Holding

An injunction to restrain the encashment of an irrevocable Letter of Credit is permissible only in cases of egregious fraud or irretrievable injury, neither of which was established; therefore the appeal is dismissed.

Summary

Himadri Chemicals Industries Ltd entered into a contract with Coal Tar Refining Co. for supply of extra‑hard pitch coal, with payment to be made by an irrevocable Letter of Credit (LC) opened by the appellant. The appellant’s bank found discrepancies in the documents and, after the appellant waived them, the parties agreed to amend the LC, but the quality of the goods remained disputed. The appellant filed an application under Section 9 of the Arbitration and Conciliation Act, 1996 seeking an injunction to stop the LC’s encashment; a single High Court judge initially granted a status‑quo, later vacated it, and the Division Bench affirmed the vacatur. On appeal, the Supreme Court examined whether an injunction could be granted to restrain an unconditional LC, noting that such relief is permissible only in cases of egregious fraud or irretrievable injury. The Court held that the alleged fraud pertained only to part of a consignment and did not meet the threshold, and that the appellant had not shown any irretrievable injury, especially since a bank guarantee had already been furnished. Consequently, the appeal was dismissed and the High Court’s order vacating the injunction was upheld.

Issues considered

Whether a court may grant an injunction under Section 9 of the Arbitration and Conciliation Act, 1996 to restrain the encashment of an irrevocable Letter of Credit.
Whether the alleged fraud concerning a portion of the consignment satisfies the requirement of egregious fraud that vitiates the foundation of the Letter of Credit.
Whether the appellant can demonstrate irretrievable injury or injustice that would justify restraining the Letter of Credit, particularly given the respondent’s lack of assets in India.
Whether a dispute over the quality of goods under the underlying contract can constitute a ground for an injunction against the Letter of Credit.

Legislation cited

Subjects

Letter of CreditInjunctionArbitration and Conciliation ActSection 9FraudIrretrievable injuryBank guaranteeQuality disputeContract performance

Judgment

.... HIMADRI CHEMICALS INDUSTRIES LTD. A
v.
COAL TAR REFINING COMPANY

AUGUST 7, 2007

[TAR UN CHA ITERJEE AND P.K. BALASUBRAMANYAN, JJ.] B

Arbitration and Conciliation Act, 1996; Section 91/ndian Contract Act,
1872/Negotiable ~nstruments Act, 1881:

Payment in. terms ofletter ofcredit-A Company entering into a contract, C
with another company for supply of certain goods-Payment agreed to be
made by a Letter of Credit-Description of goods supplied not found as per
terms of Letter of Credit-Appel/ant-company agreeing to make payments to
supplier subject to resolving the quality issue or rejection of shipping
documents-No effective steps taken by the supplier company resolving quality ,D
issue-Filing of application by purchaser company u/s. 9 of 1996 Act for
grant of injunction to stop release of payment under Letter of Credit-Single
:r
Judge ofHigh Court granting status quo in the matter-Later vacated Affirmed
by Division Bench of the High Court-On appeal, Held: Law relating to
grant of injunction in the matter of invocation of a Letter of Credit is
settled-Courts could grant an order of injunction in the matter ofencashment E
of Letter of Credit only when fraud of an egregious nature being committed
which would vitiate the very foundation of such Letter of Credit-The
beneficiary seek to take advantage of the situation or allowing such payment
would result in irretrievable harm/injustice to the other party-In the present
case, High Court was right in vacating status quo since fraud was alleged f
in respect ofpart of consignment of a shipment-Moreover, no strong prima
facie case offraud made out which would warrant continuance of the order
of status quo-Besides, no irretrievable injury caused to the appellant-
company by refusal to grant an order of injunctio~laim, if any, arise due
to supply of defective quality of goods could be recovered in the arbitration
proceeding. G
Appellant-Company entered into a contract with another company, the
responder.t, for supply of Extra Hard Pitch Coal as per schedule set out in the
contract. In the contract, one of the terms of payment' was that a Letter of
Credit will be opened. Accordingly an irrevocable Letter of Credit was opened
869 H
870 SUPREME COURT REPORTS [2007] 8 S.C.R.

