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Judgment
Anantanarayanan, C.J.—Messrs. Tarapore and Co. (here-in-after referred to as the Indian Firm) were entrusted by the Government of
India with the excavation of a canal, as part of the Farakka Barrage Project. In February, 1965. a contract was entered into as between the Indian
Firm and Messrs. V/O Tractor export (here-in-after referred to as the Russian firm), for the supplies of construction machinery, such as scrapers,
both towed and motorised, at well as Crawler Tractors and bull dozers. Arising out of this contract, the Indian firm admittedly opened a confirmed,
irrevocable and divisible letter of Credit with the Bank of India Ltd (second respondent) for the entire value of the equipment, namely Rs.
66,09,372, in favour of the Russian firm, negotiable through the Bank for Foreign trade of the U.S.S.R. Moscow. Since the terms of this
Confirmed Irrevocable letter of credit without recourse, (Ex.P-9) are of significance, we may briefly refer to them at the outset itself. The Letter of
Credit was for the sums specified, which could be payable by the Russian firm on production of the particularised documents of the letter, along
with the drafts. It was another condition of the Letter of Credit that 25 per cent was payable on presentation of the documents, and the balance of
75 percent was payable one year from the date of the first payment. Another term was that the credit was "" subject to the Uniform Customs and
Practice for documentary Credits, 1962 revision) International Chamber of Commerce Brochure No. 222"". Mr. Kumaramangalam for the Russian
firm (appellant) has made available to us the text of Art. 3 of this authority, which states, following both the law and established International
Commercial Practice, 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.........that the provisions for payment acceptance, or negotiation contained in the credit will be duly fulfilled, provided that
all the terms and conditions of the Credit are complied with."" We may also elucidate here, at the outset, that this is a C. I. F. contract, in respect of
which this Confirmed Irrevocable Letter of Credit was opened in favour of the Russian firm. In the present plaint in C. S. No. 118 of 1967 which
has succeeded an earlier abortive suit, which was withdrawn, the Indian firm proceeded to state that the particularised document ware produced
by the Russian firm in accord with the Letter of Credit, a fact which has never been in controversy through-out and that the various items of
machinery arrived at Calcutta between October, 1965 and December, 1965, and were duly taken possession of by the Indian firm. These articles
of machinery were put to work at the Fararkka Barrage projects, and admittedly, are still in the possession of the Indian firm, and are being utilised
by that firm. Sometime thereafter, the Indian firm claimed that two kind of deficiency or defect became evident-(1) while the contract was on the
basis that the Towed Scrappers had a ''struck capacity'' of 8/10 cubic meters, and were so particularised in the documents, the actual ''struck
capacity'' appear to be only six cubic meters; and (2) the performance of the motorised scrappers was far below the expected efficiency.
Admittedly there was considerable correspondence between the two firms, which mirrors this dispute, and indeed, we are not now concerned with
the merits of what was apparently a protracted controversy. But, in consequence of the correspondence, and presumably in harmony with one
term of (he actual contract, which states that any dispute between the sellers and the buyers was first to be resolved, if possible, by amicable
means or conciliation, such attempts followed and the time within which the balance due under the Letter of Credit has to be paid (25 per cent
having already been drawn and paid against the documents), was extended beyond the period of one year, for successive periods upto 31st
January 1968. It is not in dispute that the Letter of Credit was throughout kept alive, and that, when this suit was instituted, the Confirmed
Irrevocable letter of Credit was valid and in force.
In this suit, the Indian firm set forth the facts, and claimed, in paragraph 18 of the plaint, that the contract itself was vitiated by ''fraud and
misrepresentation'' within the meaning of certain provisions of the Indian Contract Act. Finally, the Indian Firm stated that as the Russian Firm had
rot yet received the balance of payments for the goods, and great loss would be otherwise occasioned to them, a permanent injunction should issue
against the the Russian firm (first defendant) from reaving further the proceeds of the Letter of credit, and a similar injunction should issue against
the Bank of India (second defendant) from implementing the Letter of Credit.
In the same action, an interim injunction was sought for at the hands of the learned Judge (Ramamurti, J.) in C. M. P. 1760 of 1967 pendente
lite, and this has been granted by the learned Judge. This order is the substance and crux of the present appeals.
We might immediately proceed, before discussing the citations from standard treatises, and the precedents that have been canvassed before us,
to set forth the propositions, very tersely, upon which Mr. Kumaramangalam for the Russin firm (appellant) seeks to contend that this interim
injunction issued by the learned Judge, (Ramamurti, J.) is quite indefensible in law and equity, and that the appeal from that order should be
allowed by us.
The propositions are as follows:
(i) The buyer is not entitled in law to the issue of an injunction against a Confirmed Irrevocable Letter of credit, save in the most exceptionable
circumstances.
(ii) Apart from this, when the goods have been accepted by the buyers, and are indisputable in their possession and utilisation, the right to reject
them no longer ensures, and the sole remedy of the buyers, in respect of the defective goods, is to sue for damages on the basis of a breach of
warranty. Any such claim for damages cannot form a ground, in law, for stopping the operation of the Letter of Credit-Cl. 3 of the contract Itself
states, in this case, that ""a claim submitted regarding any consignments of goods, cannot in any way serve as grounds for the buyers to refuse
acceptance and payment of the goods"",
(iii) The prayer in the main suit itself is prima facie not liable to be granted, as S. 54 of the Specific Relief Act, is clear, that a perpetual injunction
can be granted to the plaintiff only to prevent the breach of an obligation existing in favour of the plaintiff, whether expressly or by implication. The
Russian firm (first defendant) had delivered the goods, under the contract, and even the perices of the guarantee clauses are claimed to have
expired there can be no conceivable obligation, in law, on the part of the first deferenant, the breach of which can be prevented by the Indian firm,
by means of a perpetual injunction. That which cannot be granted in the suit itself, cannot be granted by way of an interim relief, as pointed out by
the Division Bench in Aboobucker v. Kunhammoo (1958) 1 M.L.J. 303.
Before we scrutinise these propositions and the authorities on which they are sought to be based, certain objections of a preliminary character
urged by the learned Counsel for the Indian firm (Mr, V. P. Raman) may be noticed. Mr. Raman has sought to contend that the judgment of
Ramamurti, J. granting the interim injunction in favour of the Indian firm, is itself not subject to appeal, under Cl. 15 Letters Patent. It appears to us
that this is plainly unsustainable, and we shall first dispose of it briefly, before proceeding to his other points. In a very early decision of this court,
the Full Bench decision in Tuljaram Rao v. Alagappa Chettiar 35 Mad. 1 Sir Arnold While, C. J. pointed out that an order on an independent
proceeding, which was ancillary to the suit, such as an order of on application for an interim injunction or for the appointment of a receiver would
certainly constitute a ''judgment ''within the meaning of Cl. 15. At least as regards appointment of receives, pendente lite, several subsequent
precedents in this court have admittedly confirmed this view of the learned Chief Justice. Recently, in the Full Bench decision of this court in
Palaniappa v. Krishnamurthi (1967) 2 M. L.J. 1 the entire situation has been elaborately reviewed including the trends of the case law in the other
High Courts, and the criteria formulated afresh. So long as there is a judgment in an independent proceeding, though it may be ancillary to the suit,
which determines the rights of parties in that proceeding and hence that lis itself, or a ''conceiveable order'' in which proceeding may so determine
the lis, it is appealable within Cl. 15, beyond doubt or controversy; We have no hesitation whatever in holding that the judgment of Ramamurti, J.
granting the interim injunction is subject to an internal appeal to a Division Bench, under Cl. 15 of the Letters Patent.
