HIMADRI CHEMICALS INDUSTRIES LTD. versus COAL TAR REFINING COMPANY

Citation: [2007] 8 S.C.R. 869 · Decided: 07-08-2007 · Supreme Court of India · Bench: TARUN CHATTERJEE · Disposal: Dismissed

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Judgment (excerpt)

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HIMADRI CHEMICALS INDUSTRIES LTD. 
A 
v. 
COAL TAR REFINING COMPANY 
AUGUST 7, 2007 
[TAR UN CHA ITERJEE AND P.K. BALASUBRAMANY AN, JJ.] 
B 
Arbitration and Conciliation Act, 1996; Section 91/ndian Contract Act, 
1872/Negotiable ~nstruments Act, 1881: 
Payment in. terms of letter of credit-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 
Judge of High 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 of encashment 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 of part of consignment of a shipment-Moreover, no strong prima 
facie case of fraud 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 restrai

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