# TARAPORE & CO., MADRAS v. M/S. V/0 TRACTORS EXPORT, MOSCOW AND ANR

- **Citation:** [1969] 2 S.C.R. 920
- **Court:** Supreme Court of India
- **Decided:** 1968-11-26
- **Bench:** S. M. Sikri, K. S. Hegde
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/tarapore-co-madras-v-m-s-v-0-tractors-export-moscow-and-anr-4803
- **Pages:** 13

## Headnote

Banking Practice-Irrevocable letter of
credz't--Significance of-If
Courts can interfere with commercial practice when international reper·
cussions are involved.
An Indian Firm (the
appellant) entered into a
contract with
a
Russian Firm (the respondent) for supply of certain
machinery, Jn
pursuance of the contract, the appellant opened a con.firmed, irrevocable
and divisible letter of credit with a Bank in India for the entire value
of the equipment. The respondent supplied all the machinery and received 25 % of the money payable under the Jetter of credit from the
Bank.
Thereafter, the appellant complained that the performance of the
machinery was not efficient and filed a suit seeking an injunction restrain~
ing the respondent from realising the
balance of amount payable under
the letter of credit.
The parties, however, entered into an agreement,
by which it was agreed that the appellant would wiihdraw the suit, the
respondent would not demand any payment under the
letter of credit
for 6 months, the parties would try to settle the dispute amicably during
that period, and if no
settlement was
reached the period
would be
extended by a further period of 6 months. The appellant withdrew its
suit, but before any settlement was arrived at the Indian rupee was devalued, as a result of which the appellant had to pay an additional sum
for the machinery supplied. There was
correspondence between
the
parties wherein the respondent insisted upon the appellant opening an
additional letter of credit for the extra amount and the appellant objected
to such a course.
The original dispute bet\Veen the parties was not amicably settled and when the extended time under the agreement was about
to expire, the appellant filed a suit op the original side of the High Court
for restraining the Bank and the respondent from taking any steps
in
pursuance of the letter of credit.
A temporary injunction was also prayed
for and it was granted, but the order was reversed by the Appellate Bench
of the High Court.
In appeal to this Court, on the question whether the order of temporary injunction was sustainable,
HELD : (1) An irrevocable letter of credit has a definite implication.
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It is independent of and unqualified by the contract of sale or other underlying transactions.
It is ·a mechanisμi of great importance in international
trade and any interference with that mechanism is bound to have serious
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repercussions on the international trade of this country.
The autonomy
of an irrevocable, letter of credit is entitled to protection and except in
very exceptional
circumstances courts should not
interfere with
that
autonomy. [929 B-C; 931 G]
Urquhart Lindsay and Co. Ltd. v. Eastern Bank Ltd., [1922] 1 K.B.
318· Hamzeh Malas and Sons v. British lmex Industries Ltd.,
[1958] 2
Q.B: 127 and Dulien St~el Products Inc: of Washington v. Bankers Trust
H
Co., Fed. Rep. 2nd Senes, 298, p. 836, applied.
(2) The allegation of the appellant that the respondent had no assets
in this Country and therefore if the respondent was allowed to take away
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TARAPORE & co. v. TRACTORS EXPORT, MOSCOW (Hegde, !.)
921'
the money secured to it by the le.tter of credit the appellant could not
effectively enfurce its claim arising from the breach of the contract, was
not made in the pleadings. Nor do the facts pleaded in the plaint amount
to a plea of fraud. [929 B; 931 HJ
(3) It could not be contended that the letter of credit was not enforceable as the original contract was modified by the later agreement
and subsequent correspondence between the parties.
The contention was
not taken either in the plaint or in the High Court. It is not a mere legal
contention as it bears on the intention of parties.
Further, a perusal of
the entire correspondence between the parties shows that in the absence
of an amicable settlement,
the parties continued to be bound by the
original contract subject only to extension of time granted for payment of
price. [932 B-D, FJ
C
CrvrL APPE

## Text

TARAPORE & CO., MADRAS
v.
M/S. V/0 TRACTORS EXPORT, MOSCOW AND ANR.
November 26, 1968
(S. M. SIKRI AND K. S. HEGDE, JJ.]
Banking Practice-Irrevocable letter of
credz't--Significance of-If
Courts can interfere with commercial practice when international reper·
cussions are involved.
