Supreme Court Dismisses Appeal in Letter of Credit Dispute; Upholds Autonomy of Irrevocable Credits — No Fraud or Modification Established to Justify Interference. Irrevocable Letter of Credit Held Independent of Underlying Sale Contract and Not Subject to Injunction Absent Exceptional Circumstances Under Uniform Customs and Practice for Documentary Credits.

Case Note & Summary

The dispute arose from a contract between an Indian firm (appellant) and a Russian firm (respondent) for the supply of construction machinery for the Farakka Barrage Project. The appellant opened a confirmed, irrevocable and divisible letter of credit with the Bank of India, governed by the Uniform Customs and Practice for Documentary Credits (1962 Revision). The respondent supplied all machinery by December 1965, and received 25 per cent of the value under the letter of credit. Subsequently, the appellant complained that the machinery performed inefficiently, causing losses, and filed a suit seeking to restrain the respondent from realising the balance amount. While the suit was pending, the parties entered into a Delhi agreement in August 1966, under which the appellant withdrew the suit and the respondent agreed not to demand payment for six months, with a possible further extension, to allow amicable settlement. During this period, the Indian rupee was devalued. The contract contained a gold clause providing for revaluation of the price in the event of a change in gold parity. As a result, an additional sum of approximately Rupees twenty-six lacs became payable. The respondent’s bankers called upon the appellant to open an additional letter of credit for this extra amount, and stated that the extension of time would be given effect only upon such arrangement. The appellant objected, arguing that the Delhi agreement did not require an additional letter of credit. Negotiations failed, and as the extended period was about to expire, the appellant filed a fresh suit on the original side of the Madras High Court, seeking a permanent injunction against the Bank and the Russian firm from taking any steps under the letter of credit. A temporary injunction was granted by the trial court but vacated on appeal by the Division Bench. The appellant then approached the Supreme Court by special leave, canvassing the correctness of the vacation of the temporary injunction. The core legal issues were whether courts could interfere with the autonomy of an irrevocable letter of credit by interim injunction in the absence of pleaded fraud, and whether the letter of credit stood modified by the Delhi agreement and subsequent correspondence. The appellant contended that due to the defective machinery, it had suffered loss and would be unable to recover damages if the money was paid to a foreign entity with no assets in India. The respondent maintained that the letter of credit was an independent contract between the bank and the beneficiary, not qualified by disputes under the sale contract, and that no fraud was alleged. The Bank of India supported the position that its obligation was to honour the credit on presentation of compliant documents. The Supreme Court, after examining the nature of irrevocable letters of credit and their critical role in international commerce, held that such credits are autonomous and must not be interfered with by courts except in very exceptional situations, such as established fraud. It relied on English and American precedents including Urquhart Lindsay & Co. v. Eastern Bank, Hamzeh Malas v. British Imex Industries, and Dulien Steel Products v. Bankers Trust. The court noted that the plaint did not contain any plea of fraud; the allegation that the respondent had no assets in the country was not made, and in any event would not justify an injunction absent fraud. As to the modification argument, the court found that this contention was not raised in the plaint or before the High Court, and was not a pure legal contention as it turned on the intention of the parties. On a perusal of the correspondence, it was clear that the parties intended only to extend the time for payment and did not novate the contract. Therefore, no ground was made out to restrain payment under the letter of credit. The Supreme Court dismissed the appeals, confirming the Division Bench’s order vacating the temporary injunction.

Headnote

Issue of Consideration

Final Decision

The Supreme Court dismissed the appeals and upheld the order of the Division Bench vacating the temporary injunction. It held that an irrevocable letter of credit is autonomous and independent of the underlying contract; courts should not interfere except in very exceptional circumstances such as fraud, which was not pleaded. Consequently, the appellant was not entitled to restrain payment under the letter of credit.

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