Breach Of Main Contract Not Ground For Injuncting Payments Under Bank Guarantees/ Letters Of Credit: Delhi High Court

The Delhi High Court recently held that contracts in respect of Bank Gaurantees and Letters of Credit are independent of the main contract between the parties. Thus, even if there is a breach of the main contract, that cannot be a ground for injuncting payments under the Bank Gaurantees/ LCs.

Justice Amit Bansal observed,

"Merely because there is a dispute between the buyer and the seller with regard to the contract of supply of goods, that cannot be ground for interfering with the LC."

It added that there are only two exceptions to the aforesaid principle where courts would pass an injunction in respect of payments under an LC, in cases of 'egregious fraud and 'irretrievable injustice'. Egregious fraud has to be a fraud of the kind which goes to the very root of the matter, it clarified.

Disputes Between Parties To Contract Not A Ground For Restraining Enforcement Of Bank Guarantee: Chhattisgarh High Court

Background

The plaintiff filed an application under Order XXXIX Rule 1 & 2 of the Code of Civil Procedure, 1908, seeking a restraint order against payments to the defendants of the amount covered under two letters of credits due.

The plaintiff placed sale orders for certain goods/materials with the defendant, and Letters of credit drawn on the defendant were opened. When the plaintiff received the goods, they were defective; the defendant acknowledged the same through email communications.

The goods supplied did not match the descriptions mentioned in the letter of credit. The plaintiff claimed fraud, which will cause irretrievable justice if the amount under the LCs is remitted to the defendant.

Advocate Amol Sharma, appearing for HDFC bank, submitted that the plaintiff's case is that out of the four containers supplied by defendant no.1 to the plaintiff, only two containers have defective goods. Therefore, at best, the case made out by the plaintiff is concerning breach of contract, and it is not the case of fraud.

Findings of the Court

The Court referred to the United Commercial Bank v. Bank of India, which summarises the law around judicial interference in payments under LCs.

Referring to international trade practices, it noted that normally LCs are issued by the buyers through their banks in favor of the seller through the seller's banks, particularly when buyer and seller are located in different jurisdictions/countries.

"LCs are the bedrock on which international trade and commerce is based. The goods are supplied by the seller to the buyer on the strength of the LCs provided by the buyer in favour of the seller, which functions as an assurance that once the goods are shipped and the documents in respect thereof are presented by the seller, the payment would be assured," it added.

It observed that the courts should loathe interfering with the mechanism of LCs as it would impact the efficacy and functioning of international trade. Merely because there is a dispute between the buyer and the seller concerning the contract of supply of goods, that cannot be ground for interfering with the LC, it added.

Gathering from judicial precedents, the Court mentioned two exceptions aforesaid principle where courts would pass an injunction regarding payments under an LC, in cases of (i) 'egregious fraud'; and (ii) 'irretrievable injustice.' The courts have repeatedly held that 'egregious fraud' has to be a fraud of the kind which goes to the very root of the matter.

Applying the aforesaid principles, the Court opined that no case for interference with the LCs has been made out by the plaintiff in this case.

Accordingly, the application was dismissed.

Case Title: Satish Kansal v. Synergy Tradeco NV & Anr.

Citation: 2022 LiveLaw (Del) 126

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