An Indian Firm (the
appellant) entered into a
contract with
a
Russian Firm (the respondent) for supply of certain
machinery, Jn
pursuance of the contract, the appellant opened a con.firmed, irrevocable
and divisible letter of credit with a Bank in India for the entire value
of the equipment. The respondent supplied all the machinery and received 25 % of the money payable under the Jetter of credit from the
Bank.
Thereafter, the appellant complained that the performance of the
machinery was not efficient and filed a suit seeking an injunction restrain~
ing the respondent from realising the
balance of amount payable under
the letter of credit.
The parties, however, entered into an agreement,
by which it was agreed that the appellant would wiihdraw the suit, the
respondent would not demand any payment under the
letter of credit
for 6 months, the parties would try to settle the dispute amicably during
that period, and if no
settlement was
reached the period
would be
extended by a further period of 6 months. The appellant withdrew its
suit, but before any settlement was arrived at the Indian rupee was devalued, as a result of which the appellant had to pay an additional sum
for the machinery supplied. There was
correspondence between
the
parties wherein the respondent insisted upon the appellant opening an
additional letter of credit for the extra amount and the appellant objected
to such a course.
The original dispute bet\Veen the parties was not amicably settled and when the extended time under the agreement was about
to expire, the appellant filed a suit op the original side of the High Court
for restraining the Bank and the respondent from taking any steps
in
pursuance of the letter of credit.
A temporary injunction was also prayed
for and it was granted, but the order was reversed by the Appellate Bench
of the High Court.
In appeal to this Court, on the question whether the order of temporary injunction was sustainable,
HELD : (1) An irrevocable letter of credit has a definite implication.
A
B
c
D
E
F
It is independent of and unqualified by the contract of sale or other underlying transactions.
It is ·a mechanisμi of great importance in international
trade and any interference with that mechanism is bound to have serious
G
repercussions on the international trade of this country.
The autonomy
of an irrevocable, letter of credit is entitled to protection and except in
very exceptional
circumstances courts should not
interfere with
that
autonomy. [929 B-C; 931 G]
Urquhart Lindsay and Co. Ltd. v. Eastern Bank Ltd., [1922] 1 K.B.
318· Hamzeh Malas and Sons v. British lmex Industries Ltd.,
[1958] 2
Q.B: 127 and Dulien St~el Products Inc: of Washington v. Bankers Trust
H
Co., Fed. Rep. 2nd Senes, 298, p. 836, applied.
(2) The allegation of the appellant that the respondent had no assets
in this Country and therefore if the respondent was allowed to take away
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TARAPORE & co. v. TRACTORS EXPORT, MOSCOW (Hegde, !.)
921'
the money secured to it by the le.tter of credit the appellant could not
effectively enfurce its claim arising from the breach of the contract, was
not made in the pleadings. Nor do the facts pleaded in the plaint amount
to a plea of fraud. [929 B; 931 HJ
(3) It could not be contended that the letter of credit was not enforceable as the original contract was modified by the later agreement
and subsequent correspondence between the parties.
The contention was
not taken either in the plaint or in the High Court. It is not a mere legal
contention as it bears on the intention of parties.
Further, a perusal of
the entire correspondence between the parties shows that in the absence
of an amicable settlement,
the parties continued to be bound by the
original contract subject only to extension of time granted for payment of
price. [932 B-D, FJ
C
CrvrL APPELLATE JURISDICTION : Civil Appeals Nos. 2251
D
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and 2252 of 1968.
Appeals by special leave from the judgment and order dated
October 9, 1968 of the Madras High Court in 0.S.A. Nos. 26
and 27 of 1968 and Civil Appeals Nos. 2305 and 2306 of 1968.
Appeals by special leave from the judgment and order dated
April 12, 1968 of the Madras High Court in Applications Nos.
1760 and 2455 of 19(l? fu'l C.S. No. 118 of 1967.
M. C. Setalvad, V. P. Raman, D. N. Mishra and /. B. Dadachanji for the appellant (in C.As. Nos. 2251 and 2252 of 1968)
and respondent No. 1 (in C.As. 2305 and 2306 of 1968).
S. Mohan Kumaramangalam, M. K. Ramamurthi, Shyamala
Pappu and Vineet Kumar, for respondent No. 1 (in C.As. Nos.
