Appeals Nos 2251 and 2252 of 1968
Appeals by special leave from the judgment and order dated  October 9 1968 of the Madras High Court in OSA Nos 26 and 27 of 1968 and Civil Appeals Nos 2305 and 2306 of 1968
Appeals by special leave from the judgment and order dated April 12 1968 of the Madras High Court in Applications Nos 1760 and 2455 of 1967 in CS No 118 of 1967
MC Setalvad VP Raman DN Mishra and 1
B Dadachanji for the appellant in CAs
Nos 2251 and 2252 of 1968 and respondent No 1 in CAs 2305 and 2306 of 1968
section Mohan Kumaramangalam MK Ramamurthi Shyamala Pappu and Vineet Kumar for respondent No 1 in CAs
Nos 2251 and 2252 of 1968 and the appellant in CAs 2305 and 2306 of 1968
Rameshwar Nath and Mahinder Narain for respondent No 2 in all the appeals
The Judgment of the Court was delivered by Hegde J
These are connected appeals
They arise from Civil Suit No 118 of 1967 on the original side of the High Court of Judicature at Madras
Herein the essential facts are few and simple though the question of law that arises for decision is of considerable importance
The suit has been brought by Ms Tarapore  Co Madras hereinafter referred to as the Indian Firm
That firm had taken up on contract the work of excavation of a canal as a part the Farakka Barrage Project
In that connection they entered into a contract with Ms VO Tractors Export Moscow which 922 will hereinafter be referred to as the Russian Firm for the supply of construction machinery such as Scrapers and Bulldozers
In pursuance 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 ie Rs 6609372 in favour of the Russian Firm negotiable through the Bank for Foreign Trade of the USSR 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 holders of drafts drawn andor 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
An irrevocable credit may be advised to a beneficiary through another bank without engagement on the part of that other bank the advising bank but when an issuing bank authorises another bank to confirm its irrevocable credit and the latter does so such confirmation constitutes a definite undertaking on the part of the confirming bank either that the provisions for payment or acceptance will be duly fulfilled or in the case of a credit available by negotiation of drafts that the confirming bank will negotiate drafts without recourse to drawer
Such undertakings can neither be modified nor cancelled without the agreement of all concerned
 Article 8 of the brochure says In the documentary credit operations all parties concerned deal in documents and not in goods
923 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 acceptance or negotiation   The only other Article in that brochure which is relevant for our present purpose is article 9 which reads Banks assume no liability or responsibility for the form sufficiency accuracy genuineness falsification or legal effect of any documents or for the general andor particular conditions stipulated in the documents or superimposed thereon nor do they assume any liability or responsibility for the description quantity weight quality condition packing delivery value or existence of the goods represented thereby or for the good faith or acts andor omissions solvency performance or standing of the consignor the carriers or the insurers of the goods or any other person whomsoever
 On the strength of the aforementioned
contract the Russian Firm supplied all the machinery it undertook to supply by about the end of December 1965 which were duly taken possession of by the Indian Firm and put to work at Farakka Barrage Project
They are still in the possession of the Indian Firm
After the machinery was 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
Immediately on Tarapore withdrawing the case VO Tractoro export  agree to instruct the Bank for 924 Foreign Trade of the USSR in Moscow not to demand any further payment against LC established by Tarapore  Co Madras for a period of six months from the due dates in the first instance
During this period both the parties shall do theft best to reach an amicable settlement
In case the settlement between the two parties is not completed within this period of six months VO Tractors export shall further extend the period of payment by further period of six months for the settlement to be completed
Tarapore  Co shall authorise their Bank to keep the unpaid portions LC valid for the extended period as stated above
 At this stage it may be mentioned that the Russian Firm had received from the Bank of India 25 per cent of the money payable under the letter of credit very soon after it supplied to the Indian Firm the machinery mentioned earlier
In pursuance of the aforementioned agreement the Indian Firm withdrew the suit
Thereafter there were attempts to settle the dispute
In the meantime the Indian Rupee was devalued
The contract between the Indian Firm and the Russian Firm contains the following term Payment for the delivered goods shall be made by the Buyers in Indian Rupee in accordance with the Trade Agreement between the USSR and India dated
10th June 1963
All the prices are stated in Indian Rupees
One Indian Rupee is equal to 0186621 grammes of pure gold
If the above gold content of Indian Rupee is changed the prices and the amount of this Contract in Indian Rupee shall be revalued accordingly on the date of changing the gold parity of the Indian Rupee
 This clause will be hereinafter referred to as the Gold Clause 
In view of that clause the price fixed for machinery supplied stood revised
Consequently under the contract the Indian Firm had to pay to the Russian Firm an additional sum of about rupees twenty six lacs
Accordingly the bankers of the Russian Firm called upon the Indian Firm to open an additional letter of credit for payment of the extra price payable under the contract