The next point of Mr. Raman is that, in disposing of this appeal, we are thereby virtually prejudging the suit itself. The jurisdiction of the learned
Judge by virtue of an inherent power vesting the court, to issue such an interim injunction, cannot be doubted. Vide the observations of their
Lordships of the Supreme Court in-Manohar Lal Chopta v. Hiralal A.I. R. 1962 S.C. 527 resolving the conflict of views in different High Courts,
in favour of the conclusion that Courts have inherent jurisdiction to issue temporary injunctions, in circumstances which are not covered by the
provisions of O. 39, C. P. Code. The learned Judge (Ramamurti, J.) has thought it fit to issue such an interim injunction, pendente lite, in this suit,
which is itself for permanent injunctions, against the Russian firm and the Bank of India (second defendant). He has advanced several grounds for
his decision, including the interests of justice, the balance of convenience and protection of the respective rights of parties. It is thus contended that
we ought not to interfere, both because the jurisdiction of the Court cannot be assailed, and because any interference in appeal would be the
prejudging of the suit.
The argument, in this form, is not truly a preliminary objection for, obviously everything would depend upon the merits of Mr.
Kumaramangalam''s contention that this interim Injunction is legally quite indefensible, and that if such injunction were permitted they would destroy
the foundation of international Commerce itself. Further the converse of this argument is the ground relied on by Mr. Kumaramangalam, namely,
that the relief of a permanent injunction in the form, is prima facie indefensible, and contrary to Jaw, and that what cannot be granted in the suit
cannot be granted in the application. We think that the true solution of this difficulty since both counsel rely on the argument which may amount to a
pre-judgment of the suit, lies in our disposal of the appeal against the order of injunction, with regard to its propriety and sustainability, as a matter
of law. The jurisdiction of the court, which is inherent, has not been questioned, but it is of some importance to stress the observations of their
Lordships of the Supreme Court in Manoharlal Chopra v. Hiralal A. I. R. 1962 S.C. 527 that ""no pnrty has a right to insist on the court''s
exercising that jurisdiction, and the court exercises its inherent jurisdiction only when it considers it absolutely necessary for the ends, of justice to
do so"". We may thus proceed to the main stream of the argument with regard to a ''Confirmed Irrevocable Letter of Credit, which has sprung into
existence in consequence of a C. I. F. contract.
Learned counsel (Mr. Kumaramangalam), has referred us to the following authorities, in the category of Treatises:
Mitra''s book on the Law relating to Banker''s Letters of Credit, 1964 Ed. pages 107 and 109.
Chalmers on Bills of Exchange, 1964 Ed page 180.
Davie''s book on the Law relating to Commercial Letters of Credit 1963 Edn. pages 78, 80 and 85.
Halsbury''s Laws of England, 3rd Ed. Vol. 34, page 185, para 319;
Gutteridge on the Law of Banker''s Commercial Credits, 3rd Edn. pages 33, 34 and 38 to 40.
Schmitthoof on ""Export Trade"" and ""Sale of goods""-two extracts.
As several of these passages reiterate to the same basic principles in almost identical phraseology, we shall here set forth one or two citations
alone, which are comprehensive and authoritative. For instance, the passage in Halsbury runs thus:
It is often made a condition of a mercantile contract that the buyer shall pay for the goods by means of a confirmed credit, and it is then the duty of
the buyer to procure his back, known as the issuing or originating bank to issue on irrevocable credit in favour of the seller by which the Hank
undertakes to the seller, either directly or through another bank in the seller''s country known as the correspondent or negotiating bank, (a) to
accept drafts drawn upon it for the price of the goods against tender by the seller of the shipping documents, (b) the contractual relationship
between the issuing bank and the buyer is defined by the terms of the agreement between them under which the Utter opening the credit is issued;
(c) and as between the seller and the bank, the issue of the credit duly notified to the seller; (d) creates a new contractual nexus and renders the
Bank directly liable te the seller to pay the purchase price or to accept the bill of exchange upon tender of the documents (e) The contract thus
created between the selled and the bank is separate from, although accillary, to the original contract between the buyer and the seller, by reason of
the bank''s undertaking to the seller, which is absolute, (f) 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; (g) 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 (h).
All the learned Authors agree in the basic principles, though the language might slightly differ. Thus, Mitra puts the matter in the following form:
An irrevocable credit is a definite undertaking on the part of an issuing bank and constitutes the engagement of that bank to the beneficiary......that
the provisions for payment, acceptance or negotiation contained in the credit will be duly fulfilled, provided that all the terms and conditions of the
credit are complied with.
He adds: ""Payment acceptance, or negotiation against documents, which appear on their face to be in accordance with the terms and
conditions of a credit by a Bank authorised to do so, binds the party giving the authorisation to take up the documents and reimburse the bank
which has effected the payment...
According to Chalmers: '' ""The modern commercial credit serves to interpose between a buyer and seller a third person of unquestioned
solvency, almost invariably a banker of international repute......'',
When the documents are produced by the seller film the banker is bound to honour the Letter of Credit, so long as they are in exact
compliance with the terms of the credit. But the banker can, and should, scrutinise the documents with meticulous care satisfy himself about this.
The maxim de minimus non curat lex cannot be invoked, where the payment is made by Letter of Credit Again, ""if the seller has complied with the
terms of the Letter of Credit, however, there is an absolute obligation upon the Banker company, inspective of any disputes there may be between
the buyer and the seller as to whether the goods are upto contract or not"". (emphasise added).
Davis States : ""The banker''s promise being absolute, he is not concerned with disputes between the buyer and seller, as the contract between
them does not control the letter of credit......"".
In Kennedy''s C. I. F. Contracts, 3rd Edn., Chapter 1, page 19, it is pointed out that the statement that a C.I.F. sale is a sale of documents
may be a useful phrase to remember, but is not a strict legal interpretation. The contract is more correctly described, or to be described, as ""a
contract for the sale of goods to be performed by the delivery of documents"". In the present dispute, two facts emerge crystal clear. Firstly, this
confirmed irrevocacable Letter of Credit, without recourse, between the parties, diflection no sense or respect from similar instruments of this kind
known to International Commerce; the fact that 25 per cent was payable immediately on production of the documents and 75 per cent at the
expiry of one year from that date, makes no title of difference to its legal character. Actually the precise particularise documents were produced by
the Russian firm, and the Bank of India (second defendant) is undoubtedly bound to honour the obligation. This is made clear beyond doubt by the
affidavit, on behalf of the Bank, now filed before us, in which the following language has been used:
.....the second respondent Bank which has issued a confirmed and irrevocable letter of credit is not concerned with any disputes that might arise
between the buyer......and the seller (the beneficiary under the Letter of Credit), and that it is bound to pay the amount due under the Letter of
Credit, provided the terms and conditions thereof are complled with, particularly that the documents tendered are those exactly as called for under
the Letter of Credit.
It is not attempted to be argued by the party before us that the precise documents were not produced by the Russian firm; actually they were
produced and accepted by the Bank of India after scrutiny. No ''fraud'' as alleged with regard to the Letter of Credit itself, or the documents in
relation to the particulars set forth in the Letter of Credit.
Secondly, the dispute that has arisen between the parties is and we do not see how this can be controverted on the facts, a dispute that has
arisen from the contract. It relates, in one part of it, to the efficient performance of the machines and in another part, to the characteristic or ''struck
capacity''. The Russian firm contends that, on the technical data, the machines supplied precisely correspond to the contract and the description
and that there is no divergence; the Indian firm contends that there is a marked divergence, which has caused considerable loss to the Indian firm.