2251 and 2252 oi 1968) and the appellant (in C.As. 2305 and
2306 of 1968).
Rameshwar Nath and Mahinder
Narain,
for
respondent
No. 2 (in all the appeals).
The Judgment of the Court was delivered by
, ,
Hegde, J.
These are connected appeals.
They arise from
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Civil S~it No. 118 of 1967 on 0e original side of the High Court
of Judicature at Madras. Herem the essential facts are few and
simple though the question of law that arises for decision is of
considerable importance .
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1:he suit has been brought by Mis. Tarapore & Co., Madras
(heremafter referred to as the "Indian Firm").
That firm had
taken up on contract the work of excavation of a canal as a part
of the Farakka Barrage Project. In that connection they entered
into a contract with Mis. V 10 Tractors Export, Moscow (which
'922
SUPREME. COURT REPORTS
(1969] 2 S.C.R.
will hereinafter be referred to as the "Russian Firm") for the supply of construction machinery such as Scrapers and Bulldozers. In
pursuance of that contract, the Indian Firm opened a confirmed,
irrevocable and divisible Jetter of credit with the ,Bank of India,
Limited for the entire value of the equipment i.e., Rs. 66,09,372
in favour of the Russian Firm negotiable through the Bank for
Foreign Trade of the U.S.S.R., Moscow.
Under the said letter
of credit the Bank of India was required to pay to the Russian
Firm on production of the documents particularised in the Jetter
of credit alongwith the drafts. One of the conditions of the letter
of credit was that 25 per cent of the amount should be paid on the
presentation of the specified documents and the balance of 75
per cent to be paid one year from the date of the first payment.
The agreement entered into between the Bank of India and the
Russian Firm under the letter of credit was "subject to the Uniform
Custom~ and Practice for Documentary Credits ( 1962 Revision),
International Chamber of Commerce Brochure No. 222". Article 3 of the brochure says that :
"An irrevocable credit is a definite undertaking on
the part of an issuing bank and constitutes the engage-
·ment of that bank to the beneficiary or, as the case
may be, to the beneficiary and bona fide holders of drafts
drawn and/or documents presented thereunder, that the
provisions for payment, acceptance or negotiation contained in the credit will be duly fulfilled, provided that
all the terms and conditions of the credit are complied
with.
An irrevocable credit may be advised to a beneficiary through another bank without engagement on the
part of that other bank (the advising bank), but when
an issuing bank authorises another bank to confirm its
irrevocable credit and the latter does so, such confirmation constitutes a definite undertaking on the part of
the confirming bank either that the provisions for payment or acceptance will be duly fulfilled or, in the case
of a credit available by negotiation of drafts, that the
confirming bank will negotiate drafts without recourse
to drawer.
Such undertakings can neither be modified nor cancelled without the agreement of all concerned."
Article 8 of the brochure says:
"In the documentary credit operations all parties
concerned deal in documents and not in goods.
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TARAPORE & co. v. TRACTORS EXPORT, MOSCOW (Hegde, !.)
923'
Payment, acceptance or negotiation .against documents which appear on their face to be m accordance
with the terms and conditions of a credit by a bank
authorised to do so, binds the party giving the authorisation to take up the documents and reimburse the ba~k
which has effected the payment, acceptance or negotiation . ..... "
The only other Article in that brochure which is relevant for our
present purpose is Art. 9 which reads :
"Banks assume no liability or responsibility for the
form, sufficiency, accuracy, genuineness, falsification
or legal effect of any documents, or for the general
and/ or particular conditions stipulated in the documents
or superimposed thereon; nor do they assume any liability or responsibility for the description, quantity,
weight, quality, condition, packing, delivery, value or
existence of the goods represented thereby, or for the
good faith or acts and/or omissions, solvency, performance or standing of the consignor, the carriers or the
insurers of the. goods or any other person whomsoever."
On the strength of the aforementioned contract, the Russian
Firm supplied all the machinery it undertook to supply, by about
the end of December 1965, which were duly taken possession
of by the Indian Firm and put to work at Farakka Barrage Project. They are still in the possession of the Indian Firm. After
the machinery was used for sometime, the Indian Firm complained to the Russian Firm that the performance of the machinery supplied by it was not as efficient as represented at the time
of entering into the contract and consequently it had incurred
and continues to incur considerable loss.
