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Petitioner: HARAL TEXTILES LIMITED VS Respondent: BANQU E INDOSUEZ BELGIUM, S.A. and others
Court Name: Supreme Court of Pakistan Judge(s): Muhammad Arif, Ajmal Mian, Abdur Rehman Khan Title: HARAL TEXTILES LIMITED vs BANQU E INDOSUEZ BELGIUM, S.A. and others Case No.:Civil Appeal No.612 of 1997 Civil Appeal No.879 of 1998 F.A.O. No.318 of 1996
JUDGMENT
Reported As: 1999 SCMR 591 Result: Appeal dismissed Judgment JUDGMENT ' AJMAL MIAN, C.J.--This is an appeal with the leave of this Court against the judgment dated 21-3- 1997 passed by a learned Single Judge of the Lahore High Court in F.A.O. No.318 of 1996, filed by the respondents against the order dated 29-10-1996 of the learned Civil Judge, 1st Class, Lahore, on the respondents' application filed under Order XXXIX, Rules 1 and 2, C.P.C. Granting ad interim injunction restraining respondents Nos. 3 and 8 from claiming payment or remitting under the Letter of Credit until and unless respondents Nos.3 and 8 furnish Bank guarantee equivalent to the amount of letter of credit, allowing the same as follows:- "10. For the above reasons, this appeal is allowed and the impugned order dated 29-10-1996, restraining payment under the Letter of Credit except on the condition of furnishing of bank guarantee, is set aside and the application of plaintiff-respondent No.1 herein filed under Order 39, Rules 1 and 2, C.P.C. Is hereby dismissed. No order as to costs. 2. Leave to appeal was granted to consider the question, whether the High Court was not justified to interfere with in the discretionary order of the Trial Court, and whether the appellant/plaintiff was estopped from asking for restraint order against payment under the Letter of Credit on the facts and circumstances of the case. 3. The brief facts are that the appellant agreed to purchase certain machinery from respondent No.2, a Belgium firm, and for that purpose opened an irrevocable Letter of Credit through M/s. Allied Bank of Pakistan Limited, which have been arraigned as respondents Nos.6 to 8 in the present appeal through Branch Managers referred to therein, in favour of respondent No.2 (i.e, the seller). It seems that under the terms of the Letter of Credit the payment was to be made in 12 instalments
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on the dates specified on the bills of exchange drawn by respondent No.2, i.e, the seller, and accepted by the appellant-purchaser. .It appears that the required machinery and other allied articles were duly received and the same were installed. It is the case of the appellant that upon operation of the above machinery it was discovered that the same was defective, resulting in serious losses to the appellant. The appellant, therefore, filed Suit No.375 of 1996 for the recovery of Rs,344.68 million or its equivalent amount in Belgium currency on the ground of breach of specifications and the inferior quality thereof. They also sought permanent injunction against the defendants inter alia for restraining M/s. Allied Bank of Pakistan Limited from releasing or remitting any payment by annual instalments. Alongwith the plaint of the suit the appellant also filed an application under Order XXXIX, Rules 1 and 2, C.P.C., which was allowed by learned Civil Judge, 1st Class, Lahore, through his above order dated 29-10-1996 in the aforesaid terms; against which respondent No.1 bank (which is the holder in due course) sought further injunction restraining the seller and the negotiating bank/respondent No.1 from claiming any amount under the Letter of Credit or the bills of exchange drawn under the Letter of Credit by making payment of the sale price to respondent No.2, the seller, filed F.A.O. No.318 of 1996, which was allowed in the above terms. Thereupon, the appellant filed a petition for leave to appeal which was granted to consider the above questions. 4. In support of the aforesaid appeal Mr. Gul Zarin Kiani, learned A.S.C. Appearing for the appellant, has vehemently contended that since the order of the learned Civil Judge directing the appellant and M/s. Allied Bank of Pakistan Limited not to remit the balance of the amount under the Letter of Credit/Bills of Exchange without getting the bank guarantee was just and proper, the learned Judge in Chambers was not justified to interfere with the above discretionary order particularly when it was alleged that respondent No.2, the seller, had committed fraud to which respondent No.1 was also a party. ' On the other hand, Mr. Jawwad S. Khawaja, learned Advocate Supreme Court for respondents Nos.1 to 3, has urged that no allegation of fraud or any other misconduct on the part of respondent No.1 was alleged by the appellant in their plaint and since respondent No.1 is the holder in due course of the bills of exchange for consideration drawn under the letter of credit and after having paid the price to the seller, the learned Civil Judge was not justified in burdening the above respondents to furnish bank guarantee for the balance amount to be remitted under the Letter of Credit guaranteed by the Bills of Exchange. 