However that might be, the Indian firm has taken delivery of the machines and the machines are in the possession of the Indian firm., and under its
utilisation. The dispute itself erase after such delivery of possession and subsequent to utilisation; according to Mr. Kumaramangalam, even the
periods of guarantee had expired. Mr. Kumaramangalam (sic) on passages in Schmitthoof''s ''Sale of goods'' and Ss 13 and 42 of the Indian Sale
of Goods Act. for his contention that the Indian firm failed to reject the goods that it cannot reject them after receiving possession and continued
user, and is no longer entitled to stand in the way of the Russian firm receiving the payment or price. The learned Judge (Ramamuiti J.) appears to
think that there are several remedies open to the buyer, in the case of a breach of contract, as against the seller, and that S. 59 of she Indian Sale
of Goods Act is not exhaustive of those remedies; the learned Judge has given the illustration that, sometimes after delivery of possession, the
buyer night find that, instead of the described goods, he has been sent ''drums of dust in which case the buyer may have to take steps to see that
the Bank does not pay the balance of the amount to the seller due under the letters of credit.
On this aspect, we think it is sufficient to point out that what we have here is a dispute between the seller and buyer, arising out of the contract,
in the nature of an averment of breach of warranty, while the goods are in the possession and ulilisation of the buyer Certainly, the buyer may have
remedies at law, including damages for breach, which may exceed the original price itself, and he may be entitled to enforce them, by way of
appropriate reliefs, in a suit framed for such purpose. But it is very difficult to see how this can at all affect the rights between the parties, as relating
to the Irrevocable Letter of Credit, confirmed as such, in regard to which the particularised documents have been produced by the seller (Russian
firm), and accepted by the issuing bank. We must repeat the it is very difficult to see how the word ""fraud"" can be legitimately brought within the
ambit of this suit. Even with regard to the dispute arising out of the contract, we can merely state now that there is a dispute to be tried on merits on
the averment of goods not conforming to description, and performance far less than the efficiency originally assured.
We must now proceed to the case, law and it is sufficient to be brief here, since the cases are few, and the dicta have been laid down in terms
that admit of uncertainty whatsoever. Further, while the jurisdiction it not assailed, in any of these cases, all of them reiterate that it would be
destructive of international commerce itself, if irrevocable letter and confirmed Letters of Credit, against which the necessary documents have teen
produced, identically as required by the seller, were to be ''frozen'' by an order of court, because of a controversy springing from the contract, It
appears to be very clear that it would be quite against the law, to issue an injunction under such circumstances and the case is all the stronger
where the letter of credit relates to a C.I.R.contract.
The first case that we shall notice is Hamzeh Maloss end Sons v. British lmex Industries Ltd, (1958)2 W. L. R. 100, which is almost the locus
classics on the subject. That case has very close affinities to the present case; for, the facts there were the plaintiffs (buyers) complained that the
instalment was defective, and sought an injunction, after Letters of Credit were duly opened, and the documents has been produced. The Court
stressed, declining to issue the injunction, that a confirmed Letter of Credit constituted a bargain between the barker and the seller. which imposed
on the barker an absolute obligation to pay, irrespective of any dispute between the parties, whether the goods were or were not upto contract. In
that case also, the present argument was put forward that (be defendant had received part of the money under the contract, and that the plaintiffs
only sought to restrain the defendant from realising the balance. In agreeing with Jenkins, L.J., Sellers, L I., stressed that the jurisdiction of the court
could not be doubted and conceivably it might exercise the jurisdiction in an exceptional case of ""fraudulent transaction"".
In Ian Stach Ltd, v. Baker Bosky Ltd (1958) 2 W. L. R. 419 Biplock, J cited and approbated the dicta in Hamzch Malaas and Sons v. British
Ipex Industries Ltd. (1958) 2 W. L. R. 100, Urquhart Lindlay and Co. Ltd. v. Eastern Bank Ltd. (1922)1 K. B. 318 is an interesting case, and an
extreme case apparently in favour of the Indian firm, on its facts; nevertheless, injunction was refused. That was a case in which the invoices had
included an additional ingredient of price, or; account of wages and material, which was really inadmissible. Defendants accordingly refused to pay
the bill presented on the next shipment, and even though an inadmissible claim had been made, the court held that the credit being irrevocable, the
defendants could not refuse payment, on presentation of the proper documents.
We might next proceed to notice two cases, which have been elaborately discussed in an Article in the Modern law Review, which do throw a
flood of light an the principle on which courts have been determining the respective right of parties. with regard to Letters of Credit.
Dulien Steel Products Ltd. of Washington v. Banker Trust Co. 298 F. 2d. 836 (1962). This was a very curious and complicated case, on its
facts. Dulien Steel Product contracted to sell steel scrap to the European Iron and Steel Community. Messrs. Marco Polo Group Project Ltd.
were entitled to commission for seeing through this transaction. For payment of the commission, plaintiffs produced an irrevocable credit from
Seattle First National Bank. In accordance with the request of Marco Polo, this Letter of of Credit was opened in favour of one Sica. The
Irrevocable credit was confirmed, and Sica ultimately tendered the stipulated documents. But in the meantime, there had been further negotiations
between the plaintiffs and the vendees, the price of the contracted goods had been reduced, and the commission payable to Marco Polo was
proportionately reduced. Sica was a mere nominee of Marco Polo, and be had no independent right to the credit. Nevertheless, Sica claimed
payment of the full amount of the credit against produced documents, and the defendant (Bankers Trust) complied with this demand, after
informing Scattle Bank. The action of the plaintiffs for recovery of moneys overpaid by defendants to Sica, was sought to be based on alleged
grounds of negligence, fraud and estoppel. All these grounds were overruled.
The court observed that the Bankers did diligently examine the documents specified in the Letter of Credit, and that that was ""the only duty of
care imposed on them at law. They were under no duty to go further than that and examine the underlying transaction"". Again, it is stated that. ""This
ruling re-establishes the well-known principles that the Letter of Credit is independent of and unqualified by, the contract of sale underlying
transaction.
We may now proceed to another case, a very extreme case, in which injunction was issued by the court with regard to a Letter of Credit. That
decision is Sztein v. J. Hendry Schroder Banking Corporation 31 N. Y. S. 2nd 631 at 633 (1941). In that case, the plaintiffs contracted of
purchase bristles from an Indian firm, and the defendants opened a Letter of Credit in favour of the sellers. The sellers presented a draft with
apparently regular documents, but they actually shipped crates, which contained nothing but rubbish. The fraud of the seller was brought to the
notice of the bank, even before the drafts and documents were presented for payment. That was held to be a very extreme case where the
principle of the independence of the obligation of the bank under the Letter of Credit should not be extended to protect the unscrupulous seller
particularly, where the Bank itself was aware of the perpetrated fraud. The ruling makes it very clear that mere suspicion or conjecture of fraud is
not enough, and that no subsequent dispute, arising out of the contract, can be permitted to cloud or affect the right of the seller to realise on the
Letter of credit, against produced documents, or the obligation of the Bank to fulfil that ancillary contract.
The law is thus very clear and no Injunction can issue restraining the Russian firm (appellant) from realising on the letter of credit in this case, it
would be opposed to law, and destructive of International Commercial practice. It would be quite opposed to the wellestablished precedents. The
interests of justice, which might conceivably tilt the sales in favour of the any other view, are not at all evident. The learned Judge (Ramamurti, J.)
states:
The injury or damage sustained by the plaintiff would be very large, if ultimately it succeeds in the suit. There is no point in compelling the plaintiff to
pay the money...... So far as the first defendant is concerned, the prejudice to or inconvenience is relatively less.
