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Satish Kansal Vs. Synergy Tradeco NV and Ors. - (High Court of Delhi) (17 Jan 2022)

Courts can pass an injunction in respect of payments under Letter of Credit only in cases of 'egregious fraud and irretrievable injustice'



By way of the present application under Order XXXIX Rule 1 & 2 of the Code of Civil Procedure, 1908 (CPC), the Plaintiff seeks restraint order against payments to the Defendant no. 1 of amounts covered under the Letter of Credit (LC) No. 027LC01212850007 dated 12th October, 2021 and LC No. 027LC01212600008 dated 24th September, 2021, which are due for payments on 17th January, 2022 and 28th January, 2022 respectively.

It is a settled position of law that, contracts in respect of Bank Guarantees and LCs are independent of the main contract between the parties. Therefore, even if there is a breach of the main contract between the parties, that cannot be a ground for injuncting payments under the Bank Guarantees/LCs. Letter of Credit is an irrevocable obligation undertaken by the issuing bank, to honour the same, if the documents in terms of the said LC are submitted by the beneficiary.

It is normal practice in international trade that LCs are issued by the buyers through their banks in favour of the seller through the seller's banks, more particularly when buyer and seller are located in different jurisdictions/countries. LCs are the bedrock on which international trade and commerce is based. The goods are supplied by the seller to the buyer on the strength of the LCs provided by the buyer in favour of the seller, which functions as an assurance that once the goods are shipped and the documents in respect thereof are presented by the seller, the payment would be assured. The courts should be loathe to interfere with the mechanism of LCs as it would have an impact on the efficacy and functioning of international trade.

Merely because there is a dispute between the buyer and the seller with regard to the contract of supply of goods, that cannot be ground for interfering with the LC. Therefore, the courts have recognized only two exceptions to the aforesaid principle where courts would pass an injunction in respect of payments under an LC, in cases of 'egregious fraud and irretrievable injustice'. It has repeatedly been held by the courts that 'egregious fraud' has to be a fraud of the kind which goes to the very root of the matter.

Applying the aforesaid principles, no case for interference with the LCs has been made out by the plaintiff. Admittedly, in the present case, the documents have been duly presented by the defendant no. 1 to its bankers, who, in turn, have sought acceptance from the defendant no. 2/HDFC bank and such acceptance has been conveyed to the bankers of the defendant no. 1 by the defendant no. 2/HDFC bank.

Grave prejudice shall be caused to the reputation of the Defendant no. 2/HDFC bank, if it is prevented from honouring its obligations as per the norms of the international banking system. No case is made out by the plaintiff for grant of interim injunction to restrain payment under the LCs. Application dismissed.


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