A by the appellant in favour of the respondent .In terms thereof, payment was to
be made "at sight". The document against which payment was to be made, .....
was received directly by the appellant's banker and it was found that the
description of the goods as supplied was not as per the terms of the Letter of
Credit Accordingly, the banker intimated the fact to the appellant and sought
advice whether the appellant was willing to waive the discrepancies indicated
B in the Letter. of Credit. The appellant waived the discrepancies and accepted
the documents and also directed the banker to make the payments. However,
before accepting the documents and agreeing to make payments, the appellant
had given the respondent two options: (i) either to negotiate the document and
resolve the quality issue; or (ii) reject the shipment document. Later, the
C appellant and the respondent agreed to amend the Letter of Credit On the
basis of the amended Letter of Credit, the payment could be made on or before
fOth April, 2007. However, no effective steps were taken by the respondent-
sup.plier "to resolve the quality issue of the goods agreed to be supplied.
Aggrieved; the appellant-company filed an application under Section 9 of the
Act to stop release of payment under the Letter of Credit Single Judge of the
D High C~urt passed an interim order granting status quo in the matter. The
interim order of status quo, so granted, was extended from time to time. Later,
Single Judge vacated the interim order of status quo granted earlier against
which an appeal was preferred by the appellant before a Division Bench of the
High Court which dismissed the appeal and affirmed the order of the Single
E Judge vacating 'the interim order of status quo. Hence the present appeal.

·Dismissing the appeal, the Court

HELD: 1.1. The law relating to grant or refusal to grant injunction in
the ,matter of invocation of a Bank Guarantee or a. Letter of Credit is now
F .well settled by a plethora of decisions not only of this Court but also of the
different High Courts. From these decisions, which are relating to the
principles for grant or refusal to grant of injunction to restrain enforcement
of a Bank Guarantee or a Letter of Credit, the following principles should be
noted in the matter of injunction to restrain the encashment of a Bank
Guarantee or a Letter of Credit:-
G
(i) While dealing with an application for injunction in the course of
·commercial dealings, and when an unconditional Bank Guarantee or
.Letter.ofCredit is given or accepted, the Beneficiary is entitled to
realize such a Bank Guarantee or a Letter of Credit in terms thereof
Jrrespective of any pending disputes relating,to the terms of the
H
HIMADRI CHEMICALS INDUSTRIES LTD. v. COAL TAR REFINING COMPANY 871

contract A
(ii) The Bank giving such guarantee is bound to honour it as per its
terms irrespective of any dispute raised by its customer.

(iii) The Courts should be slow in granting an order of injunction to
restrain the realization of a Bank Guarantee or a Letter of Credit. B
(iv) Since a Bank Guarantee or a Letter of Credit is an independent
and a separate contract and is absolute in nature, the existence of any
dispute between the parties to the contract is not a ground for issuing
an order of injunction to restrain enforcement of Bank Guarantees
or Letters of Credit C
(v) Fraud of an egregious nature which would vitiate the very
foundation of such a Bank Guarantee or Letter of Credit and the
beneficiary seeks to take advantage of the situation.

(vi) Allowing encashment of an unconditional Bank Guarantee or a
Letter of Credit would result in irretrievable harm or injustice to D
one of the parties concerned.
,
Keeping these principles in mind and applying the same on the facts of
the instant case, the only conclusion that could be drawn is that no good ground
has been made out by the appellant to interfere with the impugned order. E
(Paras 10, 14 and 15) 1877-C; 879-D, E, F, G, H; 880-A, B, CJ

U.P. State Sugar Corporation v. Sumac International ltd, (1997) 1 SCC
568; U.P. Coop. Federation ltd v. Singh Consultants and Engineers (P) ltd,
(1988) I SCC 174; Svenska Handelsbanken v. Indian Charge Chrome, (1994)
1 SCC 502 and U.P. State Sugar Corporation v. Sumac International ltd, F
(1997) 1 sec, relied on.