With great respect to the learned Judge, we are unable to agree with these observations and they appear to us to be against the tenor of the
law, and even en the facts, to be not sustainable on the record, so far made evident. There is not a whisper or hint in the pleadings of the Indian
Firm anywhere that, even if the plaintiff firm ultimately succeeds in the suit, and obtains a huge decree for damages, that decree could not be
enforced and realised against the assets of the Russian firm. Actually, this aspect is totally untouched by any of the averments in the extensive
records that have already piled up Nor can it be said that the Russian firm (appellant) would not be seriously inconvenienced or injured in its
interests, by not being permitted to realise the further amounts, due, on the letter of credit. Already, a considerable period of time has elapsed,
since the letter of credit became finally enforceable and the documents were produced and accepted long ago. We are unable to accept the
argument of Mr. Raman that a mere provision enforcing interest payable on the balance, will be adequate protection for the Russian firm which has
been deprived of the moneys justly due to it. We have already pointed out that the Bank of India (second defendant) is bound to fulfil the
obligations and is ready to do so.
Accordingly, we allow the appeals and set aside the order of interim injunction granted in favour of the Indian firm. Costs Rs. 500 (Advocate''s
fee) in both the appeals against the plaintiffs.
Learned Counsel for the Bank of India, the second respondent, now represents before us that a certain minimum time may be essential for the
bank to complete Its administrative arrangements, in order to fulfil the obligation to make payment to the Moscow Bank under the letter of credit.
We think that this is a reasonable request, and we grant time for ten days from today to the Bank of India, for making these arrangements and for
compliance with the letter of credit.
Natesan J.:-While I am in agreement with my Lord, the Chief Justice, in the judgment just now delivered, having regard to the fact that we
differ from our learned brother, Ramamurthi J, on an interlocutory order and having regard also to the stakes involved and the questions raised, I
propose to set out briefly the principal grounds for my concurrence.
The controversy between the parties and the facts leading to the controversy get elaborately discussed in the connected case, and I shall
content myself, for the purpose of this judgment, with referring briefly to certain salient facts. The appellants are Messrs V/O Tract or export
earring on business at Moscow, and are the first defendant in the suit from interlocutory orders in which these appeals have been preferred. The
plaintiffs in the suit are Messrs. Tarapore and Co, a firm of engineers and contractors, who take up big construction works and projects. For the
purpose of a contract which the plaintiffs have entered into with the Government of India, with respect to excavation in the feeder Canal on the
Farakka Barrage Project, a huge Government project, the first defendant offered to supply and the plaintiff agreed to purchase heavy machinery.
The terms of the contract between the parties were duly embodied in writing, the first defendant to supply the construction machinery as described
in the appendix to the contract, the total value of the machinery being Rs. 66,09,372. The contract was on C. I. F. terms, delivery C. I. F.
Calcutta. The contract provided that payment for the goods to be delivered, shall be effected in Indian rupees out of an irrevocable, divisible and
confirmed letter of credit opened by the buyers through a first class Indian Bank with the Bank for Foreign Trade of the USSR in Moscow in
favour of the first defendant .Messrs V/O Tractore xport, Moscow. The machinery listed consisted of 30 Towed scrapers, 10 Motorised
Scrapers, 6 crawler tractors and 4 bulldozers. The payment wider the letter of credit was to be against five specified documents, namely, full set of
negotiable Bills of lading to be made out at the Black Port on the buyer''s name, sellers'' invoice in triplicate specification of the goods shipped in
triplicate, manufacturers ''or sellers'' certificate of quality and insurance policy or certificate of ''Irgosstrakh''. The contract provided for
partshipments and transhipments and no other terms, except what were mentioned were to be incorporated in the Letter of Credit. As regards the
payment, 25 per cent payment was to be made on the presentation of the documents and the balance of 75 per cent, within the one year from the
date of the first payment. In accordance with the agreement between the buyers and sellers, the Bank of India Ltd, the second defendant in the
suit, was requested by the buyers to open a Letter of Credit for Rs. 66,09.372, in favour of the sellers with the Bank for Foreign Trade of the
USSR in Moscow, with stipulation regarding payment in two installments, 25 per cent payment on presentation of documents and the balance 75
per cent within one year from the date of the first payment, A confirmed irrevocable credit, without recourse, was opened with the Bank of India
Ltd. The credit opened, was made subject to the Uniform customs and Practice for documentary credit (1962 revision, International Chamber of
Commerce Brochure No. 222. The letter of credit was made to expire on the 30th June 1966. In due course, the sellers presented the documents
and 25 per cent payment was made to them by the Bankers. For the balance of 75 per cent payable under the letter of credit, the sellers drew
right drafts for different amounts, totalling in all Rs, 45,0630, the amcunts drawn thereunder being payable on different dates commencing from
19th August 1966 to 27th November 1966. The several items of machineri, arrived at Calcutta between 13th October 1965 and 31st December
1965, and were taken delivery of by the buyers and pressed into service at the site of the Farakka Barrage project. Disputes have subsequently
arisen between the parties. There has been complaint of some defects in the construction and performance of the Motorised scrapers. But the
serious complaint of the buyers is about the capacity of the towed scrapers. The capacity of the towed scraper contracted for was $ 8/10 cubic
metres, that is it should have a struck capacity of 8 cubic metres and a heaped capacity of 10 cubic metres. There is no doubt about this
requirement. The letter from the Back to the sellers advising the establishment of the confirmed irrevocable credit in specifying the shipping
documents that just accompany drafts also gives the capacity of the machinery. The complaint of the buyers is that the towed scrapers, actually
supplied and delivered, have only capacity of 6/8 cubic metres. This vital defect in the towed scrapers, the buyers state, they discovered only in
March 1966. Admittedly, the buyers put the machinery to the full use they could, as they would state to minimise damages. Pending talks of
settlement, the validity of the credit was extended from time to time, first from 1st July 1965 to 31st January 1967 and again from 31st January
1967 to 31st January 1968. The dispute between the buyers and sellers as to the capacity of the towed scrapers did not get resolved, as,
according to the sellers, it is the geometrical capacity of the Bowl that is material with reference to this machinery and not the water level capacity
which the buyers are insisting upon. Meanwhile, consequent on the devaluation of Indian rupee, the buyers became liable to pay an additional
amount of Rs 25,91,174-23. Of course, this was not covered by any letter of credit. It is in these circumstances that the buyers filed the suit on the
original side of of this court, praying for a permanent injunction against the sellers restraining them from further receiving the proceeds of the
divisible Letter of Credit, opened on 9th June 1965 with the Bank of India Ltd., Madres, and also a permanent injunction against the record
defendant restraining it from proceeding further on the letter of credit, opened in favour of the sellers and from payment of any further sum to them.
The buyers valued the suit, for the purpose of court fee and jurisdiction at at Rs 50,000 and the substantial basis for relief claimed is found stated in
paragraph 22 of the plaint thus:
The plaintiffs state that though they had opened a Letter of Credit for the entire amount with the second defendant, the first defendant both in law
and in equity, would be entitled to receive the value of the Letters of Credit only if it had acted according to the contract The plaintiffs are advised
and state that in law, had the first defendant already received the money, the plaintiffs would be entitled in the circumstances of the case, to reject
the goods and pray for refund, but as much as the first defendant has rot yet received full Payment for the goods, the plaintiffs are entitled to stop
the first defendant from so receiving the money pending the settlement of the plaintiffs'' claim.
The plaintiffs have subsequently amended the plaint to set out the damages they have suffered, consequent on the defective machinery, at Rs.
92,90,000. In the plaint, they reserve the claim for damages to another suit and the amendment seeks to show that the amounts due to the plaintiffs
by way of damages are far greater than the amounts payable to the sellers on the foot of the Letter of Credit, sought to be interdicted by the suit.