In that connection
there was some correspondence between the Indian Firm and the
Russian Firm. Thereafter the Indian Firm instituted a suit on the
original side of the High Court of Madras seeking an injunction
restraining the Russifil'l Firm from realizing the amount payable
under the letter of credit. During the pendency of that suit the
parties arrivt:d at an agreement on August 14,
1966 at Delhi
(which shall be hereinafter referred to as the Delhi agreement).
The portion of that agreement which is relevant for our present
purpose reads as follows :
"Tarapore & Co., Madras, agree to withdraw immediately the court case filed by them against 'Tractoro
export' Moscow, in the Madras High Court.
2. Immediately on Tarapore withdrawing the case,
V /0 'Tractoro export' agree to instruct the Bank for
SUPREME COURT REPORTS
(1969] 2 S.C.R.
Foreign Trade of the USSR in Moscow, not to demand
any further payment against L.C. established by Tarapore & Co., Madras, for a period of six months from
the due dates in the first instance. During this period
both the parties shall do their best to reach an amicable
settlement.
3. In case the settlement between the two parties is
not completed within this period of six months V /0
Tractoro export shall further extend the period of payment by further period of six months for the settlement
to be completed.
4. Tarapore & Co. (shall authorise their Bank to
keep the unpaid portions L.C. valid for the extended
period as stated above."
At this stage it may be mentioned that the Russian Firm had
Teceived from the Bank of India 25 per cent of the money pay-
.able under the letter of credit very soon after it supplied to the
Indian Firm the machinery mentioned earlier. In pursuance of
the aforementioned agreement the Indian Firm withdrew the suit.
Thereafter there were attempts to settle the dispute. In the meantime the Indian Rupee was devalued. The contract between the
1ndian Firm and the Russian Firm contains the following term :
"Payment for the delivered goods shall be made by
the Buyers in Indian Rupee in accordance with the Trade
Agreement between the USSR and India dated 10th
June, 1963. All the prices are stated in Indian Rupees.
One Indian Rupee is equal to 0.186621 grammes of pure
gold. If the above gold content of Indian Rupee is
changed the prices and the amount of this Contract in
Indian Rupee shall be revalued accordingly on the date
of changing the gold parity of the Indian Rupee."
This clause will be hereinafter referred to as the 'Gold Clause'.
In view of that clause, the price fixed for machinery supplied
stood revised. Consequently under the contract the Indian Firm
had to pay to the Russian Firm an additional sum of about rupees
twentysix lacs.
Accordingly the bankers of the Russian Firm
·called upon the Indian Firm to open an additional letter of credit
for payment of the extra price payable under the contract. They
also intimated the Indian Firm tha, the extension of time for the
payment of the price of the machinery supplied, agreed to at Delhi
will be given effect to only after the Indian Firm arranges for the
additional letter of credit asked for.
The Indian Firm objected
to this demand as per its letter of 20th September, 1966 .. The
relevant portion of that letter reads :
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TARAPORE & co. v. TRACTORS EXPORT, MOSCOW (Hegde, I.)
925
"We are rather surprised to see this, because, by
our arrangement dated the 14th Aug., 1966, at New
Delhi you had agreed to give further time for the payments mi the withdrawal of the Madras High Court case.
That was the only condition that was talked about and
incorporated in our written agreement. If you will be
good enough to refer to the agreement dated the 14th
Aug., 1966, you will find that we were obliged to withdraw the Madras suit pending talks of settlement and
immediately on our withdrawi11g this suit, you agreed to
instruct your Bankers not to demand any further payment under the letter of credit. There is absolutely no
reterence in that agreement to our having to open any
additional letter of credit in view of the devaluation· of
the Indian rupee . . . . . . . . We would therefore request
you to immediately instruct your Bankers in Moscow to
advise our Bankers regarding the extension of time for
payment under the letter of credit without any reference
to any additional letters of credit in view of devaluation . . . . . . . . . . Moreover, when the entire question
is open for amicable settlement between us, it is not possible to determine what exactly will be the amount payable and unless that amount is known, it is not possible
to open additional letters of credit to give effect to the
gold clause . . . . . . . . . . . . "
On November I, 1966, the Russian Firm sent to the Indian Firm
addendum No. 1 modifying the original contract in accordance
with the gold clause. The last clause of that addendum recited
that "all other terms and conditions are as stated in the above
mentioned contract" (original contract). The Indian Firm objected
to that addendum as well as to the demand for opening an additional letter of credit. In that connection the Russian Firm wrote
a letter to the Indian Firm on November 29, 1966.
