Travancore Cements Ltd. v Ras Al Khaima Co. for White Cement and Construction Materials PSC & Ors.

# **IN THE HIGH COURT OF KERALA AT ERNAKULAM** ## **PRESENT** **THE HONOURABLE MR. JUSTICE SUNIL THOMAS** **WEDNESDAY, THE 3RD DAY OF JULY 2019 / 12TH ASHADHA, 1941** ## **OP(C).No.1508 of 2019** **(AGAINST THE ORDER IN IA NO.1591/2019 IN OS 322/2019 of PRINCIPAL MUNSIFF COURT , KOTTAYAM )** ## **PETITIONER/S:** **THE TRAVANCORE CEMENTS LTD. NATTAKOM, KOTTAYAM 686 013, REPRESENTED BY ITS COMPANY SECRETARY MR. SAJI A.J** **BY ADVS. SRI.JOSEPH MARKOSE (SR.) SHRI.ALEXANDER JOSEPH MARKOS SHRI.SHARAD JOSEPH KODANTHARA SHRI.VIPIN ANTO H.M. SRI.ABRAHAM JOSEPH MARKOS SRI.ISAAC THOMAS SRI.P.G.CHANDAPILLAI ABRAHAM SRI.V.ABRAHAM MARKOS** ## **RESPONDENT/S:** **1 RAS AL KHAIMA CO. FOR WHITE CEMENT AND CONSTRUCTION MATERIALS PSC P.O BOX 1492, RAK, UAE 2 STATE BANK OF INDIA, THIRUNAKKARA BRANCH, THIRUNAKKARA, KOTTAYAM 686 001. 3 STATE BANK OF INDIA, MAIN BRANCH, K.K ROAD, KOTTAYAM 686 001** ## **OTHER PRESENT:** **ADV.JOSEPH MARKOS FOR PETITIONER, ADV.MATHEW JOHN FOR R1, ADV.N.DEEPA FOR R2 AND R3** **THIS OP (CIVIL) HAVING COME UP FOR ADMISSION ON 24.06.2019, THE COURT ON 3/7/2019 PASSED THE FOLLOWING:** O.P.(C) NO.1508/2019 2 ## **JUDGMENT** This original petition arises from IA No.1591/2019 in OS No.322/2019 of the Munsiff's court, Kottayam. 2. The petitioner company is the plaintiff. Respondents are defendants in the above suit. Pursuant to a global e-tender floated by the plaintiff for the supply of raw materials for white cement under a rate contract basis, first defendant was the successful bidder, having quoted the lowest rate. Accordingly, plaintiff entered into a contract with the first defendant dated 16/8/2019, inter alia, undertaking to supply raw materials. According to the specification, irrevocable letter of credit with 60 days credit from the date of invoice against the supply was to given by the plaintiff from time to time. As part payment of the order, plaintiff placed a letter of credit for Rs.75,00,000/payable on 4/6/2019. Initial supply was received at the company of the plaintiff. As per the agreement, samples were drawn for quality test. It was found that, it did not satisfy the prescribed specification. Though the tests were O.P.(C) NO.1508/2019 3 conducted at various labs, none of the samples satisfied the specification. Immediately, it was informed to the principal banker of the plaintiff company who are defendants 2 and 3. A message was also sent on 30/3/2019 for opening the letter of credit issued by the third defendant. Since, it was not replied, plaintiff approached the court below filing the above suit. The prayer sought in the plaint was for an ex-parte injunction restraining the defendants 2 and 3 from disbursing the amount covered by Ext.P2 letter of credit. Along with the application, an interlocutory application for temporary injunction was moved on 1/6/2019. The letter of credit was to be encashed on 4/6/2019. The court below ordered urgent notice to the defendants and posted the case to 6/6/2019. 3. Contending that the court below, by posting the case on a date subsequent to the date of encashment of letter of credit, abdicated the jurisdiction and committed grave jurisdictional error, plaintiff has approached this court. An interim order was granted by Court directing respondents 2 and 3 not to release any amount covered by letter of credit till 17/6/2019. O.P.(C) NO.1508/2019 4 4. Respondents appeared through the counsel and were heard. 5. According to the learned senior counsel for the plaintiff, clause 35 of Ext.P1 agreement specifically provided that material not confirming to the specifications was liable to be rejected. It was also understood that, specification mentioned in the contract was an essential ingredient of the contract of supply and by supplying inferior quality raw materials, the first defendant had committed fraud. Hence, there was a fundamental breach of the condition. It was contended that, Ext.P2 letter of credit, though irrevocable, was conditional. Clause 41A of Ext.P2 had provided that, it was subject to acceptance. It was, hence, contended that, by Ext.P3 test reports it was confirmed that raw materials did not satisfy the mandatory specification. The first defendant had committed fundamental breach of the condition of supply and hence the contract has become void and supply was rejected. Consequently, the letter of credit has not become payable, it was argued. The suit was preceded by Ext.P2 message to the first defendant and Exts.P6 and P7 letters to the bank. O.P.