They also intimated the Indian Firm that the extension of time for the payment of the price of the machinery supplied agreed to at Delhi will be given effect to only after the Indian Firm arranges for the additional letter of credit asked for
The Indian Firm objected to this demand as per its letter of 20th September 1966
The relevant portion of that letter reads 925 We are rather surprised to see this because by our arrangement dated 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 of credit to give effect to the gold clause    On November 1 1966 the Russian Firm sent to the Indian Firm addendum No 1 modifying the original contract in accordance with the gold clause
The last clause of that addendum recited that all other terms and conditions are as stated in the above mentioned contract original contract
The Indian Firm objected to that addendum as well as to the demand for opening an additional letter of credit
In that connection the Russian Firm wrote a letter to the Indian Firm on November 29 1966
As considerable arguments were advanced on the basis of that letter we shall quote the relevant portion of that letter   
We confirm that you have signed with us the addendum No 1 to our Contract No 61Tarapore 22065 dated the 2nd Feb 1965 at our request for the sole and specific purpose of satisfying our bankers
We confirm further that this addendum will not in any manner prejudice the arrangement we have come to in Delhi on the 14th August 1966 and is without prejudice to your claims and points of controversy regarding which we shall have further discussions with a view to reach an amicable settlement
926 Under this addendum the company will extend the letter of credit for one year and accept the drafts for the difference in value of 575 per cent due to devaluation
The final amount payable will be in accordance with the settlement
 Thereafter the Russian Firm appears to have drawn drafts on the Indian Firm for the excess amount payable under the gold clause
For one reason or the other no settlement as contemplated by the Delhi agreement was reached
The Indian Firm complained that the Russian Firm never made any serious attempt to resolve the dispute whereas the Russian Firm alleged that it found no substance in the complaint made by the Indian Firm as regards the machinery supplied
In the suit as brought as well as in these appeals that controversy is not open for examination
Suffice it to say that the parties did not amicably settle the dispute in question
When the extended time granted under the Delhi agreement was about to come to a close the Indian Firm instituted the suit from which these appeals have arisen
In that suit the only substantive relief asked for is that the Bank of India as well as the Russian Firm  should be restrained from taking any further steps in pursuance 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 article 133 of the Constitution
Evidently as a matter of abundant caution the Indian Firm had filed two separate applications seeking special leave to appeal against the orders of the Appellate Bench of the Madras High Court
After hearing the parties this Court revoked the certificates granted holding that the orders appealed against are not final orders but at the same time granted special leave to the Indian Firm to appeal against the orders of the Madras High Court
Civil Appeals Nos
2051 and 2052 of 1968 are appeals filed by the Indian Firm
Before the Appellate Bench of the High Court of Madras the Indian Firm had objected to be maintainability of the appeals 927 filed by the Russian Firm on the ground that orders appealed against are not judgments within the meaning of el 15 of the Letters Patent of the Madras High Court but that objection had been overruled by the Appellate Bench following the earlier decisions of that High Court
That contention was again raised in the appeals filed by the Indian Firm in this Court
To obviate any difficulty the Russian Firm applied to this Court for special leave to appeal against the interim orders passed by the trial judge
We allowed those applications and consequently Civil Appeals Nos
2305 and 2306 of 1968 came to be filed
In view of the appeals filed by the Russian Firm in this Court against the interim orders made by the trial judge it is not necessary to decide whether the appeals filed by the Russian Firm before
the Appellate Bench of the Madras High Court were maintainable On that question judicial opinion is
sharply divided as could be seen from the decision of this Court in Asrumati Debi vs Kumar Rupendra Deb Rajkot and Orsx Hence we shall confine our attention to the question whether the temporary injunctions issued by the trial judge are sustainable The scope of an irrevocable letter of credit is explained  thus in Halsbury s Laws of England Vol
34 paragraph 319 at p 185 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 Iris bank known as the issuing or originating bank to issue an irrevocable credit in favour of the seller by which the bank undertakes to the seller either directly or through another bank in the seller s country known as the correspondent or negotiating bank to accept drafts drawn upon it for the price of the goods against tender by the seller of 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 1  L6 Sup
CI69 8
928 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 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
A letter of credit may be in any one of a number of specialised forms and contains the undertaking of the banker to honour all bills of exchange drawn thereunder
It can hardly be over emphasised that the banker is not bound or entitled to honour such bills of exchange unless they and such accompanying documents as may be required thereunder are in exact compliance with the terms of the credit