As considerable arguments were advanced on the basis of that letter, we
shall quote the relevant portion of that letter :-
" ...... We confirm that you have signed with us
the addendum No. 1 to our Contract No. 61/Tarapore220/65 dated the 2nd Feb., 1965, at our request for
the sole and specific purpose of satisfying our bankers.
· We confirm further that this addendum will not in any
manner prejudice the arrangement we have come to in
Delhi on the 14th August, 1966, and isi without prejudice !o your claims and points of controversy regardmg which we shall have further discussions with a view
to reach an amicable settlement.
926
SUPREME COURT REPORTS
[1969] 2 S.C.R.
Under this addendum, the company will extend the
letter of credit for one year and accept the drafts for the
difference in value of 57 .5 per cent due to devaluation.
The final amount payable will be in accordance with the
settlement."
Thereafter the Russian Firm appears to have drawn drafts on the
Indian Firm for the excess amount payable under the gold clause.
For one reason or the other, no settlement as contemplated by the
Delhi agreement was reached. The Indian Firm complained ~at
the Russian Firm never made any serious attempt to resolve the dispute whereas the Russian Firm alleged that it found no substanc.e
in the complaint made by the Indian Firm as regards the machinery supplied. In the suit as brought, as well as in these appeals
that controversy is not open for examination. Suffice it to say that
the parties did not amicably settle the dispute in question. When
the extended time granted under the Delhi agreement was about
to come to a close, the Indian Firm instituted the suit from which
these appeals have arisen. In that suit the only substantive relief
asked for is that the Bank of India as well as the Russian Firm
should be restrained from taking any further steps in pursuance
of the letter of credit opened by the Indian Firm in favour of the
Russian Firm. Therein temporary injunctions were asked for in
the very terms in which the permanent injunctions were prayed
for.
At a subsequent stage a further injunction restraining the
Russian Firm from enforcing its right under the gold clause was
also prayed for.
The Russian Firm opposed those applications
but the trial judge granted the temporary injunctions asked for.
The Russian Firm took up the matter in appeal to the Appellate
Bench of that High Court which reversed the order of the trial
judge by its Order dated October 9, 1968 but it certified that they
are fit cases for appeal to this Court. When the applications in
the appeals seeking interim orders came up for consideration by
this Court the Russian Firm entered its caveat. It not only opposed the interim reliefs prayed for, it further challenged the validity
of the certificates granted by the High Court on the ground that
the orders appealed against are not final orders within the meaning
of Art. 133 of the Constitution. Evidently as a matter of abundant caution, the Indian Firm had filed two separate applications
seeking special leave to appeal against the orders of the Appellate
Bench of .the Madras High Court.
After hearing the parties
this Court revoked the certificates granted holding that the orders
appealed against are not final orders but at the same time granted
special leave to the Indian Firm to appeal against the orders of the
Madras High Court. Civil Appeals Nos. 2051 and 2052 of 1968
are appeals filed by the Indian Firm.
Before the Appellate Bench of the High Court of Madras, the
Indian Firm had objected to be maintainability of the appeals
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TARAPORE & CO. v. TRACTORS EXPORT, MOSCOW (Hegde, /.)
927
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fiied by the Russian Firm on the ground that orders appealed
against are not judgments within the meaning of cl. 15 of the
Letters Patent of the Madras High Court but that objection had
been overruled by the Appellate Bench following the earlier decisions of that High Court. That contention was again raised in the
appeals filed by the Indian Firm in this Court. To obviate any
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difficulty the Russian Firm applied to this Court for special leave
to appeal against the interim orders passed by the trial judge.
We allowed those applications and consequently Civil Appeals Nos .
2305 and 2306 of 1968 came to be filed.
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In view of the appeals filed by the Russian Firm in this Court
against the interim orders made by the trial judge it is not necessary to decide whether the appeals filed by the Russian Firm before
the Appellate Bench of the Madras High Court were maintainable?
