TMI Blog1968 (11) TMI 97X X X X Extracts X X X X X X X X Extracts X X X X ..... rsuance of that contract, the Indian Firm opened a confirmed, irrevocable and divisible letter of credit with the Bank of India, Limited for the entire value of the equipment i.e., ₹ 66,09,372 in favour of the Russian Firm negotiable through the Bank for Foreign Trade of the U.S.S.R., Moscow. Under the said letter of credit the Bank of India was required to pay to the Russian Firm on production of the documents particularised in the letter of credit alongwith the drafts. One of the conditions of the letter of credit was that 25 per cent of the amount should be paid on the presentation of the specified documents and the balance of 75 per cent to be paid one year from the date of the first payment. The agreement entered into between the Bank of India and the Russian Firm under the letter of credit was subject to the Uniform Customs and Practice for Documentary Credits (1962 Revision), International Chamber of Commerce Brochure No. 222 . Article 3 of the brochure says that: An irrevocable credit is a definite undertaking on the part of an issuing bank and constitutes the engagement of that bank to the beneficiary or, as the case may be, to the beneficiary and bona fide hol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s used for sometime, the Indian Firm complained to the Russian Firm that the performance of the machinery supplied by it was not as efficient as represented at the time of entering into the contract and consequently it had incurred and continues to incur considerable loss. In that connection there was some correspondence between the Indian Firm and the Russian Firm. Thereafter the Indian Firm instituted a suit on the original side of the High Court of Madras seeking an injunction restraining the Russian Firm from realizing the amount payable under the letter of credit. During the pendency of that suit the parties arrived at an agreement on August 14, 1966 at Delhi (which shah be hereinafter referred to as the Delhi agreement). The portion of that agreement which is relevant for our present purpose reads as follows: Tarapore Co., Madras, agree to withdraw immediately the court case filed by them against Tractoro export Moscow, in the Madras High Court. 2. Immediately on Tarapore withdrawing the case, V/O Tractoro export agree to instruct the Bank for Foreign Trade of the USSR in Moscow, not to demand any further payment against L.C. established by Tarapore Co., Madras ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the 14th Aug., 1966, at New Delhi you had agreed to give further time for the payments on the withdrawal of the Madras High Court case. That was the only condition that was talked about and incorporated in our written agreement. If you will be good enough to refer to the agreement dated the 14th Aug., 196 6, you will find that we were obliged to withdraw the Madras suit pending talks of settlement and immediately on our withdrawing this suit, you agreed to instruct your Bankers not to demand any further payment under the letter of credit. There is absolutely no reference in that agreement to our having to open any additional letter of credit in view of the devaluation of the Indian rupee ........ We would therefore request you to immediately instruct your Bankers in Moscow. to advise our Bankers regarding the extension of time for payment under the letter of credit without any reference to any additional letters of credit in view of devaluation .......... Moreover, when the entire question is open for amicable settlement between us, it is not possible to determine what exactly will be the amount payable and unless that amount is known, it is not possible to open additional letters ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ursuance of the letter of credit opened by the Indian Firm in favour of the Russian Firm. Therein temporary injunctions were asked for in the very terms in which the permanent injunctions were prayed for. At a subsequent stage a further injunction restraining the Russian Firm from enforcing its right under the gold clause was also prayed for. The Russian Firm opposed those applications but the trial judge granted the temporary injunctions asked for. The Russian Firm took up the matter in appeal to the Appellate Bench of that High Court which reversed the order of the trial judge by its Order dated October 9, 1968 but it certified that they are fit cases for appeal to this Court. When the applications in the appeals seeking interim orders came up for consideration by this Court the Russian Firm entered its caveat. It not only opposed the interim reliefs prayed for, it further challenged the validity of the certificates granted by the High Court on the ground that the orders appealed against are not final orders within the meaning of Art. 133 of the Constitution. Evidently as a matter of abundant caution, the Indian Firm had filed two separate applications seeking special leave to ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the shipping documents. The contractual relationship between the issuing bank and the buyer is defined by the terms of the agreement between them under which the letter opening the credit is issued; and as between the seller and the bank, the issue of the credit duly notified to the seller creates a new contractual nexus and renders the bank directly liable to the seller to pay the purchase price or to accept the bill of exchange upon tender of the documents. The contract thus created between the seller and the bank is separate from, although ancillary to, the original contract between the buyer and. the seller, by reason of the bank s undertaking to the seller, which is absolute. Thus the bank is not entitled to, rely upon terms of the contract between the buyer and the seller which might permit the buyer to reject the :goods and to refuse payment therefore; and, conversely, the buyer is not entitled to an injunction restraining the seller from dealing with the letter of credit if the goods are defective. Chalmers on Bills of Exchange explains the legal position in these words: The modern commercial credit serves to interpose between a buyer and seller a third person ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evance. An irrevocable letter of credit has a definite implication. It is a mechanism of great importance in international trade. Any interference with that mechanism is bound to have serious repercussions on the international trade of this country. Except under very exceptional circumstances, the Courts should not interfere with that mechanism. For our present purpose we shall assume, without deciding, that the allegations made by the Indian Firm are true. We shall further assume that the suit as brought is maintainable though Mr. Kumaramangalam seriously challenged its maintainability. But yet, in our judgment, the learned trial judge was not justified in law in granting the temporary injunctions appealed against. Ordinarily this Court does not interfere with interim orders. But herein legal principles of great importance affecting international trade are involved. If the orders impugned are allowed to stand they are bound to have their repercussion on our international trade. We have earlier referred to several well known treatises on the subject. Now we shall proceed to consider the decided eases bearing on the question under consideration. A case somewhat similiar to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een the vendor and the purchaser was to have effect of freezing, if I may use that expression, the sum in respect of which the letter of credit was opened. In Urquhart Lindsay and Co. Ltd. v. Eastern Bank Ltd.( [1922] 1 K.B. 318.) the King s Bench held that the refusal of the defendants bank to take and_pay for the particular bills on presentation of the proper documents constituted a repudiation of the contract as a whole and that the plaintiffs were entitled to damages arising from such a breach. It may be noted that in that case the price quoted in the invoices was objected to by the buyer and he had notified his objection to the bank. But under the terms of the letter of credit the bank was required to make payments. on the basis of the invoices tendered by the seller. The Court held that if the buyers had an enforceable claim that adjustment must be made by way of refund by the seller and not by way of retention by the buyer. Similar opinions have been expressed by the American Courts, The leading American case on the subject is Dulien Steel Products Inc., of Washington v. Bankers Trust Co.( Federal Reporter 2nd Series 298, p. 836.). The facts of that case are as foll ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Indian Firm to persuade us not to apply the principles noticed above as in these appeals we are dealing with a complaint of fraud. The facts pleaded in the plaint do not amount to a plea of fraud despite the assertions of the Indian Firm that the Russian Firm was guilty of fraud. Evidently with a view to steer clear of the well established legal position Mr. Setalvad, learned Counsel for the Indian Finn urged that the letter of credit was no more enforceable as the original contract stood modified as a result of the Delhi agreement and the Subsequent correspondence between the parties., It was urged that according to the modified contract the Indian Firm is only liable to pay the price that may be settled between the buyer and the seller. This contention has not been taken either in the plaint or in the arguments before the trial judge or before the Appellate Bench. It is taken for the first time in this Court. This is not purely a legal contention. The contention in question bears on the intention of the parties who entered into the agreement. NO one could have known the intention better than the plaintiff who was a party to the contract. If there was such an intention, the pla ..... X X X X Extracts X X X X X X X X Extracts X X X X
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