Such documents must be scrutinised with meticulous care the maim de minimis non curat lex cannot be invoked where payment is made by later of credit
If the seller has complied with the terms of the letter of credit however there is an absolute Obligation upon the banker to pay irrespective of any disputes there may be between the buyer and the seller as to whether the goods are up to contract or not Similar are the views expressed in Practice and Law of Banking by HP Sheldon the Law of Bankers Commercial Credits by HC Gutteridge the Law Relating to Commercial Letters of Credit by AG Davis the Law Relating to Bankers  Letters of Credit by BC Mitra and in several other text books read to us by Mr Mohan Kumaramangalam learned Counsel for the Russian Firm
The legal position as set out above was not controverted by Mr MC Setalvad learned Counsel for the Indian Firm
So far as the Bank of India is concerned it admitted its liability to honour the letter of credit and expressed its willingness to abide by its terms
It took the same position before the High The main grievance of the India Firm is that if the Russian Firm is allowed to take away the money secured to it by the letter  929 of credit it cannot effectively enforce its claim arising from the breach of the contract it complains of
It was urged on its behalf that the Russian Firm has no assets in this country and therefore any decree that it may be able to obtain cannot be executed
Therefore it was contended that the trial court was justified in issuing the impugned orders
The allegation that Russian Firm has no assets in this country was not made in the pleadings
That apart in the circumstances of this case that allegation has no relevance
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 the one before us came up for consideration before the Queens Bench Division in England in Hamzeh Malas and Sons vs British Imex Industries Ltd1 Therein the plaintiffs a 10 Jordanian firm contracted to purchase from the defendants a British firm a large quantity of reinforced steel rods to be delivered in two instalments
Payment was to be effected by opening in favour of the defendants of two confirmed letters of credit with the Midland Bank Ltd in London one in  respect of each instalment
The letters of credit were duly opened and the first was realized by the defendants on the delivery of  t he first instalment
The plaintiffs complained that that instalment was defective and Sought an injunction to bat the defendants from realizing the second letter of credit
Donovan 1
 the trial judge refused the application
In appeal Jenkins Sellers and Pearce LJJ
confirmed the decision of the trial judge
In the course of 1 930 his judgment Jenkins LJ who spoke for the Court observed thus We have been referred to 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 up to 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
There is this to be remembered too
A vendor of goods selling against a confirmed letter of credit is selling under the assurance that nothing will prevent him from receiving the price
That is of no mean advantage when goods manufactured in one country are being sold in another
It is furthermore to be observed that vendors are often reselling goods bought from third parties
When they are doing that and when they are being paid by a confirmed letter of credit their practice is and I think it was followed by the defendants in this case to finance the payments necessary to be made to their suppliers against the letter of credit
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 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 vs Eastern Bank Ltd1 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
1 931 Similar opinions have been expressed by the American Courts The leading American case on the subject is Dulien Steel Products Inc of Washington vs Bankers Trust Co1
The facts of that case are as follows The plaintiffs
Dulien Steel Products Inc of Washington contracted to sell steel scrap to the European Iron and Steel Community
The transaction was put through Ms Marco Polo Group Project Ltd who were entitled to commission for arranging the transaction
For the payment of the commission to Marco Polo plaintiffs procured an irrevocable letter of credit from Seattle First National Bank
As desired by Marco Polo this letter of credit was opened in favour of one Sica
The defendant bankers confirmed that letter of credit
The credit stipulated for payment against 1  a receipt of Sica for the amount of the credit and 2  a notification of Seattle Bank to the defendants that the plaintiffs had negotiated documents evidencing the shipment of the goods
Sica tendered the stipulated receipt and
Seattle Bank informed the defendants that the Dulien had negotiated documentary drafts
Meanwhile after further negotiations between the plaintiffs and the vendees the price of the goods sold was reduced and consequently the commission payable to Marco Polo stood reduced but the defendants were not informed of this fact
Only after notifying the defendants about the negotiation of the drafts drawn under the contract of sale the Seattle Bank informed the defendants about the changes underlying the transaction and asked them not to pay Sica the full amount of the credit
The defendants were also informed that Sica was merely a nominee of Marco Polo and has no rights of his own to the sum of the credit
Sica however claimed payment of the full amount of the credit
The defendants asked further instructions from Seattle Bank but despite Seattle Bank s instructions decided to comply with Sica s request
After informing Seattle Bank of their intention they paid Sica the full amount of the credit
Plaintiffs thereupon brought an action in the District Court of New York for the recovery of the moneys paid to Sica
