment to defendant No. 1. The learned Civil Judge (Sr. Division) held that the plaintiffs had not made out any case for grant of an Interim injunction in its favour as refusal of the Injunction order would not cause any Irreparable Injury and it could always claim damages from defendant No. 1. It was further held that under law, the defendant No. 2 cannot be restrained from making payment to defendant No. 1 in view of the Letter of Credit having been opened in its favour. It was also held that balance of convenience did not lie in favour of the plaintiff. In view of these findings, the injunction application was rejected.
( 5 ) SRI S. K. Gupta, learned counsel for appellant has submitted that the defendant No. 1 committed fraud upon the plaintiffs and did not supply the machine for which the parties had entered into a contract. The machine was not a heavy duty machine as had been contracted by the plaintiff and it broke down immediately after Installation which could not be successfully repaired by the engineers of defendant No. 1. He has further submitted that it was for this reason that the period of encashment of Letter of Credit was