The order allowing the amendment is also the subject of an appeal.
Along with the suit, the plaintiffs applied for and obtained a temporary injunction, preventing the credit being encashed by the sellers. With
reference to the amount not covered by the Letter of Credit payable consequent on the devaluation, a separate application, Appln. No. 2455 of
1967, was taken out by the plaintiffs. The sellers have entered appearance in these proceedings under protest, as it is their contention that, under
S. 3 of the Foreign Awards (Recognition and Eriforcerrent) Act, Act 45 of 1961, the suit has to be stayed, the contract between the parties
providing that the sellers and buyers shall take all measures to settle amicably any disputes and differences which may arise out of or in connection
with the contract, 3nd that in the event of the parties being unable to arrive at an amicable settlement, all disputes shall be submitted for arbitration
by the Foreign Trade Arbitration Commission at the USSR Chamber of Commerce in Moscow in accordance with the Rules of Procedure of the
said Commission. There were elaborate arguments on the several questions that were raised for consideration on the interlocutory application and
our learned brother, Ramamruiti, J. has rejected the application for stay as not maintainable in the absence of any reference to arbitration prior to
the institution of the suit. The injunction prayed for have been granted.
We have taken up for consideration the appeals from the temporary injunction order first, as the credit period of the letter of credit which was
further extended by consent of the parties will expire on the 31st October, 1968.
The substantial argument of Mr. Mohan Kumaramangalam for the sellers is that the buyers, in a case like the one under consideration, are not
entitled to the issue of an injunction preventing cashing a confirmed irrevocable letter of credit. It is argued that it is only a most exceptional
circumstances that a court will restrain a beneficiary under a letter of credit from having the benefit of the sameparticularly when the credit is in the
course of international commerce. Leaned Counsel points cut that, apart from the peculiar name of commerce through letter of credit, in the instant
case, the buyers who have the full benefit of the machinery using the same all these years should not be granted any equitable relief. The buyers had
paid only 25 per cent of the original value of the goods. The guarantee period for the 30 towed scrapers was over and the machinery had been
used for more than twice the guaranteed period. The goods have been accepted on delivery without protest. The complaint is about the capacity of
the towed scrapers and the balance due in respect of this machinery is Rs. 22,21,650 while the balance in respect of the otter items is Rs.
22,84,740. If account is taken of the devaluation, the buyers have to pay the sellers Rs. 34,99,098-75 for the lowed screpers and Rs. 35,98, 465-
50 for the other items. It is submitted further that there has been no complaint whatsoever about the crawler tractors and bulldozers. Counsel urges
that, having regard to the amounts involved and the fact that the machinery has been taken delivery of on payment of 25 per cent of their value
between 4th September, 1965 and 27th October, 1965, the averments in the affidavit on which the injunction is claimed are bald and wholly
devoid of case for a temporary injunction. In the relevant paragraphs in the affidavit in support of the application, for injunction, it is averred that
the plaintiffs apprehend that serious loss would be caused if the defendants are-allowed to draw the amount as per letter of credit opened by the
plaintiffs with the Bank of India and that the first defendant would suffer no loss whatsoever by reason of an interim injunction, as the money is not
returned to the plaintiffs but it is only in the second defendant''s bank. It is urged for the sellers that this is a case of C. I. F. constract that the goods
when delivered were accompanied by operative manuals which made clear the method adopted by the sellers in measuring the capacity of the
towed scrapers, and that, once the goods have been accepted and used by the buyers, the remedy, it any for any defect, is only in damages for
breach of warranty, Admittedly, the buyers have not rejected the goods; but, for their own. reason made use of them as their own. Leaned
Counsel for the sellers would question, in the circumstances, the very maintainability of the suit for injunction. It is submitted that there is not a
whisper anywhere, either in the plaint or in the affidavit in support of the application for injunction, that there will be difficulties in recovering
damages from the sellers in the event of their being permitted to operate on the letter of credit, on the buyer''s claim for damages being made out.
In the context, learned counsel for the sellers would submit that, apart from the special characteristics of the letter of credit, operation whereon by
the beneficiary could not be stopped at the instance of the buyer''s, the buyers have not even a positive case for the exercise of any discretion in
their favour, an injunction being a purely discretionary relief. Learned counsel submits that, there being an irrevocable confirmed letter of credit by
the buyers in favour of the sellers, the buyers are choosing to interdict an obligation of the Bankers to the buyers independent of the contract
between the buyers and sellers. Mr. Mohan Kumaramangalam referred us to the available leading decisions and eminent text writers on the
character of letters of credit and the relative obligations and rights of parties with reference to the same.
The Injunction claimed is pendente lite, pending resolution of the controversy between the parties and determination of the question whether
the plaintiffs are entitled to the relief claimed. The jurisdiction of this court 10 grant an injunction, even in cases where irrevocable confirmed letters
of credit are involved, is not questioned for the appellants. The court''s jurisdiction to grant an injunction under inherent powers, to prevent the ends
of justice being defeated and to render any judgment that may ultimately be obtained by a successful party effective, is wide. But no party has a
right to insist on the court exercising this jurisdiction and the court, when it exercises this jurisdiction in a matter, to do justice between the parties
before it will certainly have due regard to the legal rights and obligations of the parties ex facie made out by them and the equities of the occasion
by virtue of its duty to do justice between the parties.
Now, to examine briefly the rights and obligations of the buyers and sellers and the bankers who issued the letter of credit contains the clause
that, except as otherwise, expressly stated therein, the credit is subject to the uniform Customs and Practice for Documentary Credits, 1962
Revision, international Chamber of Commerce Brochure No. 222 which the Banks are expected to observe provides that the provisions,
definitions etc, therein shall apply to all documentary credits and are binding upon all parties thereto unless otherwise expressly agreed. Art. 3 of
the Brochure defines an irrevocable credit, as a definite undertaking on the part of an issuing Bank and as constituting the engagement of that Bank
to the beneficiary ,or, as the case may be, to the beneficiary and the bonafiide holders of drafts drawn and/or documents presented thereunder,
that the provisions for payment, acceptance or negotiation contained in the credit will be duly fulfilled, provided that all the terms and conditions of
the credit are complied with; Art 8 provides that, in documentary credit operations, all parties concerned deal in documents and not in goods, and
that payment, acceptance or negotiation against documents, which appear on their face to be in accordance with the terms and conditions of a
credit by a bank athorised to do so binds the party giving the authorisation to take up the documents and reimburse the Bank which has effected
the payment, acceptance on negotiation, In Chalmers on Bills of Exchange 13th Edition, page 179 it is stated:-
The modern commercial credit serves to interpose between a buyer and seller a third person of unquestioned solvency, almost invariably a banker
of international repute; the banker on the instructions of the buyer issues the letter of credit and thereby undertakes to act as paymaster upon the
seller performing the conditions set out in it.
The irrevocable credit of a banker of international repute is obtained by the buyers to facilitate commerce across national frontiers and
overseas. The exporter thereby is enabled to look forward with assurance So the ultimate payment, upon due performance of the conditions
stipulated in the letter of credit. Once the exporter has complied with the terms of the letter of credit, there springs up immediately an absolute
obligation on the Banker issuing the letter of credit to pay the exporter, irrespective of any disputes there may be or that may arise between the
buyer and seller as to whether the goods are as per the contract or not. The law in this regard is found stated in the text books referred to us.
