We would uphold and restate the law on injunction against
honouring Letter of Credit by a Bank as summed up by the learned
Single Judge as follows:
(1) The Court must be slow in granting an order of injunction
restraining the realisation of a bank guarantee or Letter of Credit.
(2) There are two exceptions to the above rule. The first is that it
must be clearly shown that a fraud of a grievous nature has been
committed and to the notice of the Bank. The second is that
injustice of the kind which would make it impossible for the
guarantor to reimburse himself, or would result in irretrievable harm
or injustice to one of the parties concerned, should have resulted.
(3) It is not enough to allege fraud but there must be clear evidence
both as to the fact of fraud as well as to the bank's knowledge of
such fraud.
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.
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 3103 OF 2015
(Arising out of SLP (C) No.9689 of 2014)
M/S. MILLENIUM WIRES (P) LTD.
...APPELLANT
:versus:
THE STATE TRADING CORPORATION
OF INDIA LTD. AND ORS.
...RESPONDENTS
AND
CIVIL APPEAL NO. 3104 OF 2015
(Arising out of SLP (C) No.11848 of 2014)
Dated;March 23, 2015.
2. These appeals, by special leave, have been preferred against
the judgment and order dated 17.12.2013 in RFA (OS) No.142/2013
and
judgment
and
order
dated
10.12.2013
in
RFA
(OS)
No.139/2013, passed by the Division Bench of the Delhi High Court
by which the High Court dismissed the appeals filed by the
appellants. RFA (OS) Nos.142/2013 and 139/2013 were filed by M/s.
Millenium Wires (P) Ltd. and the State Trading Corporation of India
Ltd., respectively, against the judgment and order of the learned
Single Judge of the Delhi High Court in Original Suit, being CS (OS)
No.545/2012. The learned Single Judge rejected the plaint of the
appellants herein under Order VII Rule 11 of the Code of Civil
Procedure, 1908. Since these appeals are arising from same factual
matrix and involve same questions of law and fact, they are being
disposed of by this common judgment.
3.
Briefly stated, the facts of the case are that M/s. Millenium
Wires (P) Ltd. (hereinafter referred to as “Millenium Wires”) and
State Trading Corporation of India Limited (hereinafter referred to as
“STC”) entered into an Associateship Agreement (hereafter referred
to as “the Agreement”), for importing continuous cast copper wire
rods from Synergic Material Services PTE Limited, Singapore and
Synergic Industrial Material Services, Malaysia (hereinafter referred
to as “Synergic, Singapore” and “Synergic, Malaysia” severally and
collectively as the “Synergic Companies”).
The STC opened 4
Letters of Credit with the Allahabad Bank being Issuing Bank and
the Malayn Banking BHD, Malaysia being the Confirming Bank.
4.
Under the said Agreement, STC was to import the said copper
wire rods for Millenium Wires from the Synergic Companies. The
Page 2
3
agreement stipulated that Millenium Wires shall provide STC with
margin money as advance of 25% of the value of Letter of Credit to
be opened by STC (clause 4 of the Agreement)
along with 25%
cash advance and a post dated cheque 102.5% of the value of
consignment in favour of STC along with an undertaking. The mode
of effecting the transaction between the Millenium Wires and STC
on one hand and the Synergic Companies on other hand, was this:
Oral orders were placed by the Millenium Wires on the two Synergic
Companies and the latter sent sales contract/proforma invoices to
STC. The proforma invoices were to be issued by Synergic,
Singapore in favour of STC, specifically mentioning Millenium Wire's
name as “A/c- Millenium Wires Pvt. Ltd.”. On acceptance of the said
proforma invoice, final invoice was to be issued by the two Synergic
Companies, which on acceptance by Millenium Wires was to be sent
back to the Synergic Companies. This would constitute the contract
between STC/Millenium Wires on one side and the Synergic
Companies on the other. At this stage Letters of Credit were to be
opened by STC through Allahabad Bank payable to the Synergic
Companies through the Malayn Bank.
5.
In pursuance to the Agreement, STC opened four Letters of
Page 3
4
Credit with the Allahabad Bank being:
L.C. No.