1.2. There are two exceptions when courts can grant an order of
injunction in favour of an aggrieved party in the matter of encashment of a
Bank Guarantee or a Letter of credit· Condition Nos. (v) and (vi), as noted
above, are two such exceptions. (Para 15) (880-C) G
2.1. From a close scrutiny oftl.~ facts pleaded so in the application, it
cannot be held that such facts have constituted fraud for which an order of
\·
injunction in the matter of encashment of Letter of Credit could be passed by
the courts. The facts pleaded would only show that although the respondent
had agreed to remove the defects in the goods by saying that it shall take H
..J_

872 SUPREME COURT REPORTS [2007] 8 S.C.R.

A steps to reduce the ash content of the goods to 0.3 % before the payment date
of the Letter of Credit as extended, but they deliberately and with ulterior
· motive had not fulfilled their intention to do so. (Para 151 (880-D, E, Fl

2.2. A case of fraud was alleged only in respect of a part of the
consignment of the second shipment. It has be~n rightly held by the High
B Court that this could not constitute fraud as fraud must be in respect of the
whule consignment and not in respect ofa part of the same. In this view of the
matter, this Court is in agreement with the High Court that the pleadings
made relating to fraud in the application for injunction were not sufficient
nor any strong prima facie case of fraud could .be made out in the petition
C which would warrant a continuance of the order of status quo. That apart, in
the matter of invocation of a Bank Guarantee or a Letter of Credit, it is not
open for the bank to rely upon the terms of the underlying contract between
the parties. !Paras 15 and 161 (880-G-H; 881-A, Bl

2.3. In any view of the matter, the defective quality of goods in respect of
D which· an order of injunction of the encashm~nt of the Letter of credit was
sought could at all be a reasonable ground for grant of injunction as it was
related to payment dated 29th May, 2006 which was the subject matter of the .
-\::
arbitration proceeding and the claim, if any, can be recovered in the said
arbitration proceeding. (Para 171 (881-D, E)

E 3.1. Irretrievable injury was not caused to the appellant by a refusal to
grant an order of injunction restraining the encashment of the Letter of Credit
for two reasons :-

(i) Exceptional circumstances have not been made out by the appellant
which would make it impossible for the Guarantor to reimburse
F himself if he ultimately succeeds. Only a case of apprehension has
been shown in the application for injunction to the extent that if i
ultimately, the application for injunction is allowed, it would be
impossible to recover the amount encashed on the basis of the Letter
of Credit because the respondent is a Foreign Company which has
no assets in India. This cannot come within the second exception
G
indicated above.

(ii) Admittedly in this case, the appellant has already filed an
Admiralty Suit in the original side of the Calcutta High Court
claiming damages in respect of the same set of goods. In the said suit
filed, the respondent was given liberty to furnish a Bank Guarantee
H
HIMADRI CHEMICALS INDUSTRIES LTD. v. COAL TAR REFINING COMPANY 873
_, for a sum of Rs. 21,86,68,540/- being the sum claimed by the appellant A
..... on account of damages to the credit of the said suit and a Bank
Guarantee to the extent of this amount has already been furnished
by the respondent. (Para 18] (881-F, G, H; 882-A, B, CJ

3.2. In the facts and circumstances of the case, the question of
irretrievable injury even prima facie which would lead to injustice and harm B
to the appellant cannot at all be conceived of since the appellant has been duly
protected by the furnishing of Bank Guarantee. Since the respondent has
already furnished Bank Guarantee in the other suit relating to the same
materials, the question of granting injunction in favour of the appellant cannot
arise only because the respondent has no assets in India which can be sold in
the event a decree is passed ultimately in his favour. In this view of the matter,
c
the finding of the High Court in refusing to grant an order of injunction in
favour of the appellant is echoed and thus the High Court was fully justified
in doing so. jPara 18) (882-C, D, EJ

4. It is clarified that whatever findings have been arrived at by this C<;urt D
in this appeal or by the High Court while dealing with the prayer for grant of
an interim order of injunction, shall not be taken to be final as to the disposal
~
of the application for injunction by the High Court. (Para 19) (882-E, FJ

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 3522 of2007.
E
From the Judgment and Order dated 21.6.2007 of the High Court of
Calcutta in T.No. 306 of2007 in APO No. NIL of2005.

