Reportable

* HIGH COURT OF DELHI AT NEW DELHI

+ OMP No. 648/2007

Date of decision : December 5

th

, 2007

# M/s Impex Trading Gmbh ..... PETITIONER.

! Through : Mr. Raman Kapur, Advocate

Mr. J.N. Patel, Advocate

Mr. Guru Saran Singh, Advocate

Versus

$M/s. Anunay Fab. Ltd. & Ors. ..... RESPONDENTS

^ Through : Mr. A.S. Chandhiok, Sr., Advocate

Mr. Ajay Garg, Advocate

Mr. Vijay K. Jain, Advocate

%

CORAM:

HON'BLE MS. JUSTICE ARUNA SURESH

(1) Whether reporters of local paper may be

allowed to see the judgment?

(2) To be referred to the reporter or not? Yes

(3) Whether the judgment should be reported

in the Digest ? Yes

ARUNA SURESH, J. (Oral)

1.This is a petition under Section 9 of the Arbitration and

Conciliation Act, 1996 (hereinafter referred to as 'Act')

filed by the petitioner against the respondents seeking

interim relief for restraining the respondent No. 1 from

encashing/invoking Letter of Credit No. DIA101180 for

OMP No. 648/2007 Page 1 of 16

321346.14 Euro (Rs. 1,89,72,276.11p in Indian currency)

or in the alternative some interim measure or relief be

provided to the petitioner to secure the amount of

1,83,754.91 (Rs. 1,08,48,889.89p in Indian currency) till

the dispute in the proposed arbitration between the

petitioner and the respondent No. 1 is adjudicated upon by

the arbitral tribunal.

2.Petitioner company entered into three separate

agreements with the respondent for supply of

manufactured goods/items to the petitioner. These

agreements are:

(1) Consignment Contract No. PJN 1192/07 dated February

22, 2007 for supply/export of Fitted Bed Sheet, solid color,

knitted 100% polyester micro fiber, single jersey 135-140

gsm with rubber band stitched inside around the whole sheet

size 100 X 200+27 cms edges around with machine washable

60 decrees of the value of 74648.88 Euro.

(2) Consignment Contract No. PJN 1194/07 dated

February 22, 2007 for supply/export of roman Shade, printed

100% Polyester micro fiber 110 gsm, size 100 x 170 cms with

wooden bar on top, with 2 metal ears, with metal weight bar

on bottom including fixtures (2 hooks, 2 dowels, 2 screws)

OMP No. 648/2007 Page 2 of 16

with colour matching draw rope of the value of 1,12,797.60

Euro.

(3) Consignment Contract No. PJN 1198/07 for

supply/export of children bed set, 2 pieces set, printed 100%

polyester micro fiber 110 gsm, Duvet covers and pillow case

with color matching YKK-zipper with white plastic head, with

machine washable 60 decrees of the value of 1,33,860 Euro.

3.As per the agreements, respondent No. 1 was required to

provide Oekotex standard 100 certificate free of charge.

On the request of the petitioner, respondent No. 3, the

bankers of the petitioner at Germany, opened an

irrevocable Letter of Credit (hereinafter referred to as

'L/C') bearing No. DIA101180 dated 17.7.2007 for

3,24,716.64 Euro with date and place of expiry being

September 03, 2007 and D-Bielefeld in favour of

respondent No. 1.

4.The amount of the L/C was reduced for short supply of

consignment goods and also because of some consignments

of goods relating to fitted sheets of orange colour and

yellow colour were found on testing by accredited textile

laboratory in Germany 'Forschungsinstitut Hohenstein'

mutually appointed by the petitioner and the respondent

OMP No. 648/2007 Page 3 of 16

No. 1, to be contaminated with forbidden AZO dye stuff

and they did not comply with the Oekotex 100 Standards.

5.The consignment goods sent under contract No. PJN

1194/07 were sent on the condition that if the petitioner's

final client cancelled the order on account of non

production of valid Oekotex 100 Standard certificate, the

petitioner shall have the right to return the goods to the

respondent No. 1 and to claim back the paid amount. The

consigned goods under the consignment contract No.

1194/07 were rejected by the final client at Germany and

the goods had to be transported back by the petitioner.

Petitioner claims a total amount of 183754.91 Euro

inclusive of his transportation and penalty charges imposed

upon it by the final client against respondent No. 1. Since

there is an arbitration clause in the agreements, present

petition has been filed by the petitioner under Section 9 of

the Act seeking interim relief for restraining the

respondents from encashing the Letter of Credit.