The action was dismissed by the trial court and that decision was affirmed by the Court of Appeals
That decision establishes the well known principle that the letter of credit is independent of an unqualified by the contract of sale or underlying transaction
The autonomy of an irrevocable letter of credit is entitled to protection
As a rule courts refrain from interfering with that autonomy
A half hearted attempt was made on behalf of the 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 1 Federal Reporter 2nd Series 298 p 836
932 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 plaintiff would have certainly pleaded the same
That apart we are unable to accept the contention that either the Delhi agreement or the subsequent correspOndence between the parties modified the original contract
The Delhi agreement merely provided that the parties will try and settle the dispute out of court if possible
Much was made of the letter written by the Russian Firm to the Indian Firm on 29 11 1965 wherein as seen earlier it was stated that the final amount payable will be in accordance with the settlement
This letter has to be read along with the other letters that passed between the parties
If so read it is clear that the statement that the final payment will be made in accordance with the settlement is subject to the condition that the parties are able to arrive at a settlement
Otherwise the parties continue to be bound by the original contract subject to the extension of the time granted under the Delhi agreement for the payment of the price
As regards the additional payment demanded by the Russian Firm there is no occasion for issuing any temporary injunction
If the Indian Firm does not comply with that demand the law will take its course
It is for that Firm to choose its course of action
In the result we allow Civil Appeals Nos
2305 and 2306 of 1968 with costs of the appellant therein and set aside the temporary injunctions granted by the trial judge
The other appeals are dismissed with no order as to costs
The costs to be paid by the Indian Company
VPS CA Nos
2305  230668 allowed
CANos
2251  225268 dismissed


Summary:
An Indian Firm the appellant entered into a contract with a Russian Firm the respondent for supply of certain machinery
In pursuance of the contract the appellant opened a confirmed irrevocable and divisible letter of credit with a Bank in India for the entire value of the equipment
The respondent supplied all the machinery and received 25 of the money payable under the letter of credit from the Bank
Thereafter the appellant complained that the performance of the machinery was not efficient and filed a suit seeking an injunction restraining the respondent from realising the balance of amount payable under the letter of credit
The parties however entered into an agreement by which it was agreed that the appellant would withdraw the suit the respondent would not demand any payment under the letter of credit for 6 months the parties would try to settle the dispute amicably during that period and if no settlement was reached the period would be extended by a further period of 6 months
The appellant withdrew its suit but before any settlement was arrived at the Indian rupee was devalued as a result of which the appellant had to pay an additional sum for the machinery supplied
There was correspondence between the parties wherein the respondent insisted upon the appellant opening an additional letter of credit
for the extra amount and the appellant objected to such a course
The original dispute between the parties was not amicably settled and when the extended time under the agreement was about to expire the appellant filed a suit on the original side of the High Court for restraining the Bank and the respondent from taking any steps in pursuance of the letter of credit
A temporary injunction was also prayed for and it was granted but the order was reversed by the Appellate Bench of the High Court
In appeal to this Court on the question whether the order of temporary injunction was sustainable HELD 1  An irrevocable letter of credit has a definite implication
It is independent of and unqualified  by the contract of sale or other underlying transactions
It is a mechanism of great importance in international trade and any interference with that mechanism is bound to have serious repercussions on the international trade of this country
The autonomy of an irrevocable letter of credit is entitled to protection and except in very exceptional circumstances courts should not interfere with that autonomy
929 B C 931 G Urquhart Lindsay and Co Ltd vs Eastern Bank Ltd  Hamzeh Malas and Sons vs British Imex Industries Ltd and Dulien Steel Products Inc oWashington vs Bankers Trust Co Fed
Rep 2nd Series 298 p 836 applied
2 The allegation of the appellant that the respondent had no assets in this Country and therefore if the respondent was allowed to take away 921 the money secured to it by the letter of credit the appellant could not effectively enforce its claim arising from the breach of the contract was not made in the pleadings
Nor do the facts pleaded in the plaint amount to a plea of fraud
929 B 931 H 3 It could not be contended that the letter of credit was not enforceable as the original contract was modified by the later agreement and subsequent correspondence between the parties
The contention was not taken either in the plaint or in the High Court
It is not a mere legal contention as it bears on the intention of parties
Further a perusal of the entire correspondence between the parties shows that in the absence of an amicable settlement the parties continued to be bound by the original contract subject only to extension of time granted for payment of  price
932 B D F