S.K. Kapoor, Anil Agarwalla, J. Saha, Sandip Agarwal, Jagdeep Anand
and Rukhsana Choudhury for the Appellant.
,;.. F
Dushyant Dave, R. Banerjee, Krishna Raj Thakur, Ritupama Chatterjee
and Arvind Kumar Gupta for the Respondent.

The Judgment of the Court was delivered by

T ARUN CHATTERJEE, J. l. Application for permission to file special G
,. leave petition is allowed. Leave granted.

2. This appeal is directed against the judgment and order dated 21st
\. June, 2007 passed by a Division Bench of the Calcutta High Court whereby
an appeal preferred against an order dated 5th June, 2007 of a learned Single
Judge of the same High Court was dismissed and the order of the learned H
874 SUPREME COURT REPORTS [2007) 8 S.C.R.

A Single Judge was affinned. The learned Single Judge by his order dated 5th
June, 2007 had vacated an interim order of status quo granted earlier on an
app Iication filed under Section 9 of the Arbitration and Conciliation Act, 1996
(hereinafter referred to as 'the Act') for an order of injunction restraining the
respondent from receiving any payment under a Letter of Credit.

B 3. At this stage, we feel it proper to narrate the facts which have given
rise to the filing of this appeal in this Court.

4. The appellant entered into a contract on 29th May, 2006 with the
respondent· by which the respondent had agreed to supply 26,000 metric
tones of Extra Hard Pitch (Reprocessing Grade) (in short "goods") to the
C appellant as per schedule set· out in the contract. In the said contract, one
of the tenns of payment was that a Letter of Credit will be opened and
·accordingly an irrevocable Letter of Credit was opened by the appellant in
favour of the respondent. Initially, under the said Letter of Credit, payment
was to be made "at sight". The document against which payment was to be
D made, was received directly by the banker of the appellant and on presentation
of the document it was found by the banker of the appellant that the description
of the goods was not as per the terms of the Letter of Credit. Accordingly,
the banker of the appellant by a Letter dated I Ith September, 2006, intimated
the aforesaid fact to the appellant and sought advice whether the appellant
was willing to waive the discrepancies indicated in the Letter dated 11th
E September, 2006. In response to this query of the banker, the appellant waived
the discrepancies and accepted the documents by a letter dated 3rd October,
2006 and also agreed to make the payments in the following manner:

"With reference to the above and further to your swift message
dated 3/10/2006, We are accepting the documents with
F discrepancy and the payment will he made after 180 days from
today. We accept to make the following payments. (Emphasis
supplied)
Total amount against above mentioned

G three (3) Bills Euro 2348915 .00
Less: Advance payment already
Made through Central Bank

of India Kol. Main Office Euro 387788.82

H
HIMADRJ CHEMICALS INDUSTRIES LTD. v. COAL TAR REFINING COMPANY [TARUN CHATTERJEE. J.) 8'75

Amount to be paid against A
the above three Bills Euro 1961126.18"

5. Before accepting the documents and agreeing to make payments, by
a communication dated 28th September, 2006, the respondent had given the
appellant two options:- (i) either to negotiate the document and resolve the B
quality issue; or (ii) reject the shipment document.

6. Thereafter, correspondence was exchanged between the appellant
and the respondent and the Letter of Credit was amended and payment "~t
sight" was substituted by the words "230 days from the shipment date". On
the basis of the amended Letter of Credit, the payment was, thereafter, payable C
on or before l 0th April, 2007. The amendment of the terms of Letter of Credit
was informed to the bankers of the respondent which was accepted by the
respondent as well. The issue regarding the quality of goods remained
undecided although an inspection report was submitted by SGS India PVt.
Ltd. with the concurrence of the respondent. lnspite of various steps taken
by the appellant and promises made by the respondent, no effective step was D
. taken to resolve the dispute regarding quality of the goods and hence ttle

' application under Section 9 of the Act was filed by the appellant to stop
release of payment under the Letter of Credit without first resolving the issue
regarding the quality of goods of the second consignment supplied by ttle
respondent to the appellant. Therefore, in the application for injunction, it w~ E
pleaded that the act of the respondent for not resolving the dispute on the
quality of goods in the second c1 nsignment amounted to fraud as th~
respondent had dishonestly and with ulterior motive not resolved the dispute
as raised by the appellant and in any event, an order of injunction should bF
granted, 'otherwise, it would not be possible for the appellant to recover the
money released under the Letter of Credit as the respondent is a foreign F
company from Iran and has no assets in India.