5. Before touching upon the above contentions on merits, we may observe that Mr. Gul Zarin Kiani, learned Advocate Supreme Court appearing for the appellant, was candidly submitted that in the body of the plaint or in the application under Order XXXIX, Rules 1 and 2, C.P.C. Or in the supporting affidavit, no allegation as to fraud or any other misconduct on the part of respondent No.1 was alleged. However, he submitted that an application for amendment of the plaint has been filed in which the amendment is sought of the plaint as to include the above plea of fraud on the part of respondent No.1. Mr. Jawwad S. Khawaja has submitted that his client has not received any copy of such application. 6. Be that as it may, it will not be appropriate on our part to take into consideration the allegations which are now sought to be made through the amendment. Even the amendment application has not yet been allowed. We would, therefore, proceed on the assumption that there is no allegation of fraud or any misconduct on the part of respondent No.1 bank, which is holder in due course of the Bills of Exchange for consideration. 7. Mr. Gul Zarin Kiani, learned Advocate Supreme Court for the appellant, has referred to section 9 of the Negotiable Instruments Act, 1881, particularly the Explanation to the same. Above section 9 lays down that "Holder in due course" means any person who for consideration becomes the possessor of a promissory note, bill of exchange or cheque if payable to bearer, or the payee'or indorsee
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thereof, if payable to order, before it became overdue, without notice that the title of the person from whom he derived his own title was defective. ' Explanation to the same provides that "For the purpose of this section the title of a person to a promissory note, Bill of Exchange or cheque is defective when he is not entitled to receive the amount due thereon by reason of the provisions of section 58". ' It may be stated that section 58 lays down that "when a promissory note, Bill of Exchange or cheque has been lost or has been obtained from any maker, drawer, acceptor or holder thereof by means of an offence or fraud, or for an unlawful consideration, neither the person who finds or so obtains the instrument nor any possessor or indorsee who claims through such person is entitled to receive the amount due thereon from such maker, drawer acceptor or holder, unless such possessor or indorsee is, or some person through whom he claims was, a holder thereof in due course". 8. On the other hand, Mr. Jawwad S. Khawaja, learned Advocate Supreme Court for respondents Nos. 1 to 3, has referred to section 118 of the aforesaid Act, which provides as under:-- "118. Presumptions as to negotiable instruments.-- Until the contrary is proved, the following presumption shall be made-- (a) of consideration; that every negotiable instrument was made or drawn for consideration, and that every such instrument, when it has been accepted, indorsed, negotiated or transferred, was accepted, indorsed, negotiated or transferred, for consideration; (b) as to date; that every negotiable instrument bearing a date was made or drawn on such date; (c) as to time of acceptance; that every accepted bill of exchange was accepted within a reasonable time after its date and before its maturity; (d) as to time of transfer; that every transfer of a negotiable instrument was made before its maturity; (e) as to order of endorsement; that the endorsements appearing upon a negotiable instrument were made in the order in which they appear thereon; (t) as to stamp; that a lost promissory note, bill of exchange or cheque was duly stamped; (g) that holder is a holder in due course; that the holder of a negotiable instrument is a holder in due course; provided that, where instrument has been obtained from its lawful owner, or from any person in lawful custody thereof, by means of an offence or fraud, or has been obtained from the maker