On that question, judicial opinion is sharply divided as
could be seen from the decision of this Court in Asrumati Debi
v. Kumar Rupendra Deb Rajkot and Ors. (1)
Hence we ·shall
confine our attention to the question whether the temporary injunctions issued by the trial judge are sustainable?
The scope of an irrevocable letter of credit is
explained
thus in Halsbury's Laws of England (Vol. 34 paragraph 319 at
p. 185) :
"It is often made a condition of a mercantile contract
that the buyer shall pay for the goods by means of a
confirmed credit, and it is then the duty of the buyer to
procure his bank, known as the issuing or originating
bank, to issue an irrevocable credit in favour of the seller
by which the bank undertakes to the seller, either directly
or through another bank in the seller's country known as
the correspondent or negotiating bank, to accept drafts
drawn upon it for the price of the goods, against tender
by the seller of the shipping documents. The contractual
relationship between the issuing bank and the buyer is
defined by the terms of the agreement between them
under which the letter opening the credit is issued; and
as betwe.en the seller and the bank, the issue of the credit
duly notified to the seller creates a new contractual nexus
and renders the bank directly liable to the seller to pay
the purchase price or to accept the bill of exchange upon
tender of the documents. The contract thus created between the seller and the bank is separate from although
ancillary to, the original contract between the buyer and
the sell~r, ?Y reason of the bank's undertaking to the seller, which 1s absolute. Thus the bank is not entitled to.
(1) (1953] S.C.1l. 1159.
.
L6 Sup. CI/69-8.
928
SUPREME CQURT REPORTS
[1969] 2 S.C.R.
rely upon terms of the rontract between the buyer and
the seller which might permit . the buyer to reject the
goods and to refuse payment therefor; and, conversely,
the buyer is not entitled to an injunction restraining
the seller from dealing with the Jetter of credit if the ·
goods are defective."
Chalmers on "Bills of Exchange" explains the legal position in
these words:
"The modem commerCial credit serves to interpose
between a buyer and seller a third person of unquestioned solvency, almost invariably a banker of international repute; the banker on the instructions of the
buyer issues the Jetter of credit and thereby undertakes
to act as paymaster upon the seller performing the conditions set out in it. A letter of credit may be in any
one of a number of specialised forms and contains the
undertalcing of the banker to honour all bills of exchange
drawn thereunder.
It can hardly be over-emphasised
that the banker is not bound or entitled to honour such
bills of exchange unless they, and such accompanying
documents as may be required thereunder, are m exact
rompliance with the terms of the credit. Such documents must be scrutinised with meticulous care, the
maxim de minimis non curat lex cannot be invoked
where payment is made by letter of credit. If th.e seller
has complied with the terms of the letter of credit, however, there is an absolute obligation upon the banker
to pay irrespective of any disputes there may be between
the buyer and the seller as to whether the goods are up
to rontract or not".
Similar are the views expressed in 'Practice and Law of Banking'
by H. P. Sheldon "the Law of Bankers' Commercial Credits" by
H. C. Gutteridge "the Law Relating to Commercial Letters of
Credit" by A. G. Davis "the Law Relating to Bankers' Letters of
Credit" by B. C. Mitra and in several other text books read to
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us by Mr. Mohan Kumaramangalam, learned Counsel for the RusG
sian Firm. The legal position as set out above was not rontroverted by Mr. M. C. Setalyad, learned Counsel for the Indian
Firm. So far as the Bank of India is concerned it admitted its
liability to honour the letter of credit and expressed its willingness
to abide by its terms. It took the same position before the High
Court.
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The main grievance of the Indian Firm is that if the Russian
Firm is allowed to take away the money secured to it by the letter
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TARAPORE & CO. v. TRACTORS EXPORT, MOSCOW (Hegde, /.)
929
of credit, it cannot effectively enforce its claim arising from the
breach of the contract it complains of. It was urged on its behalf
that the Russian Firm has no assets in this country and therefore
any decree that it may be able to obtain cannot be executed.
Therefore, it was contended that the trial court was justified in
issuing the impugned orders. The allegation that Russian Firm
has no assets in this country was not made in the pleadings.
That apart in the circumstances of this case that allegation has
no relevance. An irrevocable letter of credit has a definite iiilplication. It is a mechanism of great importance iii international
trade. Any interference with that mechanism is bound to have
serious repercussions on the international trade of this country.
Except under very exceptional circumstances, the Courts should
not interfere with that mechanism.
