HON’BLE SRI JUSTICE NOOTY RAMAMOHANA RAO WRIT PETITION No.28169 OF 2011 ORDER: The petitioner herein is carrying on business in manufacturing of paper containers. The third respondent herein offered to supply certain raw material for purpose of manufacturing the paper containers and sent its quotation on 11.07.2011 for a total amount of USD $38,720. The proforma invoice indicated any USA / Canadian Port as the loading point and the shipment will be booked within thirty days after receipt of irrevocable confirmed Letter of Credit, generated in favour of the third respondent. The letter of credit was required to be advised and confirmed by Bank of America or JP Morgan Chase or Standard Chartered Bank. Accordingly, the petitioner has opened a Foreign Letter of Credit (FLC) on 20.07.2011 in favour of the third respondent and deposited a sum of Indian Rs.17,35,000/- equivalent to USD $38,720. Thereafter, at the request of the third respondent, the time for shipment of goods was extended up to 31.08.2011. While the first respondent-bank assures the payment on behalf of the buyer namely the petitioner, the second respondent-bank assures on behalf of the seller- the third respondent, the receipt of the goods / products. Thus, the payment for and receipt of goods are assured by the first and second respondent-banks respectively. Suspecting some foul play, the petitioner appears to have asked for cancellation of the Letter of Credit on 27.07.2011 and intimated the same to Respondents 1 to 3. The petitioner seems to have asked for the product quality and quantity inspection certificate to be furnished from any Standard Certifying Agency so as to ensure that the product supplied by the third respondent is as per USFDA 176.170 and 176.180 with tolerance limits of + or – 3 mm on the size of the reel. The third respondent has declined for undertaking any such inspection report on the ground that the inspection at that stage is not capable of being arranged. But however, the petitioner suspected that the goods will not be shipped to the port at Mumbai and hence reported to the first respondent-bank not to entertain any request from the beneficiary bank for payment under the Letter of Credit, in view of the deviation in the terms of purchase order. The first respondent-bank has replied to the petitioner on 08.10.2011 pointing out that, as per the request of the petitioner through its letter dated 25.07.2011, the payment terms of letter of credit have been amended authorizing the negotiating banker to debit the first respondent-bank’s Nostro account, upon presentation of credit complying documents. The first respondent-bank has also pointed out that it has received the original documents from Bank of America, San Francisco drawn as per the letter of credit on 19.09.2011 and prima facie the documents are complying with the terms of the letter of credit. The first respondent-bank made it clear that when once the documents are presented in accordance with the terms of the letter of credit, the first respondent-bank is under an obligation for payment under the letter of credit. The first respondent-bank has disowned any obligation to deal with the goods. Therefore, the first respondent-bank has rejected the request of the petitioner to revoke the authorization for debiting the Nostro account of the first respondent-bank. Hence this writ petition. 2. On behalf of the first respondent-bank, one of it’s Senior Manager has filed a detailed counter affidavit confirming the basic facts of the case. The first respondent-bank has pointed out that the Foreign Letter of Credit (FLC) has been obtained by the writ petitioner for purchase of goods from the third respondent and the second respondent-bank is the beneficiary. It is pointed out that the Foreign Letter of Credit (FLC) generated, is governed by Uniform Custom and Practice for Documentary Credit (UCPDC) latest version namely UCP600. The Letter of Credit obtained by the petitioner is irrevocable and any amendment or cancellation thereof requires consent of all the four parties. The Letter of Credit is payable within 60 days from the date of bill of lading. When the petitioner made a request on 25.07.2011 for amendment of the Foreign Letter of Credit (FLC), the request was forwarded to the second respondent-beneficiary bank. The repayment procedure stipulated at the first instant in the Foreign Letter of Credit (FLC) is “upon receipt of credit complying documents, we shall remit proceeds on the due date as per negotiating banks instructions”. This was subsequently amended at the request of the petitioner as under: “on receipt of credit complying documents, please debit our account and pay beneficiary” 3. Thus, the petitioner opted to give reimbursement authorization to the beneficiary bank by virtue of amendment, which was not contemplated by the original FLC. It is now pointed out by the first respondent-bank that, by virtue of this reimbursement authorization given to the beneficiary bank, on the due date, the beneficiary bank will debit the FLC amount from the first respondent-bank’s account and credit the same to the third respondent’s account. When the petitioner sought for cancellation of the Letter of Credit on 27.07.2011, the said request was communicated to the second respondent-beneficiary bank. Again on 03.08.2011, the petitioner requested, that in case their representation is not accepted for cancellation of the FLC, to amend FLC with product quality and quantity inspection certificates. When this was transmitted to the second respondent on 04.08.2011, the second respondent-bank informed the first respondent-bank that they are unable to obtain the consent of the beneficiary for cancellation of the FLC. In so far as amendment of the FLC incorporating the condition of inspection, the second respondent bank has communicated to the first respondent bank, the rejection of the request by the supplier. It was further pointed out in paragraph 5 of the counter affidavit that the first respondent-bank has received the credit complying documents referred to in the FLC from the beneficiary bank on 19.09.2011. On the same day, the second respondent-bank issued mail to the first respondent-bank to consider discounting of this presentation of documents. The petitioner addressed a letter on 05.10.2011 to the first respondent-bank that they have tracked the arrival of cargo and though the vessel has arrived at Mumbai Gateway terminal, the cargo was not offloaded and left for Algeciras, Spain on 29.09.2011 and requested to seek clarification from the beneficiary bank. As requested, the first respondent-bank has taken up the matter with the second respondent- beneficiary bank, but, no reply was received there from. Since the letter of credit is irrevocable, it’s encashment can only be stopped with the consent of all parties. Therefore, the first respondent-bank has prayed for dismissal of this writ petition. 