6.Respondent No. 1 has contested this petition alleging that

as per article 3 of the UCP in case of an irrevocable bank

guarantee or L/C, the buyer cannot obtain injunction

against the banker or the seller on the ground that there

OMP No. 648/2007 Page 4 of 16

was a breach of the contract by the seller. Respondent No.

2 to 4 are not a party to the agreements and therefore,

petition under Section 9 of the Act is not maintainable

against them. Petitioner has not been able to prima facie

make out a case of fraud or that the alleged fraud was also

in the knowledge of the bank issuing L/C. Petitioner has

also not been able to show that an irreparable injury shall

be caused to it or is likely to be caused if the relief sought

for by it is not granted. It is further averred that the agent

of the petitioner in India had conducted the pre-dispatch

inspection of the consignments under contract No. PJN

1194/07 and other contracts. It was on the satisfaction of

the petitioner, the goods were dispatched in September

2007. As and when the petitioner raised any objections

regarding short supply or goods not upto Oekotex

certificate standard, the respondent No. 1 immediately

modified/reduced the L/C amount. Petitioner was aware

that the respondent No. 1 has the oekotex certificate with

regard to articles i.e. woven fabric made of 100%

polyester, dyed which was sent to the petitioner by the

respondent on 21.6.2007. Petitioner never informed the

respondent No. 1 as to whether the goods under the

contract No. PJN 1194/07 was also submitted to the said

Lab for quality test. It is further averred that there is no

OMP No. 648/2007 Page 5 of 16

violation of the terms and conditions of the L/C and the

petitioner as well as its bankers have accepted the

documents submitted by the respondents No. 1 & 2 after

verifying the same for encashment of the said L/C.

Therefore, present petition is not maintainable.

7.Maintainability of the petition is also challenged on the

grounds that the petitioner has not invoked the arbitration

clause in the agreement till date or even after the filing of

the present application.

8.I have heard learned counsel for the parties and have

carefully perused the record.

9.Learned counsel for the petitioner conceded that there is

no dispute regarding the consignments of goods vide

consignment contract PJN 1192/07 and PJN 1198/07 and

the petitioner is ready and willing to make the payments of

the goods sent under the said contracts totaling to

208508.88 Euro and the dispute therefore remains only in

respect of agreement PJN 1194/07.

10.Clause 12 of the consignment contract PJN 1194 is an

arbitration clause which reads as follows:

OMP No. 648/2007 Page 6 of 16

“That the parties to the

agreement, agreed that all the

disputes or difference

whatsoever, arising between the

parties, out of or relating to the

construction, meaning or/and

operation or effect of this

contract, or the breach thereof,

shall be settled by the Arbitration

in accordance with the Rules of

Arbitrators of the Indian Council

of Arbitration by the Arbitrators

nominated by both the parties

and the Award made, in

pursuance thereof, shall be

binding on the parties, at New

Delhi.”

11.Since the goods supplied by the respondent No. 1 under

this consignment contract were rejected by the final buyer

of the petitioner and the petitioner has claimed return of

the money against this consignment contract as well as

transportation charges and the penalty levied upon it by

the final buyer, a dispute has arisen between the petitioner

and the respondent No. 1 in terms of the arbitration clause.

The petitioner has not referred the dispute to the arbitral

tribunal till date for adjudication upon the dispute inter se

the parties. Much has been said about the non issuance of

Oekotex standard certificate having not been issued by the

respondent No. 1 in respect of the goods supplied vide

consignment contract No. PJN 1194/07. My attention has

also been drawn to a letter dated 22.9.2007 written by the

OMP No. 648/2007 Page 7 of 16

petitioner to the respondent No. 1 whereby the petitioner

reserved its rights to return back the goods covered under

the said contract because no valid oekotex standard

certificate was presented by the respondent No. 1 in case

the goods were rejected by the final buyer. Whereas

according to the respondent No. 1, oekotex standard

certificate was sent to the petitioner vide letter dated

21.6.2007. These issues are not to be considered in this

application as these are the matters and disputes to be

decided by the arbitral tribunal. The only issue before me

for consideration is whether the petitioner is entitled to the

relief as claimed for restraining the respondents from

invoking the L/C No. DIA101180 which was issued on

17.7.2007 and date and place of expiry is shown as

3.9.2007 and beneficiary is shown to be respondent No. 1.

As per this L/C, the deferred payment was 90 days after

B/L date. The rules applicable are UCP latest version.

After the L/C was opened on 14.9.2007 by the respondents

No. 3 & 4, bill of exchange for 321346.14 Euro was issued.

As per this bill of exchange, the payment was to be made to

the Order of Bank of Baroda, CFS branch, Law Garden,

Ahmedabad, India. Thus, it is clear that L/C was

negotiated and enforced.