7. The respondent raised a plea for vacating the interim order of status
quo granted by the learned Single Judge on the application for injunction filed
u/s 9 of the Act alleging the following facts:- Goods were dispatched to the G
appellant by the respondent under two shipments. So far as the first shipment
was concered, goods were received, documents negotiated and payment
released. Therefore, there could not be any dispute in respect of the goods
\
relating to the first shipment. By the second shipment, the respondent had
dispatched 12,503 metric tones of goods to the appellant which arrived at
Calcutta from Iran by a vessel called M. V. Iran Takhti. Out of the aforesaid H
876 SUPREME COURT REPORTS [2007] 8 S.C.R

A 12,503 metric tones of goods so dispatched and arrived at Calcutta, documents
relating to 2503 metric tones of goods were negotiated by the Central Bank
of India, Cakutta and payment released. However, for the balance 10,000
metric tons, documents were not negotiated and no payment was released.
It was further alleged by the respondent that there was no reason for not
B negotiating the documents or effecting release of the payment as payments
for part consignment as noted hereinabove were already released. It was also
the case of the respondent in support of its contention for vacating the
interim order of status quo that despite discrepancies raised by the appellant,
by its communication dated 3rd October, 2006, the appellant had agreed to
accept the documents with discrepancy and make payments in respect of the
C goods for which disputes were raised by the appellant regarding the quality
of such goods. It was further the ca5e of the respondent that the defective
quality of goods in respect of which order of injunction of the Letter of Credit
was sought could not also be the reason for grant of injunction as it was
related to a payment dated 29th May, 2006 which was also the subject matter
D of an arbitration proceeding and the claim, if any, could be recovered .in the
said arbitration proceeding. According to the respondent, since the Letter of
Credit was an independent contract and the appellant could not satisfy any
breach of the terms of the .Letter of Credit, no order of injunction could be
passed by the court·for stopping the respondent from realizing the payment
relating to the price of the goods supplied. The respondent further stated that
E the appellant could not make out any case of fraud for which an order of
injunction restraining the respondent from realizing th.e payment by encashing
the Letter of Credit could be granted and therefore the application for injunction
must be rejected.

8. As noted herein earlier, the order of status quo was passed by the
F learned Single Judge of the High Court on the application for injunction filed
under Section 9 of the Act at the instance of the appellant on 9th April, 2007, I
and by the said order, the interim order of status quo was granted till 30th
April, 2007 and the same was extended from time to time from 23rd April 2007
till 17th May, 2007. Thereafter the matter was directed to appear on 16th May,
G 2007 and heard by the learned Single Judge on 17th May, 2007 and interim
order of status quo was extended till 25th June, 2007. As noted herein earlier,
the learned Single Judge by order clted 5th June, 2007 vacated the interim
order of status quo granted earlier against which an appeal was preferred by
the appellant before a Division Bench of the High Court of Calcutta which
dismissed the appeal and affirmed the order bf the learned Single Judge
H vacating the interim order of status quo.
HIMADRICHEMICALSINDUSTRIES LTD. v. COAL TAR REFINING COMPANY [TARUN CHATTERJEE, J.) 877

9. We have heard the learned counsel for the parties and carefully A
examined the orders of the learned Single Judge as well as that of the Division
Bench. We have also examined in detail the application for injunction, the
original contract, the Letter of Credit as amended and the other documents
on record. Having noted salient facts and materials on record, let us now
consider whether the Division Bench was justified in affirming the order of
the learned Single Judge vacating the interim order of status quo in the matter B
of stopping the payment in terms of the Letter of Credit. But before dealing
with this aspect of the matter, let us consider the principles for grant or refusal
to grant injunction in the matter of release of payment in terms of a Letter of
Credit or a Bank Guarantee.