For our present purpose we shall assume, without deciding,
that the allegations made by the Indian Firm are true. We shall
further assume that the suit as brought is maintainable though Mr.
Kumararnangalam seriously challenged its maintainability.
But
yet, in our judgment, the learned trial judge was not justified in
law in granting the temporary injunctions appealed against. Ordinarily this Court does not interfere with interim orders. But
herein legal principles of great importance affecting international
trade .are involved. If the orders impugned are allowed to stand
they are bound to have their repercussion on our international
trade.
We have earlier referred to several well known treatises on
the subject. Now we shall proceed to consider the decided c3.'les
bearing on the question under consideration.
A case somewhat similar to the one before us came up for
consideration before the Queens Bench Division in England in
Hamz~h Malas '!n4 Sons v.
Br_itish
Imex Industries_ Ltd.(')
Therem the plamttffs, a Jordaman firm contracted to purcliase
from the defendants, a British firm, a large quantity of reinforced
steel rods, to be delivered in two instalments. Payment was to
be effected by opening in favour of the defendants of two confirmed
letters of credit with the Midland Bank Ltd., in London one in
respect of each instalment. The letters of credit were duly opened
and the first was realized by the defendants on the delivery of the
first instalment.
The plaintiffs complained that that instalment
was defective and sought an injunction to bar the defendants from
realizing the sec~nd .letter of credit. Donovan J., the trial judge
refused the application. In appeal Jenkins, Sellers and Pearce
L.JJ. confirmed the decision of the trial judge. In the course of
(1) [1958] 2 Q.B. 127.
930
SUPREME COURT REPORTS
(1969) 2 S.C.R.
bis judgment Jenkins L.J. who spoke for the Court observed
thus:
"We have been referred to a number of authorities,
and it seems to be plain enough that the opening of a
confirmed letter of credit constitutes a bargain between
the banker and the vendor of the goods, which imposes
upon the banker an absolute obligation to pay, irrespective of any dispute there may be between th1: parties
as to whether the goods are up to contract or not. An
elaborate commercial system has been built up on the
footing that bankers' confirmed credits are of that character, and, in my judgment, it would be wrong for
this Court in the present case to interfere with that established practice.
There is this to be remembered, too. A vendor of
goods selling against a confirmed letter of credit is selling under the assurance that nothing will prevent him
from receiving the price. That is of no mean advantage
when goods manufactured in one country are being sold
in another.
It is, furthermore, to be observed that
vendors are often reselling goods bought from third parties.
When they are doing that, and when they are
being paid by a confirmed letter of credit, their practice is-and I think it was followed by the defendants
in this case-to finance the payments necessary to be
made to their suppliers against the letter of credit. That
system of financing these operations, as I see it, would
break down completely if a dispute as between the vendor and the purchaser was to have efj'ect of 'freezing,'
if I may use that expression, the sum in respect of
· which the letter of credit was opened."
In Urquhart Lindsay and Co. Ltd. v. Eastern Bank Ltd.(') the
King's Bench held that the refusal of the defendants bank to ·take
and pay for the particular bills on presentation of the proper documents constituted a repudiation of the contract as a whole and
that the plaintiffs were entitled to damages arising from such a
breach. It may be noted that in that case the price quoted in
the invoices was objected to by the buyer and he had notified his
objection to the bank. But under the terms of the letter of credit
the bank was required to make payments on the basis of the invoices tendered by the seller. The Court held that if the buyers
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had an enforceable claim that adjustment must be made by way
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of. refund by the seller and not by way of retention by the ·
buyer.
(1) [1922] 1 K.B. 318.
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TARAPORE & co. v. TRACTORS EXPORT, MOSCOW (Hegde, J.)
931
Similar opinions have been expressed by the American Courts.
The leading American case on the subject is Dulien Steel Products
Inc., of Washington v. Bankers Trust Co.('). The facts of
that case are as follows :
The plaintiffs, Dulien Steel Products Inc., of Washington,
contracted to sell steel scrap to the European Iron and Steel Community.
The transaction was put through M/s. Marco Polo
Group Project, Ltd. who were entitled to commission for arranging the transaction. For the payment of the commission to. Marco
Polo, plaintiffs procured an irrevocable letter of credit from
Seattle First National Bank. As desired by Marco Polo this letter
of credit was opened in favour of one Sica. The defendant-bankers confirmed that letter of credit.