Davies'' Law relating to Commercial Letters of Credit, 3rd Edn. at pages 79 and 80, Chalmers Bills of Exchange, 13th Edn. at pages 179 and
180, the law of Bankers'' Commercial Credits by Gutteridge and Megrah, at pages 33 39 and 40 and the Export Trade by Clive M. Sehmithoff,
4th Edn. at page 223. Reliance is placed in these text books, on two leading decisions, Uruquhart Lindsay and Co. V. Eastern Bank Ltd. (1922)1
K. B. 318 and Hamzeh Malas and Sons v. British Imex Industries Ltd, (1958) 2 W. L. R. 100 at 103 which I shall be referring presently. In
Halsbury''s Laws of England, Simonds Edn. Vol. 34, at page 185, the position is thus stated:
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 therefor; 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.
In Uruquhart Lindsay and Co. v. Eastern Bank Ltd. (1922)1 K. B. 318 the Eastern Bank Ltd. the defendant, issued an irrevocable credit to
the sellers of machinery in England, the plaintiffs in the suit, the buyers being in Calcutta. The payment was to be made against bills of Lading on the
buyers, accompanied by the corresponding invoices and shipping documents. After two instalments of the machinery had been sent and paid for by
the Bank under letter of credit, before the next shipment the buyers discovered that the sellers were including in the invoices additional sums
representing rise in the cost of wages and materials, and so instructed the bankers to pay only so much of the next invoices as represented the
original prices. On the Banker''s refusal to pay the bill presented on the next shipment, the sellers, cancelling the contract, sued the bankers claiming
damages. Rowlatt, J. held that the credit being irrevocable, the refusal of the Bankers constituted a repudiation of their contract with the sellers and
observed:
The whole purpose of the arrangement is that the seller shall have a responsible payment in this country to protect him against the very contingency
which has occurred and the very damages which he claims.
In Hamzah Mallas''s case (2) where we have a decision of the Court of Appeal, the situation is similar to the present case, and I would say that
it affords considerable guidance as to how the discretion of the court should be exercised. In the case referred to the plaintiffs, a Jordanian firm,
entered into a contract, with the defendants in the suit, a British firm, for the purchase of a large quantity of reinforced steel rods which had to be
delivered in two instalments. For payment of the instalments, confirmed letters of credit were duly opened with the Midland Bank Ltd. in London.
The first payment was duly realised by the defendants, the sellers, and before they could cash the credit for the second instalment, the buyers,
alleging that the goods of the first instalments were defective, commenced an action and applied for an injunction pendente lite under 0.50 of the
Rules of the Supreme Court, which provides for interlocutory orders as to amendment, injunction and interim preservation of properties, to restrain
the defendants from drawing on the second letter of credit or receiving any money from the Midland Bank Ltd., under the contract. It was
contended for the plaintiffs that the defers ants had already realised moneys under the first letter of credit in respect of worthless goods under a
contract which the buyers were entitled to repudiate and had repudiated, and that they were seeking not to take away any moneys from the
bankers but to restrain the sellers from realising the credit, subject to any terms which the court might impose. The arguments presented before us
were in similar terms, For the defendants, the sellers in that case it was contended that, if the application were granted the whole procedure by
which in commercial transactions, letters of credit were used would be wrecked, and that the Back had no right to refuse payment on presentation
of the proper documents. In the Court of Appeal, affirming the order of the court of the first instance rejecting the application for injunction, Jenkins
L. J. observed:
We have been referred a number of authorities, and it seems to be plain enough that the opening of a confirmed letter of credit constitutes a bargain
between the Banker and the vendor of the goods, which imposes upon the Banker an absolute obligation to pay irrespective of any dispute there
may be between the parties as to whether the goods are upto contract or not. An elaborate commercial system has been built up on the footing
that bankers'' confirmed credits are of that character and in my judgment, it would be wrong for this court in the present case to interfere with that
established practice......That system of financing these operations, as I, see it would break down completely if a dispute as between the vendor and
the purchaser was to have the effect of ''freezing, if I may use that expression, the sum in respect of which the letter of credit was opened.
The learned Judge, while affirming the court''s wide jurisdiction to grant an Injunction, said that the case on hand was not one in which the court
ought, in the exercise of its jurisdiction, grant an injunction. Sellers L J, agreeing with Jenkins LJ, on the question of jurisdiction, remarked:
there may well be cases where the court would exercise jurisdiction as in a case where there is a fraudulant transaction.
Cutteridge. in his book, the Law of Bankers'' Commercial Credits, after referring to Malass'' case, 1958-2 W. L. R. 100 at 102, expressed as
his view that in no case except fraud could a Bank be restrained from paying. It is unnecessary for me to consider whether fraud and fraud alone
will give jurisdiction to the court to interdict, by way of an injunction, the operation on a letter of credit. One cannot contemplate what
circumstances may arise which would necessitate the court to exercise its jurisdiction in a particular cage. One thing is clear that the court will not
issue an injunction unless it is absolutely essential for the ends of justice. Diplock J in Ian Stach Ltd v. Baker Bosky Ltd (1958) 3 W. L. 419 at
423 examining the role of a commercial letter of credit and referring to Malass'' case 19582 W. L. R. 100 at 102, remarked:
As has been pointed out in numerous cases, the commercial purpose of a Banker''s confirmed credit is more than a mere method of payment; it
creates a direct liability upon the Banker Independent of the contract of sale and is an undertaking by the Banker that if the seller presents the
required document in the required time he will receive the payment of the contract price.
The liability of a Banker being an absolute obligation to pay the seller on presentation of the specified documents irrespective of any disputes
between the buyer and seller, it may not be proper that any and every dispute between the buyer and seller should result in the interdiction of
payment by the Banker to the seller. Injunction is an equitable relief and a temporary injunction pendente lite is granted to aid the ultimate relief the
court may give to a suitor. When the court is called upon to restrain a Banker from carrying out an obligation he has undertaken, the court will have
to weigh all the circumstances and see whether there are equitable considerations so paramount and high as to warrant the Court compelling a
breach of an obligation when as between the obliger and obliger there is no dispute and the Banker is willing to pay and the seller, ready to
receive...Where matters of international commercial practice and code of conduct are involved, the court will have to be conservative and should
not upset established codes of conduct, unless the requirement of justice imperatively demands upsetting established rules. The law as to letters of
credit, as is seen from the text books referred to above is uniform throughout.
Davis, in his book on the Law relating to Commercial letters of Credit, refers to Kingdom of Sweden v. New York Trust Co, (1949) 96 N.
Y. Supp (2d) 779 as an authority for the proposition that, unless express conditions are contained in the letter of credit, the performance of the
sales contract is not a condition precedent of the credit or of the buyer''s agreement to reimburse, and that the letter of credit is a wholly
independent contract. Davies cites another case in the United States Frey v. Sherburne and the National City Bank of New York, (1920) 193
App. D. 849; 184 NYS. Supp. 661 an action for injunction framed like the one before us. It was an action by the buyers to restrain the Bank
which was made the second defendant from honouring and paying drafts under an irrevocable Letter of Credit. Under the terms of the contract,
the buyers had an option of cancelling such portion of the contract as was not cleared within a specified time. Under this provision, the buyers, as
they were entitled to do, cancelled the contract and brought the action. The action failed, the court holding that the plaintiff''s remedy was an action
against the sellers for damages and it had no right to restrain the Banker from paying drafts drawn by the sellers in accordance with the terms of the
Letter of Credit. It would be a different case, It is pointed out, if the documents, required by a Letter of Credit are not in order, because to the
Banker''s knowledge they falsely described the goods. The author points cut that a buyer can protect himself against sharp practice by the seller or
even genuine error by the seller, by including in the sales contract a term that one of the documents to be called for by the Letter of Credit is for
example, a certificate by the buyer''s agent, vouching the correctness of the invoice, and by ensuing that, in the Letter of Credit, as issued, it is one
of the documents to be provided.