or acceptor thereof by means of an offence or fraud, or for unlawful consideration, the burden of proving that the holder is a holder in due course lies upon him." 9. In our view, prima facie there is nothing uptil now on record from which it can be concluded that either the above Explanation to section 9 of the above Act is attracted to or section 58 thereof. On the contrary, as pointed out hereinabove, there is no allegation in the body of the plaint or in the application filed under Order XXXIX, Rules 1 and 2, C.P.C. Or in the supporting affidavit which may disentitle respondent No.1 from receiving the amount under the Bills of Exchange. There is nothing reliable on record till now from which the presumption attached to the validity of the Bills of Exchange under section 118 of the above Act can be negated. 10. Mr. Gul Zarin Kiani, learned Advocate Supreme Court for the appellant, has referred to the following case-law in support of his above submissions:-- (i) An unreported order dated 26-6-1998 passed on C .M . A . No.519 of 1998 in Civil Appeal No.879 of 1998 by this Court, which appeal was directed against the order of a learned Single Judge of the Lahore High Court directing that the amount of instalments due under the Letter of Credit be paid to the appellant on the condition of furnishing a bank guarantee was 'modified as the quantum of amount. (ii) Messrs U.D.L. Industries Ltd. v. Hongguang Electron. Tube Plant and others PLD 1997 Karachi 553; in which a learned Single Judge of the High Court of Sindh allowed the encashment of a Letter of
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Credit subject to furnishing bank guarantee by the defendants on an application under Order XXXIX, Rules 1 and 2, C.P.C. After having found that the whole transaction was vitiated by fraud on the part of the seller. (iii) Pan Ocean Enterprises (Pvt.) Limited v. Thai Rayon Company Limited and 5 others PLD 1990 Karachi 395; ' In the above case a learned Single Judge of the High Court of Sindh after having found prima facie that the bill of lading contained wrong statements of facts particularly about the dates of shipping, vessels in which the goods were loaded and that there was transshipment, and all this was in violation of the terms of Letter of Credit, restraining defendants Nos. 1 and 6 from claiming payment under the Letter of Credit in question and defendants Nos. 4 and 5 from making any payment thereunder until and unless defendants Nos.1 and 6 furnished bank guarantee equivalent to the amount of Letter of Credit. (iv) Messrs Kohinoor Trading (Pvt.) Ltd. v. Mangrani Trading Co. And 2 others 1987 CLC 1533; ' in which a Division Bench of the High Court of Sindh to which one of us (Ajmal Mian, C.J.) was a party, maintained the order of a learned Single Judge declining to issue a restraint order against the bank from releasing the amount under a Letter of Credit and observed as follows as to the law governing the grant of an ad interim injunction restraining the bank from honouring its commitment under a Letter of Credit: ' 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 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 he 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." (v) The State Trading Corporation of India Ltd., v. Jainsons Clothing Corporation and another (AIR 1994 SC 2778). ' In the above case the Indian Supreme Court allowed an appeal against a restraint order against the encashment of a bank guarantee and enunciated law in respect thereof in the following terms:-
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"9. The grant of injunction is a discretionary power in equity jurisdiction. The contract of guarantee is a trilateral contract which the bank has undertaken to unconditionally and unequivocally abide by the terms of the contract. It is an act of trust with full faith to facilitate free flow of trade and commerce in internal or international trade of business. It creates an irrevocable obligation to perform the contract in terms thereof. On the occurrence of the events mentioned therein the Bank guarantee becomes enforceable. The subsequent disputes in the performance of the contract does not give rise to a cause nor is the Court justified on that basis, to issue an injunction from enforcing the contract, i.e, bank guarantee. The parties are not left with no remedy. In the event of the dispute in the main contract ends in the party's favour he/it is entitled to damages or other consequential reliefs. 