Opened On
Bill of Lading
Documents
forwarded by
Malayn Bank to
Allahabad Bank
Response of the
Allahabad Bank
0189111FLU000150 07/12/11 08/12/11 14/12/11 Accepted on
23/12/11
0189111FLU000151 07/12/11 09/12/11 12/12/11 Rejected on
31/12/11
0189111FLU000154 17/12/11 31/12/11 22/12/11 No information 0189111FLU000159 02/01/12 07/01/12 06/01/12 Accepted
16/01/12
on
With respect to all these Letters of Credit the Malayn Bank had
released the payment to the Synergic Companies after the
documents were presented by them. It was at this stage that the
Millenium Wires and STC approached the Delhi High Court by filing a
suit seeking permanent, mandatory and perpetual injunction
against the Synergic Companies from claiming any benefit under
the Letters of Credit in question and against the Confirming Foreign
Bank being Malayn Bank to prevent any action or release of funds
under the Letters of Credit.
6.
The Malayn Bank filed an application under Order VII Rule 11 of
the Code of Civil Procedure, 1908. The learned Single Judge of the
Delhi High Court allowed the application thereby dismissing the
plaint giving following reasons:
(i)
There were no specific allegation against the Malayn Bank
Page 4
5
except a statement that the Bank seems to be hand in glove with
the Synergic Companies.
(ii)
As
per
UPC-600
(Uniform
Customs
and
Practice
for
Documentary Credits, Sixth Edition) published by International
Chambers of Commerce, the Banks are bound to release the
payment in terms of the Letter of Credit if the complying
presentation is made by the Beneficiary (in this case Synergic
Companies). Further the learned Single Judge relied on established
principle that the Court shall not grant injunction against the issuing
bank or the confirming bank except in two circumstances:
a) There is fraud and the bank has knowledge of the fraud; or
b) There would be irreparable injury caused to one of the
parties if the injunction is not granted.
The plaintiffs made specific allegations only against the
Synergic Companies and no averment with respect to the
knowledge of such fraud to the confirming bank was made.
Rather, it has been shown that there was no knowledge of
fraud on the part of the Confirming Bank and it cleared the
payments to the Synergic Companies as per the provisions of
UPC-600.
(iii) The learned Single Judge further pointed out that as per UPC-
600 Clause 16, in case the issuing bank refuses to honour the
presentation of documents, it has to give a notice of such refusal to
the confirming bank within 5 days of the presentation of the
documents. Here, the Allahabad Bank approved the presentation of
documents made by the Malayn Bank, Confirming Bank, for 2 of the
four Letters of Credit and refused only one and even this refusal was
communicated after 19 days, way beyond the time period
prescribed by Clause 16. Thus, the Malayn Bank was in its right as
well as duty to have made the payment to the Synergic Companies
as per the Letter of Credit and the UPC-600.
(iv) The learned Single Judge also pointed out that the remedies
sought in the plaint i.e. injunction against the Synergic Companies
to claim any benefit under the Letters of Credit and against the
Malayn Bank to advance any payment under Letters of Credit had
already become infructuous as the Malayn Bank had made the
payments to the Synergic Companies.
(v) The learned Single Judge discussed the established law relating
to the Letters of Credit in great detail. He stated that the Letter of
Credit is independent of the underlying contract between the
applicant and the beneficiary and Courts of law would not meddle
with the dealings of the banks and grant injunction as a matter of
course as it would affect the trustworthiness of these transactions
and also the position of the banks in the market. Further, the Banks
should not be asked to not comply with the Letter of Credit for some
dispute between the parties.
7.
On these grounds the learned Single Judge allowed the
application under Order VII Rule 11 of the Code of Civil Procedure,
1908 and dismissed the plaint as showing no cause of action
against the Malayn Bank, giving liberty to the Plaintiffs to pursue
other appropriate remedies against the Synergic Companies.
Against the order of the learned Single Judge, both the appellants
filed separate appeals before the Division Bench of the High Court.
The Division Bench also dismissed both the appeals on same
grounds as that of the learned Single Judge.
8.