(C) NO.1508/2019 5 5. Seriously opposing the above application, learned senior counsel for the second and third defendants contended that the letter of credit was a solemn document and parties are bound by the terms of the agreement. The respondent bank was under an obligation to comply with the terms of the letter of credit and any interference with its encashment by virtue of the orders of the court was held to be not sustainable. It was contended that, the Supreme Court in number of cases has held that, the courts shall not interfere in such a commercial transaction, merely on the basis of breach of the terms of the agreement and it would affect credibility of the international commercial transaction. It was also contended by the learned senior counsel that payee bank of the first defendant had called upon the second defendant bank to pay interest for the delayed payment. Learned counsel for the first defendant contended that, they have supplied goods in accordance with the specification and they cannot be burdened with any liability, based on unilateral test reports obtained. It was also contended that the courts should not interfere in such commercial transactions and enforcement of letter of O.P.(C) NO.1508/2019 6 credit was the rule and the only exception to it was a case of fraud. It was contended that the fraud should be in relation to the nature of agreement of letter of credit and not the basic contract of supply. It was further contended that, even assuming the entire plaintiff's case to be true, it was only a breach of contract and damages would be the appropriate remedy. There were sufficient provisions in the contract for arbitration and also for payment of damages. 6. Both sides relied on a catena of decisions to support their case. 7. It is pertinent to note that the suit was filed on 1/6/2019. Court below did not grant any interim relief. Though it was apprised that letter of credit would be encashed on 4/6/2019, the court below posted the case to a date thereafter. So, the court did not exercise the jurisdiction vested on it. It was at this stage, the petitioner moved to this Court under Article 227 of the Constitution of India and this court, as an interim measure, granted a temporary relief. This was a case of non exercise of jurisdiction which was sought to be corrected by filing the O.P.(C) NO.1508/2019 7 original petition. 8. The legal position regarding the interference in the international commercial transactions has been referred to in various decisions. 9. In **Tarapore and Co.Madras v. M/s.V/O Tractoroexport Moscow and Another(1969 KHC 404)** , it was held that irrevocable letters of credit 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. It was held that, only in exceptional circumstances the courts would interfere. It was held by the Supreme Court that the contract created between the seller and the bank was 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 was absolute. The bank was not entitled to rely upon the 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 was not entitled to an injunction restraining the seller from dealing with the letter of credit if O.P.(C) NO.1508/2019 8 the goods are defective. 10. In **United Commercial Bank v. Bank of India and Others (1981) 2 Supreme Court Cases 766)** , it was held that the bank owes a duty to the buyer to ensure that the documents tendered by the sellers under a credit are complied with those, for which the credit calls and which are embodied in terms of paying or negotiating bank. It was held that, the letter of credit constitutes the sole contract with the banker and a bank issuing or confirming a letter of credit is not concerned with the underlying contract between the buyer and seller. It was also held that in case description in the documents tendered in the bank are not identical to those specified in the credit letter, the paying bank is duty bound to refuse payment to the beneficiary. 11. In **U.P. Cooperative Federation Ltd. v. Singh Consultants and Engineers (P) Ltd.(1988)** 1 Supreme Court Cases 174), regarding the general principles governing the commercial contract and scope of interference by the court, it was held that commitments of banks must be honoured free from inteference by the O.P.(C) NO.1508/2019 9 courts. An irrevocable commitment either in the form of a confirmed bank guarantee or irrevocable letter of credit cannot be interfered with. In order to restrain the operation either of irrevocable letter of credit or of confirmed letter of credit or of bank guarantee, there should be serious dispute and there should be good prima facie case of fraud and special equities. 12. In **Himadri Chemicals Industries Ltd. v. Coaltar Refining Co.(2007) 8 Supreme Court Cases** **110),** Supreme Court reiterated that the court should be slow in granting an order of injunction to restrain the realisation of a bank guarantee or a letter of credit. There were two exceptions for grant of an order of injunction to restrain the enforcement of an unconditional bank guarantee or a letter of credit(i) fraud of an egregious nature committed in the notice of the bank which would vitiate the very foundation of the guarantee or letter of credit and the beneficiary seeks to take advantage of the situation ; and (ii) injustice of the kind which would make it impossible for the guarantor to reimburse himself or would result in irretrievable harm or injustice to one of the parties O.P.