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High Court Appeal No.48 of 1987, decided on 20th April, 1987.

Civil Procedure Code (V of 1908)‑‑

‑‑‑O.XXXIX, Rr.l & 2‑‑Negotiable Instruments Act (XXVI of 1881), S.13‑‑Import of goods‑‑Breach on part of vendor as to quality of goods‑‑Application for grant of interim injunction to the extent of prohibiting remission of part of money by Bank under letter of credit‑ Irrevocable letter of credit, when can be dishonoured by Bank‑‑Payment under irrevocable letter of credit cannot be stopped on the ground that there was some breach on the part of the vendor as to the quality of the goods‑‑Grant of interim injunction prohibiting remission of money Bank rightly declined.

An irrevocable letter of credit is open in favour of a foreign exporter through a bank, which in turn makes commitment to a foreign bank, which in turn makes the payment generally against the bill of lading and other necessary documents after the shipment of the goods.

Generally an irrevocable letter of credit cannot be dishonoured by a bank but there may be exceptions to the above general rule, for example, where it is proved that the bank knows that any demand for payment already made or which may thereafter be made will clearly be fraudulent but the evidence on the question of fraud and as to the bank's knowledge must be clear, or when there is challenge to the validity of the letter of credit. In the present case respondent‑Bank was to remit L/C amount to their counterpart in Switzerland on the basis of the commitment made by them. The appellants obtained the documents from respondent without any protest and without pointing out that there was any breach as to the terms of the L/C. It is also apparent that though the alleged survey report carried out after several weeks from the date of the delivery indicates that the packing of the goods were allegedly found in damaged condition, the appellants had taken the delivery of the goods from the carrier without any protest. The question, whether the goods were despatched in accordance with the description given in the letter of credit or whether there was any breach as to the quality would be an issue at the trial. Under an irrevocable letter of credit payment cannot be stopped on the ground that there was some breach on the part of the vendor as to the quality of the goods. An irrevocable letter of credit is a negotiable document in the commercial world which is negotiated inter alia inter se between the banks and, therefore, the Court cannot lightly cause its dishonouring by one bank to another, unless prima facie a sufficiently grave cause is shown.

Reliance upon rule 2 of Order XXXIX, C.P.C. is not warranted in the instant case as the alleged breach/injury had already been committed /caused by respondent before the filing of the suit.

Shirafi Trading Establishment v. Trading Corporation of Pakistan 1984 C L C 381; J.H. Rayner & Co. Ltd. and Oilseeds Trading Co., Ltd. v. Hambors Bank Ltd. (1942) 2 All England Law Reports 694; Bolivinter Oil SA v. Chase Manhattan Bank and others (1984) 1 All England Law Reports 351; Sui Gas Transmission Company v. Sui Gas Employees' Union and others 1977 S C M R 220 and The Law of Bankers' Commercial Credits by H.C. Gutteridge Maurice Megrah, Fourth Edition ref.

Naseem Farooqi for Appellant.

Badruddin Vellani for Respondents.

Date of hearing: 20th April, 1987.

This appeal is directed against an order dated 14‑4‑1987 passed in Suit No.748 of 1986 by a learned Single Judge upon an application under Order XXXIX, rules 1 and 2 read with section 151, C . P. C . whereby he has dismissed the above application.

2. The brief facts leading to the filing of the above appeal are that the appellants purchased from respondent No.2 through respondent No.l goods described as viscose staple fibre bright/bleached G.D.R. origin First Quality with prescribed measurements. The total price of the goods was about U.S. 100,725 equivalent to Pak Rs. 17 lakh. The appellants opened an irrevocable letter of credit on 15‑6‑1986 with respondent No.3 bank. The goods were shipped on 14‑7‑1986 and arrived at the port of Karachi on 2‑8‑1986. The same were unloaded from the ship on 3‑8‑1986. It is the case of the appellants that upon the arrival of the goods acting‑‑upon representation of respondents 1 and 2 took delivery of the goods and stored the same in their bonded custom warehouse. It is also the case of the appellants that as 'the visible conditions of the goods did not inspire confidence, they had straightaway got the goods surveyed and laboratory tested after notice to the respondents. Thereupon, it was found that the goods were not in accordance with their description. After that the appellants filed the aforesaid suit, inter alia, for declaration and injunction as follows:

"(i) Declare that the defendants 1 and 2 having committed breach of the suit contract while supplying defective goods are not entitled to the value of the letter of credit (Annexure 'C') and in view of the price differential established by survey, laboratory reports and resale the letter of credit be cancelled and from its proceeds the plaintiff is entitled to obtain corresponding adjustment in the price to the extent of the assessed loss on account whereof the defendants 1 and 2 are only entitled to the value of the goods to the extent of Rs. 8,74,125.06 which amount only be remitted from the proceeds of letter of credit and the balance of amount of Rs.8,40,456 being plaintiffs entitlement be decreed in favour of the plaintiff by way of money decree against defendants 1 and 2.

(ii) A perpetual injunction to issue to defendant No.3 restraining them from paying the total amount covered by the Letter of Credit No. KAR 86114 and out of the said credit remit only Rs. ( ) and to retain the balance until adjudication of the suit and pending such adjudication the amount be invested in Defence Saving Certificates of Government of Pakistan and upon final adjudication of the suit to pay up the amount alongwith interest to date to the party found entitled thereto."

Alongwith the above suit an application under Order XXXIX, rules 1 and 2, C.P.C. read with section 151, C.P.C. was also filed. The above application was resisted by the respondents. The learned Single Judge after issuing notice to the respondents granted ad interim injunction to the extent of prohibiting remission of Rupees six lakhs by respondent No.3 Bank under the L/C. However, when the above application came up for hearing for confirmation of the ad interim order the learned Single Judge recalled the aforesaid order and dismissed the application. The operative part of the order reads as follows:

"On the facts and circumstances it appears that the plaintiff has not got a prima facie case for injunction. Now, the question is whether the plaintiff shall suffer an irreparable loss if the injunction is not granted. Admittedly, the case does not fall within the ambit of Order XXXIX, rule 1, C.P.C. Mr. Farooqui however submits that rule 2 is attracted to the facts of the present case. Rule 2 is, in fact, in relation to issuance of an interim injunction to restore repetition or continuance of the breach which, on the facts of the case, is not there, because the contract has already been completed goods have been supplied and in fact, they have been sold unilaterally by the plaintiff. In case the plaintiff has suffered any loss it can be adequately compensated in terms of money. Moreover, the defendant No.3 Bank is under a legal and moral duty to pay the amount to its counterpart in Switzerland and there being a privity of contract between defendant No.3 Bank and the foreign bank. Defendant No.3, it will be inadequate to issue an injunction against them as prayed. The application is, therefore, rejected."

The appellants being aggrieved by the above order have filed the present appeal.

3. In support of the above appeal Mr. Nasim Farooqui, learned counsel for the appellants has vehemently urged that since the goods supplied were not of the description given inter alia in the L/C, the appellants were entitled to claim cancellation of the L/C to the extent of the amount of loss suffered by the appellants upon resale of the goods after notice to the respondents 1 and 2. Whereas, Mr. Badruddin Vellani learned counsel for the respondents has submitted that the appellants took the delivery of the documents under the L/C unconditionally and also took the delivery of the goods from the carrier without any protest as to the damaged condition of the goods and, therefore, the appellants have no case for an interim injunction for restraining remission of the L/C by respondent No.3 Bank to their foreign counterpart.

4. Mr. Nasim Farooqui in furtherance of his above submission has referred to the last few lines of pare 1 of the L/C, which read as follows:--

He has also referred to the operative part of Messrs Joseph Lobo Surveyors' report dated 29‑10‑1986, which reads as follows:--

"The entire consignment was inspected externally at the time of destuffing and delivery from port premises. A detailed survey was carried out immediately upon arrival of goods at warehouse, the patent discrepancies found were that which were torn/missing and those which were found intact tallied with invoice. We then picked up 50 pot i.e. 190 bales which were opened for detailed inspection. Samples were drawn and will be retained by us for a period of sixty days unless otherwise requested.

Our findings recorded at time of inspection are as under:

The packing was found to be used/second hand polypropylene sheet in single layer. At several places this packing was torn/bale ends exposed, resulting in dirt/oil stained/surface contents of bale. Wire binding of all bales was found worn and rusty. Old wire being used which caused stains and damage to contents.