10. It is settled law that the Court, before issuing the injunction under Order 39, Rules 1 and 2, C.P.C. Should prima facie be satisfied that there is triable issue strong prima facie case of fraud or irretrievable injury and balance of convenience is in favour of issuing injunction to prevent irremedial injury. The Court should normally insist upon enforcement of the bank guarantee and the Court should not interfere with the enforcement of the contract of guarantee unless there is a specific plea of fraud or special equities in favour of the plaintiff. He must necessarily plead and produce all the necessary evidence in proof of the fraud in execution of the contract of the guarantee, but not the contract either of the original contract or any of the subsequent events that may happen as a ground for fraud." (vi) Syndicate Bank, v. Vijay Kumar and others, AIR 1992 SC 1066. ' in which the Indian Supreme Court allowed the appeal of the appellant bank against a restraint order passed in respect of two F.D.Rs, over which the bank had lien in respect of the liability of the judgment-debtor. However, the case was remanded in the following terms:-- "However, in the view taken by us above namely that the Bank has a general lien over the two F.D.Rs, we set aside the order of the High Court directing the appellant-Bank to deposit an amount of Rs,35,000. The High Court shall, however, consider the objections raised by the Bank, namely that no amounts are due to the judgment-debtor, in the light of the above principles laid down by us and then decide whether there is any amount left for being attached by the decree-holder in execution of his decree. With the above directions the appeal is accordingly allowed. ' In the circumstances of the case, there will be no order as to costs." (vii) General Electric Technical Services Company Inc. v. M/s. Punj Sons (P) Ltd. And another AIR 1991 SC 1994. ' In the above case the Indian Supreme Court allowed the appeal against the judgment of the High Court and reiterated the principle of law relating to unconditional bank guarantee and unconditional bond in the case of U.P. Cooperative Federation Ltd. v. Singh Consultants and Engineers (P) Ltd. (1988) 1 SCC 174 as under:-- "Almost all such cases have been considered in a recent judgment of this Court in U.P. Cooperative Federation Ltd. v. Singh Consultants and Engineers (P) Ltd., (1988) 1 SCC 174, wherein Sabyasachi Mukherji, J., as he then was, observed (at p.189): 'that is order to restrain the operation either of irrevocable Letter of Credit or of confirmed Letter of Credit or of bank guarantee. There should be good prima facie case of fraud and special equities in the form of preventing irretrievable injustice between the parties. Otherwise, the very purpose of bank guarantee would be negatived and the fabric of trading operations will get jeopardised'. It was further observed that the Bank must honour the bank guarantee free from interference by the Courts. Otherwise, trust in commerce internal and international would be irreparably damaged. It is only in exceptional cases that is to say in case of fraud or in case of irretrievable injustice, the Court should interfere. ' In the concurring opinion one of us (K. Jagannatha Shetty, J.) has observed that whether it is a traditional bond or performance guarantee, the obligation of the Bank appears to be the same. If
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the documentary credits are irrevocable and independent, the Bank must pay when demand is made. Since the Bank pledges its own credit involving its reputation. It has no defence except in the case of fraud. The Bank's obligations of course should not be extended to protect the unscrupulous party, that is, the party who is responsible for the fraud. But the banker must be sure of his ground before declining to pay. The nature of the fraud that the Court talk about is fraud of an ' egregious nature as to vitiate the entire underlying transaction'. It is fraud of the beneficiary, not the fraud of somebody else." (viii) Centax (India), Appellant v. Vinmar Impex Inc. And others AIR 1986 SC 1924. ' In the above case the Indian Supreme Court, while dismissing the appeal and maintaining the order of the High Court declining to restrain the Bank from making payment, reiterated the principle governing the grant or refusal of injunction in respect of payment under the Letter of Credit as follows:-- "This case is really an extension of the principles laid down by this Court in United Commercial Bank's case. The main point in controversy in that case was whether the Court should