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Supreme Court Of India
Himadri Chemicals Industries Ltd - Appellant
Versus
Coal Tar Refining Company - Respondent
Decided On : 08/07/2007
Arbitration and Conciliation Act - Grant of Injunction - Section 9 - 1996 Act
Fact of the Case:
The appellant entered into a contract with the respondent for the supply of goods. Disputes arose regarding the quality of the goods, and the appellant filed an application under Section 9 of the Arbitration and Conciliation Act, 1996 to stop the release of payment under a Letter of Credit.
Finding of the Court:
The court found that the appellant failed to establish fraud or irretrievable harm justifying the grant of injunction to restrain the encashment of the Letter of Credit. The court also noted that the appellant had already filed an Admiralty Suit claiming damages for the same set of goods and the respondent had furnished a Bank Guarantee to protect the appellant's interest.
Issues: The main issue was whether the court should grant an injunction to restrain the release of payment under the Letter of Credit based on the disputes regarding the quality of the goods supplied by the respondent.
Ratio Decidendi: The court held that the principles for granting or refusing injunctions in the matter of encashment of a Bank Guarantee or a Letter of Credit are well-settled. The court emphasized that the existence of a dispute between the parties to the contract is not a ground for issuing an injunction to restrain enforcement of Bank Guarantees or Letters of Credit, except in cases of fraud or irretrievable harm.
Final Decision: The appeal was dismissed, and the court held that the findings in the appeal shall not be taken as final with respect to the disposal of the application for injunction by the High Court.
Based on the legal principles established in the provided document, the court's stance is that the bank is obligated to honor and pay the amount under the Letter of Credit or Bank Guarantee without protest once the demand is made, provided that the terms of the guarantee or letter are met. The court emphasizes that the bank must act in accordance with the unconditional and independent nature of such guarantees or letters, and it is not permissible for the court to scrutinize or examine the "merits" of the underlying dispute between the beneficiary and the contractor or applicant.
The court clearly states that the existence of a dispute or disagreements regarding the underlying contract or the quality of goods does not provide sufficient grounds to restrain the bank from paying under an unconditional guarantee or letter of credit. The bank's obligation is to honor the demand as per the terms of the guarantee, regardless of any pending dispute, unless there is clear and egregious fraud or irretrievable harm that would justify an exception.
Therefore, once a proper demand is made in accordance with the terms, the bank must process the payment without raising objections or examining the dispute's merits, maintaining the principle that the guarantee or letter of credit is an independent and autonomous contract.
JUDGMENT
TARUN CHATTERJEE, J.
1.Application for permission to file special leave petition is allowed. Leave granted.
2. This appeal is directed against the judgment and order dated 21st June, 2007 passed by a Division Bench of the Calcutta High Court whereby an appeal preferred against an order dated 5th June, 2007 of a learned Single Judge of the same High Court was dismissed and the order of the learned Single Judge was affirmed. The learned Single Judge by his order dated 5th June, 2007 had vacated an interim order of status quo granted earlier on an application filed under Section 9 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as the Act ) for an order of injunction restraining the respondent from receiving any payment under a Letter of Credit.
3.At this stage, we feel it proper to narrate the facts which have given rise to the filing of this appeal in this Court.
4.The appellant entered into a contract on 29th May, 2006 with the respondent by which the respondent had agreed to supply 26,000 metric tones of Extra Hard Pitch (Reprocessing Grade) (in short goods ) to the appellant as per schedule set out in the contract. In the said contract, one of the terms of payment was that a Letter of Credit will be opened and accordingly an irrevocable Letter of Credit was opened by the appellant in favour of the respondent. Initially, under the said Letter of Credit, payment was to be made at sight . The document against which payment was to be made, was received directly by the banker of the appellant and on presentation of the document it was found by the banker of the appellant that the description of the goods was not as per the terms of the Letter of Credit. Accordingly, the banker of the appellant by a Letter dated 11th September, 2006, intimated the aforesaid fact to the appellant and sought advice whether the appellant was willing to waive the discrepancies indicated in the Letter dated 11th September, 2006. In response to this query of the banker, the appellant waived the discrepancies and accepted the documents by a letter dated 3rd October, 2006 and also agreed to make the payments in the following manner:
With reference to the above and further to your swift message dated 3/10/2006, We are accepting the documents with discrepancy and the payment will be made after 180 days from today. We accept to make the following payments. (Emphasis supplied)
Total amount against above mentioned three (3) Bills Euro 2348915.00
Less: Advance payment already Made through Central Bank of India Kol. Main OfficeEuro 387788.82
Amount to be paid against the above three BillsEuro 1961126.18
5.Before accepting the documents and agreeing to make payments, by a communication dated 28th September, 2006, the respondent had given the appellant two options:- (i) either to negotiate the document and resolve the quality issue; or (ii) reject the shipment document.
6.Thereafter, correspondence was exchanged between the appellant and the respondent and the Letter of Credit was amended and payment at sight was substituted by the words 230 days from the shipment date . On the basis of the amended Letter of Credit, the payment was, thereafter, payable on or before 10th April, 2007. The amendment of the terms of Letter of Credit was informed to the bankers of the respondent which was accepted by the respondent as well. The issue regarding the quality of goods remained undecided although an inspection report was submitted by SGS India Pvt. Ltd. with the concurrence of the respondent. Inspite of various steps taken by the appellant and promises made by the respondent, no effective step was taken to resolve the dispute regarding quality of the goods and hence the application under Section 9 of the Act was filed by the appellant to stop release of payment under the Letter of Credit without first resolving the issue regarding the quality of goods of the
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