4. Heard learned counsel for the petitioner Smt. Gogineni Jyothieshwar and Sri V. Raghu for the first respondent-bank. 5. The principles relating to invocation of bank guarantees have been set out in clear terms by the Supreme Court in U.P.State Sugar Corpn. V. Sumac International Limited[1], is the following passage: “12. The law relating to invocation of such bank guarantees is by now well settled. When in the course of commercial dealings an unconditional bank guarantee is given or accepted, the beneficiary is entitled to realize such a bank guarantee in terms thereof irrespective of any pending disputes. The bank giving such a guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer. The very purpose of giving such a bank guarantee would otherwise be defeated. The courts should, therefore, be slow in granting an injunction to restrain the realization of such a bank guarantee. The courts have carved out only two exceptions. A fraud in connection with such a bank guarantee would vitiate the very foundation of such a bank guarantee. Hence if there is such a fraud of which the beneficiary seeks to take advantage, he can be restrained from doing so. The second exception relates to cases where allowing the encashment of an unconditional bank guarantee would result in irretrievable harm or injustice to one of the parties concerned. Since in most cases payment of money under such a bank guarantee would adversely affect the bank and its customer at whose instance the guarantee is given, the harm or injustice contemplated under this head must be of such an exceptional and irretrievable nature as would over ride the terms of the guarantee and the adverse effect of such an injunction on commercial dealings in the country. The two grounds are not necessarily connected, though both may coexist in some cases.” 6. These principles have subsequently been followed in BSES Ltd. V. Finner India Ltd.[2] as well as Vinitec Electronics Private Ltd. V. HCL Infosystems Ltd[3]. The Supreme Court had set out the principles relating to grant of injunction restraining the enforcement of bank guarantees in Himadri Chemicals Industries Ltd. v. Coal Tar Refining Co.[4] in the following words: “14. (i) While dealing with an application for injunction in the course of commercial dealings, and when an unconditional bank guarantee or letter of credit is given or accepted, the Beneficiary is entitled to realize such a Bank Guarantee or a Letter of Credit in terms thereof irrespective of any pending disputes relating to the terms of the contract. (ii) The Bank giving such guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer. (iii) The courts should be slow in granting an order of injunction to restrain the realization of a bank guarantee or a Letter of Credit. (iv) Since a Bank Guarantee or a Letter of Credit is an independent and a separate contract and is absolute in nature, the existence of any dispute between the parties to the contract is not a ground for issuing an order of injunction to restrain enforcement of Bank Guarantees or Letters of Credit. (v) Fraud of an egregious nature which would vitiate the very foundation of such a Bank Guarantee or Letter of Credit and the beneficiary seeks to take advantage of the situation. (vi) Allowing encashment of an unconditional Bank Guarantee or a Letter of Credit would result in irretrievable harm or injustice to one of the parties concerned.” 7. The said principle has once again been reiterated in Mahatma Gandhi Sahakara Sakkare Karkhane v. National Heavy Engg. Coop. Ltd.[5]. Therefore, the principles relating to this subject are now well settled. The guarantee furnished by the bank is required to be honoured by it irrespective of any disputes between the principal parties. The exceptions known to this basic premise are, one, fraud laid by one party on the other, as, fraud would vitiate the very foundation of the guarantee and the second is that the encashment of the Letter of Credit would cause irretrievable harm or injustice, to the party at whose instance it was furnished. 8. The averments contained in the affidavit filed in support of this writ petition only depict the serious lack of trust and confidence in the third respondent by the writ petitioner. Such a crisis has been brought about after the FLC was opened. It was an irrevocable one. The second respondent- Bank of America is the beneficiary bank. As soon as the documents in accordance with the terms of the FLC are received from the second respondent-Bank, in accordance with the stipulations contained in the FLC, the amount is bound to be encashed by the second respondent-bank correspondingly debiting the account of the first respondent. The whole of the averments contained and filed in support of this writ petition do not lay any foundation for one to come to a safe conclusion about the fraud played by the third respondent. The contract between the petitioner herein and the third respondent for supply of goods by the third respondent is an independent contract. In terms thereof, the Foreign Letter of Contract (FLC) is obtained by the petitioner from the first respondent-Bank. That is an independent agreement. So long as the terms and stipulations in the FLC are specified and so long as the documents are presented by the second respondent-beneficiary bank, the first respondent-bank cannot revoke the same. It is bound by the terms and conditions contained in the FLC and it has to honour the stipulations contained therein. The facts narrated supra, do not attract the two exceptional principles set out by the Supreme Court in Himadri Chemicals Industries case. Learned counsel for the petitioner has placed reliance upon the Judgment rendered by the Supreme Court in Shangrila Food Products Ltd. Vs. Life Insurance Corporation of India[6]. I have not found any principle for the petitioner to derive any support there from. 9. Therefore, I do not see any justification or merit in the contentions canvassed in this writ petition and hence this writ petition is dismissed. No costs. _____________________________________ Justice Nooty Ramamohana Rao 24th October, 2011 sp HON’BLE SRI JUSTICE NOOTY RAMAMOHANA RAO (Pre-delivered Judgment) In WRIT PETITION No.28169 OF 2011 24th October, 2011 sp HON’BLE SRI JUSTICE NOOTY RAMAMOHANA RAO (Pre-delivered Judgment) In WRIT PETITION No.28169 OF 2011 October, 2011 SP [1] (1997) 1 SCC 568 [2] (2006) 2 SCC 728 [3] (2008) 1 SCC 544 [4] (2007) 8 SCC 110 [5] (2007) 6 SCC 470 [6] (1996) 5 SCC 54