OMP No. 648/2007 Page 8 of 16

12.Clause 47A of the L/C reads as follows:

“Additional conditions

After receipt of credit

conform documents in Bielefeld,

we will cover the bank presenting

documents according to their

instructions 90 days after date of

Bill of Lading.”

13.The bill of lading in respect of the goods covered under

impugned agreement is dated 7.9.2007. Therefore, since

bill of exchange had already been issued, the L/C has been

acted upon. It is pertinent to say that there is only one bill

of lading for all the three consignment contracts and no

separate L/C has been prepared in respect of consignment

No. PJN 1194/07 and only one bill of exchange is prepared

for all the three consignments.Therefore, L/C cannot be

bifurcated into two by separating the claim of the

petitioner in respect of consignment No. PJN 1194/07.

14.Under these circumstances, respondent No. 1 cannot be

restrained from invoking the L/C as prayed in para (a) of

the prayer clause. However, interest of the petitioner can

be protected by issuing appropriate directions to the

respondent No. 1 as an alternative relief as claimed in para

(c) of the prayer clause. The claim of the petitioner is for

OMP No. 648/2007 Page 9 of 16

1,16,207.76 Euro as against the consignment order No.

PJN 1194/07.

15.Petitioner has also sought restraining order against

respondents No. 2 to 4 who happened to be the bankers of

the respondent No. 1 and petitioner respectively. This

L/C is governed by rules laid down in UCP latest version.

16.Article 3 of UCP 500 reads as follows:

“Credits v. Contracts

a. Credits, by their nature,

are separate transactions from

the sales or other contract(s) on

which they may be based and

banks are in no way concerned

with or bound by such

contract(s), even if any reference

whatsoever to such contract(s) is

included in the Credit.

Consequently, the undertaking of

a bank to pay, accept and pay

Draft(s) or negotiate and/or to

fulfil any other obligation under

the Credit, is not subject to

claims or defences by the

Applicant resulting from his

relationships with the Issuing

Bank or the Beneficiary.

b. A Beneficiary can in no

case avail himself of the

contractual relationships existing

between the banks or between

the Applicant and the Issuing

Bank.”

17.Article 9 lays down the guidelines for the banks regarding

OMP No. 648/2007 Page 10 of 16

their liability of issuing and confirming. The relevant

portion of Article 9 of UCP 500 is reproduced as below:

“a. An irrevocable Credit

constitutes a definite undertaking

of the Issuing Bank, provided that

the stipulated documents are

presented to the Nominated Bank

or to the Issuing Bank and that

the terms and conditions of the

Credit are complied with:

i. if the credit provides for

sight payment – to pay at sight;

ii. if the credit provides for

deferred payment – to pay on the

maturity date (s) determinable in

accordance with the stipulations

of the Credit;

iii. if the Credit provides for

acceptance:

a. by the Issuing Bank – to

accept Draft(s) drawn by the

Beneficiary on the Issuing Bank

and pay them at maturity,

or

b. by another drawee bank-

to accept and pay at maturity

Draft(s) drawn by the Beneficiary

on the Issuing Bank in the event

the drawee bank stipulated in the

Credit does not accept Draft(s)

drawn on it, or to pay Draft(s)

accepted but not paid by such

drawee bank at maturity;

iv. if the Credit provides for

negotiation – to pay without

recourse to drawers and/or bona

fide holders, Draft(s) drawn by

the Beneficiary and/or

document(s) presented under the

Credit. A Credit should not be

issued available by Draft(s) on the

Applicant. If the Credit

nevertheless calls for Draft(s) on

the Applicant, banks will consider

OMP No. 648/2007 Page 11 of 16

such Draft(s) as an additional

document(s).”

18.Thus, it is clear that respondents No. 2 to 4 are regulated

in their working by various articles of the UCP 500.

Therefore, in case of any irrevocable bank guarantee or

L/C, the buyer cannot obtain injunction against the bank on

the ground that there was breach of the contract by the

seller. Bank has no option but to honour the demand for

encashment if the seller complies with the terms and

conditions of the bank guarantee or L/C. If the bank is

satisfied on the face of the documents that they are in

conformity with the list of documents mentioned in the

bank guarantee or L/C and there is no discrepancy, the

bank is bound to honour the demand of the seller for

encashment. Bank cannot refuse payment on the ground

that the buyer is claiming that there is breach of contract

nor the bank can decide the question of breach and refuse

payment to the seller. The liability of the bank under the

document is independent of any dispute as to breach of

contract between the seller and the buyer.