The credit stipulated for
payment against (1) a receipt of Sica for the amount of the credit
and ( 2) a notification of Seattle Bank to the defendants that the
plaintiffs had negotiated documents evidencing the shipment of
the goods. Sica tendered the stipulated receipt and Seattle Bank
informed the defendants that the Dulien had negotiated documentary drafts.
Meanwhile after further negotiations between the
plaintiffs and the vendees the price of the goods sold was reduced
and consequently the commission payable to Marco Polo stood
reduced but the defendants were not informed of this fact. Only
after notifying the defendants about the negotiation of the drafts
drawn under the contract of sale, the Seattle Bank informed the
defendants about the changes underlying the transaction and asked them not to pay Sica the full amount of the credit. The defendants were also informed that Sica was merely a nominee of Marco
Polo and has no rights of his own to the sum of the credit. Sica,
however, claimed payment of the full amount of the credit. The
defendants ~k~
furth~r instru~tions from Seattle Bank but despite
Seattle. Bank~ mstruct10ns decided to comply with Sica's request.
After mformmg Seattle Bank of their intention, they paid Sica
the full amount of the credit.
Plaintiffs thereupon brought an
action in the Dis~rict Court of. New Y o~k f?r the recovery of the
moneys paid to Sica. The act10n was d1smissed by the trial court
an~ tliat decis~on was affirmed by tlie Court of Appeals.
That
dec1~10~ ~stabhshes the well known principle that the letter of
credit i~ mdepende~t of an unqualified by the contract of sale or
underly.m~ transact10n.
The autonomy of an .irrevocable letter
?f cred~t 1s e.ntitled to protection. As a rule courts refrain from
mterfermg with that autonomy.
A half hearted attempt was made on behalf of the Indian Firm
to persuade us not to aJ?ply ~e principles noticed above as in
these ap~als we a:e deahng with a complaint of fraud. The facts
pleaded m tl!e plaint do not amount to a plea of fraud despite the
(I) Federal Reporter 2nd Series 298, p. 836.
932
SUPREME COURT REPORTS
[1969) 2 S.C.R.
assertions of the Indian Firm that the Russian Firm was guilty
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of fraud.
Evidently with a view to steer clear of the well established
legal position Mr. Setalvad, learned Counsel for the Indian Firm
urged that the letter of credit was no more enforceable as the
original contract stood modified as a result of the Delhi agreement
and the subsequent correspondence between the parties. It was
urged that according to the modified contract the Indian Firm is
only liable to pay the price that may be settled between the buyer
and the seller. This contention has not been taken either in the
plaint or in the arguments before the trial judge or before the
· Appellate Bench. It is taken for the first time in this Court. This
is not purely a legal contention. The contention in question bears
on the intention of the parties who entered into the agreement.
No one could have known the intention better than the plaintiff
who was a party to the contract. If there was such an intention,
the plaintiff would have certainly pleaded the same. That apart,
we are unable to accept the contention that either the Delhi agreement or the subsequent correspondence between the parties modified the original contract. The Delhi agreement merely provided
that the parties will try and settle the dispute out of court, if possible. Much was made of the letter written by the Russian Firm
to the Indian Firm on 29-11-1966 wherein as seen earlier it was
stated:
"that the final amount payable will be in accordance
with the settlement".
This letter has to be read along with the other letters that passed
between the parties. If so read, it is clear that the statement that
the final payment will be made in accordance with the settlement
is subject to the condition that the parties are able to arrive at
a settlement. Otherwise the parties continue to be bound by the
original contract subjeot to the extension of the time granted under
the Delhi agreement for the payment of the price. As regards
the additional payment demanded by the Russian Firm, there is
no occasion for issuing any temporary injunction. If the Indian
Firm does not comply with that demand the law will take its course.
It is for that Firm to choose its course of action.
In the result we allow Civil Appeals Nos. 2305 and 2306 of
1968 with costs of the appellant therein and set aside the temporary injunctions granted by the trial judge. The other appeals
are dismissed with no order as to costs. The costs to be paid by
the Indian Company.
V.P.S.
C.A. Nos. 2305 & 2306/68
allowed.
C.A. Nos. 2251 & 2252/68
dismissed.
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