10. The law relating to grant or refusal to grant injunction in the matter
c
of invocation of a Bank Guarantee or a Letter of Credit is now well settled
by a plethora of decisions not only of this court but also of the different High
Courts in India. In U.P. State Sugar Corporation v. Sumac International Ltd.,
[ 1997] I SCC 568, this court considered its various earlier decisions. In this
decision, the principle that has been laid down clearly on the enforcement of D
a Bank guarantee or a Letter of Credit is that in respect of a Bank Guarantee
or a Letter of Credit which is sought to be encashed by a beneficiary, the bank
giving such a guarantee is bound to honour it as per its terms irrespective
of any dispute raised by its customer. Accordingly this Court held that the
courts should be slow in granting an order of injunction to restrain the E
realization of such a Bank Guarantee. 1t has also been held by this court in
that decision that the existence of any dispute between the parties to the
contract is not a ground to restrain the enforcement of Bank guarantees or
Letters of Credit. However this court made two exceptions for grant of an
order of injunction to restrain the enforcement of a Bank Guarantee or a Letter
of Credit. (i) Fraud committed in the notice of the bank which would vitiate F
the very foundation of guarantee; (ii) injustice of the kind which would make
it impossible for the guarantor to reimburse himself.

11. Except under these circumstances, the courts should not readily
issue injunction to restrain the realization of a Bank Guarantee or a Letter of
Credit. So far as the first exception is concerned, i.e. of fraud, one has to G
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. So far as the second exception is concerned, this court
has held in that decision that it relates to cases where allowing encashment
of an unconditional bank guarantee would result in irretrievable harm or H
878 SUPREME COURT REPORTS [2007] 8 S.C.R.

A injustice to one of the parties concerned. While dealing with the case of fraud,
this court in the case of U.P. Coop. Federation Ltd. v. Singh Consultants and
Engineers (P) Ltd, (1988) 1 SCC 174 held as follows:

"The fraud must he of an egregious nature such as to vitiate the
entire underlying transaction. While coming to a conclusion as to
B what constitutes fraud, this court in the above case quoted with
approval the observations of Sir John Donaldson, MR. in Bo/iv.inter
Oil SA v. Chase Manhattan Bank, (1984) 1 All ER 351 at p. 35~,which
is as follows, "The wholly exceptional case where an injunction !'lay
he granted is where it is proved that the hank knows that. any
demand for payment already made or which may thereafter he made
c will clearly he fraudulent. But the evidence must he clear both as to
the fact offraud and as to the hank's knowledge. It would certainly
not normally he sufficient that this rests on the uncorroborated
statement of the customer, for irreparable damage can he done to a
hank's Credit in the relatively brief time which must elapse between
D the granting of such an injunction and an application by the hank
to have it charged. " (Emphasis supplied)

12. In Svenska Handelsbanken v. Indian Charge Chrome, (1994) 1 SCC
502, it has also been held that a confirmed Bank Guarantee/irrevocable Letter
of Credit cannot be interfered with unless there is established fraud or
E irretrievable injustice involved in the case. In fact, on the question of fraud,
this decision approved the observations made by this court in the case of U.P.
Coop. Federation Ltd v. Singh Consultants and Engineers (P) Ltd, (1988]
l sec 174.

13. So far as the second exception is concerned, this court in U.P. State
F Sugar Corporation v. Sumac International Ltd, (1997) l S_CC as considered
herein earlier, at para 14 on page 575 observed as follows : f

"On the question of irretrievable injury which is the second exception
to the rule against granting of injunctions when unconditional hank
guarantees are sought to he realized the court said in the above case
G that the irretrievable injury must he of the kind which was the
subject matter of the decision in the Itek Corpn. Case (566 Fed Supp
12 JO). In that case an exporter in USA entered into an agreement
with the Imperial government of Iran and sought an order terminating l
its liability on stand by letter of credit issued by an American Bank
H in favour of an Iranian Bank as part of the contract. The relief was
IUMADRI CHEMICALS INDUSTRIES LTD. v. COAL TAR REFINING COMPANY [TARUN CHATTERJEE,J) 879