(C) NO.1508/2019 10 concerned. It was held that regarding the first exception, one has to satisfy the court that the fraud in connection with the bank guarantee or letter of credit would vitiate the very foundation of such a bank guarantee or letter of credit. But, the evidence must be clear, both as to the fact of fraud and as to the bank's knowledge. 13. In **Gangotri Enterprises Ltd. v. Union of India & Ors.(Civil Appeal No.4814/2016),** the Supreme Court reiterated the above principle and held that , in the case at hand, the decision of the Supreme Court in **Union of India(DGS&D) v. Raman Iron Foundry (1974) (2)** **SCC 231)** was applicable to the facts of the case and hence, the appellant in that case was entitled for grant of injunction against the respondent. 14. Re-capitulation of the above legal position clearly shows that the settled legal position is that the courts will be slow in interfering with the irrevocable letter of credit or bank guarantee, except where there is serious dispute and there should be a prima facie case of fraud in the form of bringing irretrievable injustice to the parties. 15. In the case at hand, it emerges that the agreement O.P.(C) NO.1508/2019 11 was for supply of item of a prescribed specification. Ext.P3 series of test certificates indicate that supply was of different one. Whether the prescribed specification is the crux of the agreement, whether it vitiates the basic letter of credit are facts to be considered on the basis of the pleadings of both parties. The question whether the dictum laid down by the Supreme court consistently to invoke the jurisdiction of the court is also a mater to be considered from the available materials. According to the learned senior counsel for the petitioner, the first defendant was stationed abroad and they have no item of property herein for recovery of the money. It was also contended that the facts indicated that if the letter of credit was encashed, the plaintiff would be without any remedy for recovery of the money due. It was also stated that even otherwise the company was running at a loss and trying to re-coup with Government funds. It was also stated that though Exts.P6 and P7 notices were issued to the company, they did not respond. There are grounds for special equities, it was contended. As mentioned above, the impact of these facts, should be ascertained on the basis of the affidavit and the O.P.(C) NO.1508/2019 12 counter affidavit. Defendants had not appeared before the court below and counter affidavits have not been filed. Hence, I feel that it may not be proper on the part of this court to decide the above facts without sufficient materials being placed on record . 16. Having considered the fact that the court below did not exercise the jurisdiction, I feel that it will be appropriate if the court below is directed to consider the rival contentions and whether any ground for continuance of the interim order is made out on the basis of the pleadings. Since the interim order is continuing, I am inclined to direct the court below to consider IA No. 1591/2019 at the earliest. 17. Accordingly, the original petition is disposed of with a direction to the court below to take up IA No.1591/2019 within twenty days from the date of appearance of the parties. In the meanwhile, parties shall complete their pleadings and get ready for final hearing on the date fixed by the court below. Both sides are directed to appear before the court below on 10/7/2019. Interim order granted by this court O.P.(C) NO.1508/2019 13 will continue during the above time limit. The original petition is disposed of as above. dpk **Sd/SUNIL THOMAS JUDGE** O.P.(C) NO.1508/2019 14 ## **APPENDIX** ## **PETITIONER'S/S EXHIBITS:** - **EXHIBIT P1 TRUE COPY OF THE AGREEMENT DATED 16-032019 EXECUTED BETWEEN THE PETITIONER AND THE 1ST RESPONDENT** - **EXHIBIT P2 TRUE COPY OF THE SWIFT MESSAGE DATED 30/03/2019 ISSUED BY THE 3RD RESPONDENT** - **EXHIBIT P3 A TRUE COPY OF THGE TEST CERTIFICATE DATED 03/04/2019 FURNISHED BY THE 1ST RESPONDENT** - **EXHIBIT P3 B TRUE COPY OF THE TEST CERTIFICATE DATED 03/04/2019 FURNISHED BY THE 1ST RESPONDENT** - **EXHIBIT P3 C TRUE COPY OF THE TEST CERTIFICATE DATED 16/04/2019 FURNISHED BY THE 1ST RESPONDENT** - **EXHIBIT P3 D TRUE COPY OF THE TEST CERTIFICATE DATED 16/04/2019 FURNISHED BY THE 1ST RESPONDENT.** - **EXHIBIT P4 A TRUE COPY OF THE TEST REPORT DATED 10/05/2019 OF TEST CARRIED OUT BY THE PETITIONER.** - **EXHIBIT P4 B TRUE COPY OF THE TEST REPORT DATED 14/05/2019 OF TEST CARRIED OUT BY THE PETITIONER.** - **EXHIBIT P5 TRUE COPY OF THE COMMUNICATION DATED 30/05/2019 ISSUED TO THE 1ST RESPONDENT BY THE PETITIONER.** - **EXHIBIT P6 TRUE COPY OF THE LETTER NO. 0367 DATED 13/05/2019 ISSUED BY THE PETITIONER TO THE 2ND RESPONDENT** **EXHIBIT P7 TRUE COPY OF LETTER NO 0450 DATED 24/05/2019 ISSUED BY THE PETITIONER TO THE 2ND RESPONDENT** O.P.(C) NO.1508/2019 15 **OF 2019 DATED 31/05/2019 FILED BY THE PETITIONER ON THE FILES OF THE HONOURABLE MUNSIFF'S COURT, KOTTAYAM. EXHIBIT P9 TRUE COPY OF INTERLOCUTORY APPLICATION IA NO. 1591 OF 2019 DATED 31/05/2019 IN O.S NO 322 OF 2019 FILED BY THE PETITIONER ON THE FILES OF THE HONOURABLE MUNSIFF'S COURT, KOTTAYAM.**