Legal Position on the Grant of Injunction Against Letter of Credit

The Code of Civil Procedure, 1908 – Section 104 r/w Order XLIII Rule 1(r) and 151 – Letter of Credit – Applicability of Uniform Customs and Practice for Documentary Credits (UCP 600) – Legal Position on the Grant of Injunction Against Letter of Credit – Judicial interference against the invocation of the letter of credit – The scope of judicial interference is very limited.

The Delhi High Court on Friday in Credit Agricole, CIB Vs. JVL Agro Industries Ltd. viewed that

it is not res integra that the letter of credit is an independent contract and the courts are in trend of not to interfere with the encashment of the letter of credit unless the case falls within the purview of exceptions laid down by the Apex Court.

The Apex Court re-emphasized the principle that the letter of credit must not be interfered with by the courts as the restraint on encashment of the same has major implications upon the international commerce as well as it hinders the autonomous nature of the transaction. The court has held that the Bank is required to just look into the correctness and appropriateness of the documents and if the same are found to be in order, the other consideration of the main underlying contract does not affect the encashment of the letter of the credit.

The court again said that the contract of the Bank guarantee or the Letter of Credit is independent of the main contract between the seller and the buyer.

# Applicability of UCP 600

The Uniform Customs and Practice for Documentary Credits (UCP 600) in Article 5 states that “Banks deal with documents and not with goods, services or performance to which the documents may relate”, therefore the Banks as parties to a letter of credit are not required to concern themselves with the actual performance of the services that were to be rendered and if the requisite documents are in order then the said Banks are required to perform their obligations under the letter of credit.

The rule is well established that a bank issuing or confirming a letter of credit is not concerned with the underlying contract between the buyer and seller. Duties of a bank under a letter of credit are created by the document itself, but in any case it has the power and is subject to the limitations which are given or imposed by it, in the absence of the appropriate provisions in the letter of credits of a bank.

# Importat Para(s)

30. We have gone through the decision referred by Mr.Sethi, learned senior counsel for the respondent No.1. The above said judgment referred by Mr.Sethi does not help the case the respondent No.1 on the two reasons; firstly that the provisions of UCP 600 have not been discussed and secondly after passing the said judgment, catena of judgments has been rendered by the Supreme Court discussing the similar issue. It is also pertinent to mention that the provisions of UCP 600 have not been discussed which are applicable inter se banks. Thus, the said judgment is distinguishable on this reason. It is also pertinent to mention that no reasons have been assigned in the impugned order which is mandatory under the proviso of Rule 3 of Order XXXIX CPC.

31. Having considered the entire gamut of the matter, we are of view that the impugned order is not sustainable in law on merit. Even otherwise, the same is liable to be set aside in view of the absence of the reasons. Accordingly, the appeal is allowed. The impugned order with regard to direction to the parties to maintain status quo regarding the two LCs in question till the next date of hearing is set aside.

32. Copy of the order be given dasti under the signatures of the Court Master.

# ACT
  • Section 104 read with Order XLIII Rule 1(r) and section 151 of the Code of Civil Procedure, 1908
# Legal Points
  • Legal Position on the Grant of Injunction Against Letter of Credit
  • Judicial interference against the invocation of the letter of credit.
  • The scope of judicial interference is very limited.
  • Principles of autonomous nature of Letter of credit independent from the underlying contract.
# Referred Cases
  1. United Commercial Bank v. Hanuman Synthetics Ltd. & Ors., AIR 1985 Cal 96 2.2.1
  2. UP Cooperative Federation Ltd. v. Singh Consultants and Engineers (P) Ltd., (1988) 1 SCC 1742
  3. State Trading Corporation v. Jainsons Clothing Corporation, (1994) 6 SCC 597
  4. Svenska Handelsbanken v. M/s. Indian Charge Chrome and Ors., AIR 1994 SC 6262.5.1 (i) Centax (India) Ltd. v. Vinmar Impex Inc. & Ors. 1986 (4) SCC 136
  5. The Projects & Equipment Corporation of India Ltd. v. Onoda Engineering & Consulting Company Ltd. 43 (1991) DLT 42
  6. Coronation Marketing Services Ltd. v. MMTC Limited & Anr. 61 (1996) DLT 61
  7. Dwarikesh Sugar Industries Ltd. v. Prem Heavy Engineering Works (P) Ltd. & Anr. 1997 (6) SCC 450
  8. Mahatma Gandhi Sahakra Sakkare Karkhane v. National Heavy Engg. Coop. Ltd. & Anr. 2007 (6) SCC 470
  9. Mountain Mist Agro India (Pvt.) Ltd. & Anr. V. Mr. S. Subramaniyam IA 8979/2006 in CS(OS) 1643/2005
  10. Fair Deal Agencies & Anr. V. Inner Mongolia Muwang Animal By Product Company Ltd. & Ors. 150 (2008) DLT 623
  11. P.V. Beverages Pvt. Ltd. v. Global Beverages AG & Ors. 148 (2008) DLT 68
  12. United Commercial Bank v. Bank of India and Ors., AIR 1981 SC 1426
  13. Federal Bank Ltd v. V.M. Jog Engineering Ltd and Others, (2001) 1 SCC 663
  14. State Bank of India and Ors. vs. Manganese Ore (India) Ltd. and Anr., (1996) 11 SCC 113

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