19.In Federal Bank Ltd. v. V.M. Jog Engineering Ltd. -

AIR 2000 SC 3166, it was observed:

“In several judgments of this

OMP No. 648/2007 Page 12 of 16

Court, it has been held that

Courts ought not to grant

injunction to restrain encashment

of Bank guarantees or Letters of

Credit. Two exceptions have been

mentioned-(i) fraud and (ii)

irretrievable damage. If the

Plaintiff is prima facie able to

establish that the case comes

within these two exceptions,

temporary injunction under Order

39, Rule 1, C.P.C. can be issued.

It has also been held that the

contract of the Bank guarantee or

the Letter of Credit is

independent of the main contract

between the seller and the buyer.

This is also clear from Art.3 of the

UCP (1983 Revision). In case of

an irrevocable Bank guarantee or

Letter of Credit the buyer cannot

obtain injunction against the

Banker on the ground that there

was a breach of the contract by

the seller. The Bank is to honour

the demand for encashment if the

seller prima facie complies with

the terms of the Bank Guarantee

or Letter of Credit, namely, if the

seller produces the documents

enumerated in the Bank

Guarantee or Letter of Credit. If

the Bank is satisfied on the face

of the documents that they are in

conformity with the list of

documents mentioned in the Bank

Guarantee or Letter of Credit and

there is no discrepancy, it is

bound to honour the demand of

the seller for encashment. While

doing so it must take reasonable

care. It is not permissible for the

Bank to refuse payment on the

ground that the buyer is claiming

that there is no breach of

contract. Nor can the Bank try to

decide this question of breach at

OMP No. 648/2007 Page 13 of 16

that stage and refuse payment to

the seller. Its obligation under

the document having nothing to

do with any dispute as to breach

of contract between the seller and

the buyer. As to its knowledge of

fraud or forgery, we shall

presently deal with it.”

20.The observations made in Federal Bank Ltd. (supra)

case were followed by this Court in M/s. Nissho Iwai

Corporation v. Mauria Udyog Pvt. Ltd. & Anr. - 1110

(2004) DLT 620 (DB) and it was observed:

“This Court having

considered the material brought

on record can at best observe

that a dispute has arisen between

the parties as to the quality of the

material supplied by the

appellant and the same can only

be settled after a full-fledged

inquiry/ trial. The important

question, however, is as to

whether such a dispute can ipso

facto be termed as a fraud on the

part of the supplier of the goods

thereby disentitling them to

receive the price of the goods so

supplied. In our opinion, the

answer would be a plain `No'

because at this stage it is difficult

to hold that the material so

supplied was in fact defective or

did not conform to the

specifications or if it was so what

was the extent and nature of the

defect. In any case, we are

informed that the petitioner has

now amended its suit by

incorporating the relief of

OMP No. 648/2007 Page 14 of 16

recovery of damages/

compensation. The issue can

appropriately be considered and

answered by the Civil Court only

after the parties have gone to

trial. Thus, looking at the matter

from all possible angles, it cannot

be said that the LOCs in question

would be vitiated by fraud or any

irretrievable damage would be

suffered by the respondent

entitling them an injunction.

Therefore, we are of the

considered opinion that the

plaintiff-respondent No.1 failed to

make out a prima facie case so as

to entitle them of any restraint

order against the payment of the

LOCs either in full or in part.”

21.Coming back to the facts and circumstances of this case,

petitioner has not alleged any fraud played on it by the

respondent No. 1. No letter was issued to the bankers by

the petitioner informing any fraud having been played upon

it. The bank, therefore, could not have any knowledge of

the fraud, if any. Present case does not even fall in the

exceptions to Article 3 of UCP 500. Therefore, present

petition under Section 9 of the Arbitration and Conciliation

Act against the bankers who are not even party to the

consignment agreement and the arbitration clause is not

maintainable and deserves dismissal qua respondents No.

2 to 4.

OMP No. 648/2007 Page 15 of 16

22.To conclude, the claim of the petitioner for restraining the

respondent No. 1 from invoking the L/C No. DIA101180

dated 17.7.2007 is rejected. However, the interest of the

petitioner can be protected by other measures. Hence, it is

ordered that respondent No. 1 shall be entitled to invoke

the said L/C DIA101180 dated 17.7.2007 and receive

payment subject to it furnishing bank guarantee for

1,16,207.76 Euro (Rs. 68,60,906.15 in Indian currency)

within one week to the satisfaction of the Registrar

General.

23. Petition stands disposed of accordingly.

December 05, 2007 ARUNA SURESH

jk (JUDGE)

OMP No. 648/2007 Page 16 of 16