The major contention of the appellants herein is that the High
Court has committed grave error in dismissing the suit under Order
VII Rule 11 as it acted against the settled principles of procedure
with respect to application under Order VII Rule 11. According to the
appellants, in such an application, the Court ought to have looked
into the averments contained in the plaint only and it cannot look
into the written statement or any other evidence filed by the
Defendant. The Plaintiffs/appellants have, inter alia, relied on
Saleem Bhai v. State of Maharashtra, (2003) 1 SCC 557, Popat
Kotecha Property v. State Bank of India Association, (2005) 7 SCC
510, and Sopan Sukhdeo Sable v. Asst. Charity Commissioner,
(2004) 3 SCC 137.
9.
After having gone through the plaint filed by the Plaintiffs, we
find that it is only twice that the plaintiffs have alleged against the
Malayn Bank in following words:
(At para 17)
“That it is also pertinent to mention herein that the
Plaintiffs apprehend that the Defendant No. 4 Bank
(which is the Negotiating/Beneficiary Bank) is in active
collusion with the Defendant Nos. 3 & 4.”
(At para 47)
“Further, as enumerated hereinabove, it is amply clear
that the Defendant No. 2 has forged the shipping
documents to fraudulently demonstrate export in order to
surreptitiously negotiate with the beneficiary bank for
release of payments without actually ever dispatching the
goods. The Negotiating Bank has also wrongly negotiated
with the Defendant No. 2 without correctly verifying the
documents, giving rise to suspicion, that it is hands in
glove with the Defendant No. 2.”
10. Nothing in the plaint except the above two extracts even come
close to being an allegation against the Negotiating Banks. In the
above two extracts, there is expression of mere apprehension of the
Plaintiffs that Negotiating Banks were in active collusion with the
Synergic Companies. No explanation or justification has been made
in the plaint as to how this active collusion came about or what
makes the plaintiff suspect so. It is true that in the plaint not all the
evidence with respect to allegations is to be adduced however, a
comprehensive narration of facts that constitute cause of action has
to be given in the plaint. It is plain and clear that no cause of action,
whatsoever, may be deduced
against the Negotiating Bank from
the above two extracts which form part of the plaint.
11. Furthermore, both the learned Single judge and the Division
Bench have discussed the law relating to Letter of Credit and UPC-
600 in great detail. In view of that, the following observation of the
Court in R.D. Harbottle (Mercantile) Ltd. v. National Westminster
Bank, (1977) 3 WLR 752, should suffice:
“Banks 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.”
12. We would uphold and restate the law on injunction against
honouring Letter of Credit by a Bank as summed up by the learned
Single Judge as follows:
(1) The Court must be slow in granting an order of injunction
restraining the realisation of a bank guarantee or Letter of Credit.
(2) There are two exceptions to the above rule. The first is that it
must be clearly shown that a fraud of a grievous nature has been
committed and to the notice of the Bank. The second is that
injustice of the kind which would make it impossible for the
guarantor to reimburse himself, or would result in irretrievable harm
or injustice to one of the parties concerned, should have resulted.
(3) It is not enough to allege fraud but there must be clear evidence
both as to the fact of fraud as well as to the bank's knowledge of
such fraud.
13. 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.
14. Furthermore, it appears that the Malayn Bank had forwarded
the documents presented by the Synergic Companies to the
Allahabad Bank. Out of four Letters of Credit, Allahabad Bank had
accepted the presentation of documents in two Letters of Credit
with the consultation of the STC. Only one of the presentation was
rejected while there is no information with respect to the response
of the Allahabad Bank on presentation of documents of the fourth
Letter of Credit. Even on the Letter of Credit for which the
presentation was rejected, the response was made after 19 days
while UPC-600 provides that rejection or any objection against the
presentation must be communicated to the negotiating bank of the
beneficiary within 5 days.
15. In the circumstances as narrated above and in light of the
settled law on the point of injunction against the banks to honour
their guarantees, we are of the view that these appeals are to be
dismissed and accordingly appeals are dismissed.
16. Before we part with, it would be most appropriate for us to
point out that the appellants can pursue their remedies against the
Synergic Companies in appropriate forum by instituting appropriate
proceedings, if so advised. However, we make it clear that the
opinion expressed by us in this judgment shall not stand in the way
of deciding such proceedings on merits.
....................................J.
(M.Y. Eqbal)
....................................J.
(Pinaki Chandra Ghose)
New Delhi;
March 23, 2015.
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