In the Modern Law Review, Volume 26, at page 715, under Notes of Cases, there is an interesting discussion on the problem of fraud in
relation to documentary Letter of Credit. There is reference therein to the case Sztejn v. J.Hendry Schroder Banking Corporation 31 NYS.
2d.631 (1941), relating to fraud by the sellers. The sellers, it is regrettable to note were an Indian firm. In that case the plaintiffs contracted to
purchase bristles from this firm and at their instruction the defendant opened a Letter of Credit in favour of the sellers. The sellers presented
through their agent the Chartered Bank, a draft for the invoice amount with the documents apparently regular attached to it. Though the documents
described the shipped crates as containing bristles, the crates in fact contained rubbish. The buyers who learnt of the fraud in advance instituted an
action for an Injunction restraining the Bankers, who were made defendants in the suit, from accepting the draft. Injunction was granted, the court
observing;
In such a situation, where the seller''s fraud has been called to the Bank''s attention before the drafts and documents have been presented for
payment, the principle of the independence of the Bank''s obligation under the Letter of Credit should not be extended to protect the unscrupulous
seller...... In the instant action......(the banker)..... has received notice of......(the seller''s......fraud before it accepted the draft.
A fraud like the one in Sztejn''s case (1), it is pointed out, is a fraud on the Banker as well as the buyer. The documents of title are normally the
Banker''s security against the buyer, and by presenting him with the documents which, though evidence the shipment of the goods contracted for,
are in fact drawn against rubbish, the banker was induced to obtain an empty security and his own interest would justify a refusal to pay.
It is not necessary to discuss, for the purposes of the present case, what fraud would entitle the buyers to an Injunction against the Bank and
the sellers In the instant case, there is not even a whisper of fraud in the affidavit in support of the application for Injunction No doubt, in the plaint,
there are certain evennents as to fraud, but obviously, before the learned Judge when claiming an Injunction, no fraud has been relied upon. Our
learned brother, Ramamurti J.''s order is not rested upon any case of fraud. The learned Judge sums up the main points in controversy between the
parties as (1) whether the sellers are guilty of breach of the contract and (2) whether the buyers have sustained damages and if so, to what extent,
so as to cover the amount covered by the Letter of Credit. Noticing that the entire machinery has been taken delivery of and used by the plaintiffs,
and that even the guarantee period for the machinery has expiree, the learned judge remarks that the remedy of the plaintiffs, if any. against the
sellers, is only for damages for breach of warranty, and that the acceptance of the goods by the plaintiffs and the use of the same in their contract
work put the matter beyond doubt. The learned Judge discusses the question whether, in the circumstances of the case and on the pleas raised, a
suit for injunction as laid could not be filed. Pointing out that S. 59 of the Indian Sale of Goods Act is not exhaustive of the remedies of a buyer
where there is a breach of warranty, and that where there is a guarantor for payment of the price, the buyer could file a suit against his vendor on
the ground that the buyer has sustained damages for the breach of warranty sufficient enough to cover the amount of guarantee and that, therefore
the vendor is not entitled to proceed against the guarantor and ask for an injunction, the learned Judge observes:
I see nothing in principle why the buyer would not be entitled to institute the suit: and obtain a relief of permanent Injunction against the vendor and
the banker from realising the price of the goods supplied of course, subject however, to the special incidents of the C.I.F. contracts which I shall
presently refer.
The learned Judge takes an instance of the Bank giving a guarantee with regard to payment of the price within a period of one year after the
delivery of the goods, but without any letter of credit in the matter, and the buyer finding, after taking delivery of the goods, that the goods and
worthless and drums of dust have been sent to him. It is pointed out that in such a case, the buyer will necessarily have to take steps to see that the
bank docs not any pay money to the seller under the guarantee given. But this will be a clear case of fraud, and even if there had been a letter of
credit, the court would, as in Szteir''s case 31 NYS. 2 d. 631 (1941) restrain the seller from receiving any amount. The illustration cannot advance
the case of the plaintiffs in the present case, when a fraud has not been made a ground for the temporary injunction. Having regard to the stand
taken by the sellers has to the jurisdiction of the civil court no written statement has been filed the pleadings are not complete and the full case of
the parties have not been brought out before this court. All the same, to repeat, as far as I can see, on this application no fraud against the sellers
has been raised before the learned Judge, nor was any attempt made before us to sustain the Injunction on the ground of fraud on the part of the
sellers.
The learned Judge remarks that the points in dispute are substantial and require careful scrutiny and that they are not frivolous or useless
objections raised by the plaintiffs to evade payment. It is observed that the plaintiffs have made out a strong and prima facie case. The
considerations which have weighed with the learned Judge in exercising discretion in favour of the plaintiffs may be found in the observations:
The injury or damage sustained by the plaintiff would be very large, if ultimately it succeeds in the suit. There is no point in compelling the plaintiff to
pay the money now, if ultimately the plaintiff succeeds in proving that it has sustained damages much more than the amount covered by letters of
credit. So far as the first defendant is concerned, the prejudice or inconvenience is relatively less...... There is no question of damages of risk of any
kind of the first defendant losing that money, seeing that the money has got to be recovered from the Bank of India by realising the letters of credit.
With all respect to my learned brother, these considerations do not warrant the grant of an Injunction in the matter of this kind, restraining the
Bank from paying the sellers according to their undertaking. The bankers, the second respondent, before us, allowed the matter, at the hearing of
the application, to be fought out between the buyer and sellers. Having regard to the commercial importance of the case, we desired learned
counsel appearing for the Bank to present the Bank''s view of the matter, and for the Bank the Manager of the Madras Branch of the Bank has
filed an affidavit. In this affidavit, it is stated that the Bank has always been and is even now ready and willing to remit the amount due under the
letter of credit aggregating to Rs. 45,06,390 to the Bank for Foreign Trade of the USSR, Moscow, as per the terms of the Letter of Credit and
that the Bank is prevented from making the payment because of the Injunction granted by this court. It is further stated in the affidavit that, in the
event of this court vacating the injunction, the Bank will immediately pay the amount due by it to the Bank for Foreign Trade of the USSR,
Moscow. It is also stated in the affidavit that the Bank which issued a confirmed and irrevocable Letter of Credit is not concerned with any
disputes that might arise between the buyer the Bank''s customer for whom the Letter of Credit is opened) and the seller (the beneficiary under the
letter of credit) and that it is bound to pay the amount due under the Letter of Credit, provided the terms and conditions thereof are complied with,
particularly that the documents tendered are those exactly as called for under the Letter of Credit, and thereafter recover the amount from the
Bank''s customer at whose instance the Letter of Credit was opened. There is no question here that the documents in terms of the Letter of Credit
were presented to the Bank. The Bank has accepted the documents and has paid 25 per cent of the invoice amount of the goods acquired by the
buyers. With the acceptance of the documents of the Bank''s obligation to pay the balance of 75 per cent in the period provided arose, and the
bank accepts the subsistence of the obligation. It is not the bank''s case, that it has been misled to accept the documents which In fact were net in
order. It is nobody''s case that the documents were not in order. In the circumstances, the Bank has taken a proper and the only attitude open to it
in the matter.