sought on account of the situation created after the Iranian revolution A
when the American Government cancelled the export licences in
relation to_ Iran and the Iranian government had forcibly taken 52
. American citizens as hostages. The US Government had blocked all
Iranian assets under the jurisdiction of United States and had
cancelled the export contract. The court upheld the contention of the
exporter that any claim for damages against the purchaser if decreed B
by the American courts would not be executable in Iran under these
circumstances and realization of the bank guarantee/letters of credit
would cause irreparable harm to the Plaintiff This contention was
upheld To avail ofthis exception, therefore, exceptional circumstances
which make it impossible for the guarantor to reimburse himself it C
he ultimately succeeds, will have to be decisively established. Clearly,
a mere apprehension that the other party will not be able to pay, is
not enough. In Itek case, there was certainty on this issue. Secondly,
there was good reason, in that case for the Court to be prima facie
satisfied that the guarantors i.e. the bank and its customer would be
found entitled to receive the amount paid under the guarantee. " D
(Emphasis supplied)
-i
. ) 14. From the discussions made hereinabove relating to the principles for
grant or refusal to grant of injunction to restrain enforcement of a Bank
Guarantee or a Letter of Credit, we find that the following principles should E
be noted in the matter of injunction to restrain the encashment of a Bank
Guarantee or a Letter of Credit :-

(i) While dealing with an application for injunction in the course
of commercial dealings, and when an unconditional Bank
Guarantee or Letter of Credit is given or accepted, the Beneficiary F
is entitled to realize such a Bank Guarantee or a Letter of Credit
in terms thereof irrespective of any pending disputes relating to
the terms of the contract.

(ii) The Bank giving such guarantee is bound to honour it as per
its terms irrespective of any dispute raised by its customer.
G
(iii) The Courts should be slow in granting an order of injunction
to restrain the realization of a Bank. Guarantee or a Letter of
Credit.
\
(iv) Since a Bank Guarantee or a Letter of Credit is an independent
and a separate contract and is absolute in nature, the existence H

I
1'
880 SUPREME COURT REPORTS [2007] 8 S.C.R.

A of any dispute between the parties to the contract is not a
ground for issuing an order of injunction to restrain enforcement
of Bank Guarantees or Letters of Credit.

(v) Fraud of an egre~ious nature which would vitiate the very
foundation of such a Bank Guarantee or Letter of Credit and the
B beneficiary seeks to take advantage of the situation.

(vi) Allowing encashment of an unconditional Bank Guarantee
or a Letter of Credit would result in irretrievable harm or injustice
to one of the parties concerned. .J

15. Keeping these principles in mind and applying the same on the facts
c of this c_ase, we can only draw this conclusion that no good ground has been f
made out by the appellant to interfere with the impugned order. As noted
herein above, there are two exceptions when courts can grant an order of
r
'
injunction in favour of an aggrieved party in the matter of encashment of a r
Bank Guarantee or a Letter of credit. Condition Nos. (v) and (vi), as noted
D herein above, are two such exceptions. For this reason, iet us first deal with
the case of fraud pleaded by the appellant in their application for injunction. l
The particulars of fraud have been pleaded in paragraph 45 of the application I

for injunction filed by the appellant in the High Court. From a close scrutiny .t I
of the facts pleaded in the said paragraph of the application for injunction,
in our view, it cannot be held that such facts have constituted fraud for which
E an order of injunction in the matter of encashment of Letter of Credit could ,.
be passed by the courts. The facts pleaded in paragraph 45 of the application
for injunction would only show that although the respondent had agreed to r
•
remove the defects in the goods by saying that it shall take steps to reduce
the ash content of the goods to 0.3 % before the payment date of the Letter
of Credit as extended, but they deliberately and with ulterior motive had not
t
F ,.__
fulfilled their intention to do so. It is not in dispute that the particulars of the l
fraud prima facie were restricted to 10,000 metric tones of the goods supplied f ~
by the respondent in respect of which documents were not negotiated by the
appellant. The entire consignment which was admittedly shipped by M.V.lran
Takhti was 12,503 metric tones out of which 2503 metric tones were negotiated
t
G and payments released by the Central Bank of India. Admittedly, as noted '
ii
herein above, a case of fraud was alleged only in respect of a part of the :r
consignment of the second shipment. It has been rightly held by the High r-
I
Court that this could not constitute fraud as fraud must be in respect of the ~
,/
whole consignment and not in respect of a part of the same. In this view of f
H the matter, we are, therefore, in agreement with the High Court that the
~
•.
HIMADRI CHEMICALS INDUSTRIES LTD. v. COAL TAR REFINING COMPANY [TARUN CHATTERIEE. I) 88}

pleadings made relating to fraud in paragraph 45 of the application for A
injunction were not sufficient nor any strong prima facie case of fraud could
be made out in the petition which would warrant a continuance of the order
of status quo.