Contents were sampled and sent to Laboratory for analysis. The results confirm 100 pct Viscose Fibre.

In any case our considered opinion is that the goods as inspected do constitute old stock lot/inferior/second which can be disposed of as second. In our opinion the consignment was damaged before stuffing/shipment. .

Due to condition of packing, as observed by us to be not standard export packing of 'Viscose' staple Fibre, the market value has been depreciated approximately 25 PCT. (Twenty‑five per cents).

This report represents our findings /observation at the time, date and place of our attendance only is issued WITHOUT PREJUDICE."

He has also referred to the Certificate of tests dated 7‑3‑1987 issued by Pakistan Institute of Cotton Research and Technology as to the length and components of the fibre of which samples were supplied to them by the appellants. He has also referred to the telexes sent by the appellants to the respondents. On the basis of the above documents, it has been reiterated by him that since there was breach of the description of the goods as contained in the L/C, the appellants were entitled to obtain interim injunction in view of sub‑rule (2) of Order XXXIX, which empowers the Court to issue an injunction for restraining the defendants from committing a breach of contract or other injury of any kind whether compensation is claimed in the suit or not. He has also referred to the following cases:

(1) Sirafi Trading Establishment X . Trading Corporation of Pakistan Ltd. reported in 1984 C L C 381 in which a learned Single judge of this Court has inter alia observed as follows:--

From the discussion as above, I find that the bank‑guarantee furnished would be governed by the same principles 'of law, which are applicable to payments by the banks against confirmed letters of credit. Thus, an absolute obligation is imposed upon the bank which executes the guarantee to honour the same according to its terms. There may be exceptions to the general rule in special cases or in cases of fraud to the knowledge of the bank, where the Court may preclude banks from fulfilling their obligation to third parties. Prima facie no case falling under any of the exceptions having been made out, interim injunction granted in the case was discharged by short order passed on 21st March, 1983 with the direction to the Nazir to encash the bank‑guarantees and invest the amounts received for the benefit of the party w‑ho ultimately succeeds."

(2) J.H Rayner & Co. Ltd. and Oilseeds Trading Co. Ltd. v. Hambors Bank Ltd. reported in (1942) 2 All England Law Reports 694. In the above case it was held that a banker is entitled to insist on documents in the same form as are given in the instructions for credit. It was also held that any discrepancy in the bill of lading as to the description 'of the goods would entitle the bank to refuse to honour letter of credit.

(3) Bolivinter Oil SA v. Chase Manhattan Bank and others reported in (1984) 1 All England Law Reports 351, in which the Court of Appeal held that when an injunction is sought for restraining payment by a bank under an irrevocable letter of credit or performance bond or guarantee it should ask whether there is any challenge to the validity of the letter, bond or guarantee itself. If there is no such challenge, prima facie no injunction should be granted and the bank should be left free to honour its contractual obligation, although restrictions may well be imposed on the freedom of the beneficiary to deal with the money after he has received it. It was also held that the wholly exceptional case where an injunction may be granted is where it is proved that the bank knows that any demand for payment already made or which may thereafter be made will clearly be fraudulent. But the evidence must be clear, both as to the fact of fraud and as to the bank's knowledge.

(4) Sui Gas Transmission Company v. Sui Gas Employees' Union and others reported in 1977 S C M R 220. In the above case the honourble Supreme Court while hearing an appeal against an order passed by a learned Single Judge of the Sind and Baluchistan High Court upon an injunction application held that a prima facie case is spelt out if a serious question of fact or law is raised in the plaint on which the parties will go to trial and that the criterion for determining, whether temporary injunction be issued is to see whether prima facie case is made out by the plaintiff and the balance of convenience and inconvenience and irreparable injury in case injunction is refused."

He has also referred to a passage from the Book namely, The Law of Bankers' Commercial Credits by H.C. Gutteridge Maurice Megrah, Fourth Edition which read as follows:

"Banker's Refusal to Pay

Although the banker cannot, in the case of an irrevocable credit, rely on any defence which may be open to the buyer under the contract of sale he may be entitled to refuse payment on other grounds, which may be summarised as follows:

(a) non‑compliance by the seller with such of the terms of the credit contract as are in the nature of conditions precedent to the liability of the banker;

(b) fraud on the part of the seller;

(c) mutual mistake on the part of the seller and the banker leading to the issue of the credit."