In my view, the fact that there is a serious and substantial dispute between the buyers and the sellers requiring careful scrutiny, is not by itself
sufficient to warrant a temporary injunction in a case of this kind. We have only some bare averments in the affidavit that the plaintiffs apprehend
that serious loss would be caused to them, if the sellers are allowed to draw the amount as per the letter of credit. The only loss that we can think
of they would suffer, if payment is made to the sellers by the Bankers, will be that the plaintiffs will be debited in their accounts with the Bankers for
the amount. An Injunction is not granted, unless the anticipated injury is not reparable by recovery of damages. Here, by a simple suit for
injunction, the plaintiffs seek to set off an unascertained claim for damages to be made out, against an admitted liability. There is no plea even that,
if the sellers encash the letter of credit, the plaintiffs, in the event of their success, would be unable to recover the damages that may be decreed in
their favour. It is not the case of the plaintiffs that any such payment by the Bankers to the sellers would result in derangement of their own
business. To entitle the plaintiffs to an injunction, the situation shown must clearly call for it, a refusal of the injunction must result in real and serious
hardship and in injustice. Can that be postulated in the present case ? The mere fact that moneys due to the sellers are secured, is certainly not a
ground for granting an injunction in favour of the plaintiffs. The plaintiffs must make out positively a prima facie case at least that if the sellers draw
the money due to them under the Letter of Credit from the Bankers who are willing to pay them, the plaintiffs would be put to irreparable loss.
They must also establish the possibility of real damages if the payment is made now. The fact that the plaintiffs, if they succeed, will be entitled to
very large amounts as damages, is not a test for the grant of a temporary injunction. The court has to see whether the refusal of an injunction now
will result in loss and damages to the plaintiffs.
Mr. V. P. Raman for the plaintiffs inter alia stressed that, as the suit itself is for a permanent injunction, it would be a futile action if the
injunction is not granted now. X have examined the contention carefully. It is manifest on the facts that the dissolution of the injunction is not fraught
with irremediable consequence to the plaintiffs. The discharge of the injunction will not end the determination of the substantial controversy
between the parties that would still remain. Here, the plaintiffs are seeking only to point out that the amounts to which they are entitled as damages
will exceed the amounts payable to the sellers by the Bank. The plaintiffs are not precluded from claiming, against the defendants, damages due to
them. In Mullah''s C. P, Code 13th Edn. at page 1523, it is pointed out that the court will not grant a temporary Injunction before the hearing in
every case where a perpetual Injunction might fitly be granted of the hearing, for, to justify a temporary injunction, not only must the case be such
that an injunction is the appropriate relief, but there must be the further ingredient that unless the defendant is restrained forthwith by a temporary
Injunction, irreparable injury or inconvenience may result to the plaintiff before the suit is decreed upon its merits. It is not an invariable rule that, in
every suit for permanent Injunction, the plaintiff must have interim relief by injunction, as otherwise the suit itself will become infructuous. To
countenance such a rule, would be to put a premium on suits framed as one for injunction. Malass case, (1958-2 W. L. R. 100 at 102,) is a case
where an injunction pending action was refused. The contention of Mr. Mohan Kumaramangalam in this case is that the suit itself is not
maintainable. That apart, relief pendente lite by a temporary injunction is a process adopted by courts on principles of equity, for preventing wrong
between, and preserving the rights of, parties in controversy before them. Here the injunction is sought that the sellers be prevented from operating
on the confirmed credit in their favour, while the bankers are ready to pay them in discharge of their undertaking. The amounts are large. But no
legal rights of the plaintiffs would be invaded or jeopardised by the payment. It is net made out what wrong would be done in law by payment. This
is not an action to prevent the threatened breach of an obligation or restrain in advance the violation of a right for the maintenance of the status quo.
It is the plaintiffs'' case that the sellers have purported to discharge their obligation under the contract by performance, but the performance was not
in accordance with certain essential terms of the contract. Material conditions have been broken, and while they were entitled to repudiate, they
have elected to claim damages. By the action as at present framed, the plaintiffs are really seeking to secure partially the remedy which they claim
to be entitled to. In Manoharlal v. Seth Hiralal A. I. R. 1962 S. C. 527 referring to the inherent powers of the court to issue a temporary
injunction, it is stated:-
No party has a right to insist on the court exercising that jurisdiction and the court exercises its inherent jurisdiction only when it considers it
absolutely necessary for the ends of justice to do so.
The Immediate result of the payment by the bankers to the sellers would be, as pointed out already, and nothing more is said before us for the
buyers, a debit by the bankers in the accounts of the plaintiffs with them, the amount paid to the sellers. This may necessitate settlement of accounts
between the buyers and their bankers, dependent on the state of accounts between them and the credit the sellers command. This by itself is
certainly not a consideration that should weigh against the rights of the sellers to cash the credit, if one has regard to the high place of confirmed
credit in International Commerce.
Mr. V. P. Raman submitted that, having regard to the subsequent attempts for settlement between the parties and the agreement extending the
period of credit, the principles applicable for payment under letters of credit should not be applied. It is contended that it must be considered as if
the amounts have to be paid by the plaintiffs to the sellers and the problem should be approached in that perspective. Learned counsel submits
that, on more than one occasion, the sellers have been willing to extend the period of credit. This argument falls flat on me. The fact that the sellers
have shown an inclination to settle with the buyers the disputes raised and meanwhile agreed to postpone the period of credit, does not absolve the
Bankers of their obligation under the letter of credit. To repeat in another form what has already been said, the independent contract between the
bankers and the sellers stands un discharged and the bankers are ready to pay. It would be a dangerous precedent, if accommodation for talks at
settlement shown by the sellers to the buyers is taken hold of as a ground for injuncting the sellers from recovering moneys due to them. The
contract between the parties itself was provided that both the sellers and buyers shall take all measures to settle amicably any disputes and
differences which may arise out of or in connection with the contract. The very fact that pending negotiations the parties by agreement extended the
period of credit, shows that the relationship between the Bankers and the sellers was not affected in the least by the attempts at settlement,
Mr. V. P. Raman raised a further point that from an order granting a temporary injunction pendente lite no appeal is available under Cl. 15
Letters Patent. It was submitted that the order in question is not a judgment within the meaning of CI. 15 of Letters Patent. So far as this court is
concerned, the matter is governed by the Full Bench decision in T. V. Tutjaram v. MK. R. V. Alagappa Chettiar 35 Mad. 1 wherein White, C J.
observed:
I think, too, an order on an independent proceeding which is ancillary to the suit (not instituted as a step towards judgment, but with a view to
rendering the judgment effective if obtained) e.g., an order on an application for an interim injunction, or for the appointment of a receiver is a
''judgment'' within the meaning of the clause.
For more than half a century this court, under Cl. 15 of the Letters Patent, has been entertaining appeals from orders made on applications for
injunction or for appointment of receiver pendente lite in the exercise of original and appellate jurisdictions and we are having scores of appeals
from interlocutory orders granting or refusing injunction by single Judges of this court in the exercise of the special original jurisdiction of this court
under Art. 226 of the Constitution. In Palaniappa v. Krishnamurti A.I. R. 1968 Mad. 1(F.B.) this court recently followed the decision in Tuljaram
Rao v. Alagappa Chettiar 35 Mad. 1.
As regards the drafts drawn by the first defendant on the plaintiffs for further amounts payable on account of devaluation, the Bankers point out
that these drafts are not covered by the letter of credit, and that they are not liable to pay the amount of such additional drafts to the Bank for
foreign trade of the USSR or to any other person. These drafts, issued consequent to the devaluation of Indian rupee, have been merely sent to the
Bankers for collection In view of the injunction, the Bankers have not taken any steps for protesting or for collection of the additional drafts. In the
circumstances, ro Injunction is called for with reference to the additional drafts. If the plaintiffs do not accept and provide for payment of these
drafts, then the first defendant will have to take appropriate steps for recovery. It would be then open to the plaintiffs to pat forward their claim and
seek to set off, if they can, against the drafts, their claim for damages. For the foregoing reasons I agree with my Lord, the Chief Justice that this is
not a case in which the court ought to grant an Injunction. It follows that the appeals have to be allowed and the injunction dissolved.