16. That apart, as noted herein earlier, in the matter of invocation of a
Bank Guarantee or a Letter of Credit, it is not open for the bank to r.ely upon B
the terms of the underlying contract between the parties.

17. In view of the discussions made herein above and in view of the
admitted fact that in respect of 2503 metric tones of goods out of 12503 metric
tones of goods in the second consignment, documents were admittedly
negotiated and payments were released and further in view of the C
communication dated 3rd October, 2006 by the appellant to the banker that
it had agreed to accept the discrepancies raised in respect of the goods and
also agreed to make payment of the same, we are not satisfied that a case of
fraud even prima facie has been made out by the appellant for grant of
injunction. It is difficult to conceive that the appellant having accepted a part D
of the second consignment and having directed to release payments in respect
of the same, would be defrauded by the respondent in respect of the balance
quantity of goods which had arrived at Calcutta in the sec.ond shipment. In
any view of the matter, in our view, the defective quality of goods in respect
of which an order of injunction of the encashment of the Letter of credit was
sought could at all be a reasonable ground for grant of injunction as it was E
related to payment dated 29th May, 2006 which was the subject matter oft;ie
arbitration proceeding and the claim, if any, can be recovered in the said
arbitration proceeding.

18. Let us now consider the other exception, namely, case where allowing F
encashment of an unconditional Bank Guarantee or a Letter of Credit would
result in an irretrievable harm or injustice to one of the parties concerned. In
our view, irretrievable injury was not caused to the appellant by a refusal to
grant an order of injunction testraining the encashment of the Letter of Credit
for two reasons :-

(i) Exceptional circumstances have not been made out by the
G
appellant which would rrake it impossible for the Guarantor to
reimburse himself if he ultimately succeeds. Only a case of
\. apprehension has been shown in the application for injunction
to the extent that if ultimately, the application for injunction is
allowed, it w~uld be impossible to recover the amount encashed H
882 SUPREME COURT REPORTS [2007] 8 S.C.R.
'
I
A on the basis of the ~etter of Credit because the respondent is
a Foreign Company in Iran which has no assets in India. In our
view, this cannot come wit.hin the second exception indicated
. above. .

• (ii) Admittedly in this case, the appellant has already filed an
B Admiralty Suit No.14 of2006 in the original side of the Calcutta
High Court claiming damages in respect of the same set of
goods. In the said suit filed in the month of November 2006, the
respondent was given liberty to furnish a B~nk G~arantee for a
sum of Rs. 21,86,68,5401~ being the sum claimed, by the appellant .-=f
on account of damages to the credit of the said suit and ~.Bank
c Guararitee to the extent ofthis amount has already been furnished
by the respondent. Such being the position, the question of
irretrievable injury even prima facie which would lead to irijustice
and harm the appellant cannot at all be conceived of since the
appellant has been duly protected by the furnishing of Bank
D Guarantee.' In our view, only because the respondent has no
assets in India would not lea? us to hold that the appellant was
entitled to an injunction on the gr9und that he would suffer an
·irretrievable injury. In this view of the matter, we echo the finding
of the High Court in refusing to grant an order of injunction. in
favour of the appellant and hold that the High Court was fully .
E justified in doing so.

19. For the reasons aforesard, we do riot find any merit in this appeal.
The appeal is thus dismissed. We may, however, make it clear that whatever
findings have been arrived at by us in this appeal or by the High Court while
dealing with the prayer for grant of an· interim order of injunction, shall not
F be taken to be final as to the disposal of the applicationforinjunction by the
High Court: There will be no order as to costs.

S.K.S. Appeal dismissed.