Whereas Mr. Badruddin Vellani has also referred from the same book but different edition the following passage:

"A similar point came before Megarry, J. in Discount Records Ltd. v. Barclays Bank Ltd. and another. The plaintiffs had ordered goods from a French company, which goods turned out to be rubbish, and they applied for an injunction restraining the defendant Bank from paying the draft drawn in respect of the purchase or meeting its obligation under an irrevocable credit established for the purpose. The judge refused to interfere: 'I would be slow to interfere with bankers irrevocable credits unless a sufficiently grave cause is shown; for interventions by the Court that are too ready or too frequent might gravely impair the reliance which, quite properly, is placed on such credits.' He distinguished the Sztejn case in relation both to established fraud and to the absence of any possible holder in due course. At the same time, the buyer could achieve the same end by a clause in the credit making it impossible for the seller to comply with its terms. In many cases documents tendered may be irregular in some slight technical matter. Whether the irregularity is such that an issuing bank is justified in refusing to pay may be a difficult question. A buyer may even ask his bank to scrutinise documents with the object of finding fault. If the bank is in doubt as to the significance of an irregularity it should decline to pay; on the other hand, to refuse for an obvious mistake or for an irregularity which does not touch the contract fundamentally would destroy the value of irrevocable credits as a means of facilitating overseas trade; while literal compliance is essential; it may be impracticable. The difficulty is often met by indemnifying the issuing bank. A more recent case emphasizing when an injunction might be obtained was that of Bolivinter Oil S.A. v. Chase Manhattan Bank and others, referred to above."

The above cases cited by Mr. Nasim Farooqui and the passages from the Book referred to by him indicate that generally an irrevocable letter of credit cannot be dishonoured by a bank but there may be exceptions to the above general rule, for example, where it is proved that the bank knows that any demand for payment already made or which may thereafter be made will clearly be fraudulent but the evidence on the question of fraud and as to the bank's knowledge must be clear, or when there is challenge to the validity of the letter of credit. In the Present case respondent No.3 Bank was to remit L/C amount to: their counterpart in Switzerland on the basis of the commitment made by them. The appellants obtained the documents from respondent No.3 without any protest and without pointing out that there was any breach as to the terms of the L/C. It is also apparent that though the alleged survey report (which according to the learned counsel for the respondents 1 and 2 is an ex parte carried out after several weeks from the date of the delivery) indicates that the packing of the goods were allegedly found in damaged condition, the appellants had taken the delivery of the goods from the carrier without any protest. The question, whether the goods were despatched by respondent No.2 in accordance with the description given in the letter of credit or whether there was any breach as to the quality would be an issue at the trial. In our view, under an irrevocable letter of credit payment cannot be stopped on the ground that there was some breach on the part of the vendor as to the quality of the goods. An irrevocable letter of credit is a negotiable document in the commercial world which is negotiated inter alia inter se between the banks and, therefore, the Court cannot lightly cause its dishonouring by one bank to another, unless prima facie a sufficiently grave cause is shown. If we were to accept the contention of Mr. Nasim Farooqui it will gravely impair reliability and sanctity of an irrevocable letter of credit and will lead to commercial uncertainty. An irrevocable letter of credit is open in favour of a, foreign exporter through a bank, which in turn makes commitment to a foreign bank, which in turn makes the payment generally against the bill of lading and other necessary documents after the shipment of the goods. We may also observe that the reliance upon rule 2 of Order XXXIX, C.P.C. by Mr. Nasim Farooqui is not warranted in the instant case as the alleged breach/injury had already been committed /caused by respondent No.2 before the filing of the suit.

5. We are, therefore, of the view that the learned Single Judge has exercised discretion properly in the matter and has rightly declined to withhold the payment of any of the amount under the irrevocable letter of credit in question. The appeal has no merits and, therefore, it is dismissed in limine.

These are the reasons in pursuance of short order of even date.

M . B . A . / K‑15/ K Appeal dismissed

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