in a transaction between a banker and banker grant an injunction at the instance of the beneficiary of an irrevocable Letter of Credit, restraining the issuing bank from recalling the amount paid under reserve from the negotiating bank, acting on behalf of the beneficiary against a document of guarantee/indemnity at the instance of the beneficiary. In dealing with the nature of a banker's obligation under an irrevocable Letter of Credit, the Court observed: 'In view of the banker's obligation under an irrevocable Letter of Credit to pay, his buyer-customer cannot instruct him not to pay. In Hamzeh Malas v. British Imex Industries Ltd., (1958) 2QB 127, the plaintiffs, the buyers, applied for an injunction restraining the sellers, the defendants, from drawing under the credit established by the buyer's bankers. This was refused. Jenking, U stating at p.129 that: ' the opening of a confirmed Letter of Credit constitutes a bargain between the banker and the vendor of the goods which imposes on the banker an absolute obligation to pay.... And that this was not a case in which the Court ought to exercise its discretion and grant the injunction. ' The Court held that the same considerations should apply to a bank guarantee, and added " (ix) United Commercial Bank, v. Bank of India and others, AIR 1981 SC 1426; ' In the above case the Indian Supreme Court allowed an appeal against the judgment of the High Court and held that the Courts should refrain from granting injunction to restrain the performance of the contractual obligations arising out of Letter of Credit or a bank guarantee between one bank and another by reiterating as follows:-- "A bank which gives a performance guarantee must honour that guarantee according to its terms. In R.D. Harbottle (Mercantile) Ltd. v. National Westminster Bank Ltd., (1977) 3 WLR 752, Kerr, J. Considered the position in principle. We would like to adopt a passage from his judgment at p.761: It is only in exceptional cases that the Courts will interfere with the machinery of irrevocable obligations assumed by banks. They are the life-blood of international Commerce. Such obligations are regarded as collateral to the underlying rights and obligations between the merchants at either end of the banking chain. Except possibly in clear cases of fraud of which the banks have notice, the Courts will leave the merchants to settle their disputes under the contracts by litigation or arbitration as available to them or stipulated in the contracts. The Courts are not concerned with their difficulties to enforce such claims; these are risks which the merchants take. In this case the plaintiffs took the risk of the unconditional wording of the guarantees. The machinery and commitments of banks are on a different level. They must be allowed to be honoured, free from interference by the Courts. Otherwise trust in international commerce could be irreparably damaged.
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(x) M/s. Tilokchand Motichand and others v. H.B.Munshi, Commissioner of Sales Tax, Bombay and another. ' In this case also the Indian Supreme Court re-affirmed its view that in international trade irrevocable Letters of Credit are very important and the Court should refrain from interfering with the autonomy of an irrevocable Letter of Credit is entitled to protection. (xi) M/s. Synthetic Foams Ltd. v. Simplex Concrete Piles (India) (Pvt.) Ltd. AIR 1988 Delhi 207; ' in which a learned Single Judge of the Delhi High Court granted an ad interim 'injunction restraining the encashment of a bank guarantee and after having found prima facie that the beneficiaries/defendants had invoked the bank guarantee by suppression of material facts but where there allegations of fraud in so far as they had not disclosed that the contract had been cancelled by the defendants due to increase in price and technical reasons without any fault or mistake of, the plaintiff. (xii) M/s. Banerjee & Banerjee v. Hindusthan Steel Works Construction Ltd. And others (AIR 1986 Calcutta 374): ' In the above case a learned Single Judge of the Calcutta High Court observed that suppression of material facts by beneficiary while seeking enforcement of bank guarantees will entail special equity in favour of principal debtor to stop payment by Bank on the basis of demand letters in respect of the bank guarantees and the Letters of Credit. (xiii) National Oils & Chemical Industries, Delhi v. Punjab & Sindh Bank Ltd., Delhi and another (AIR 1979 Delhi 9): ' In the aforesaid case a learned Single Judge of the Delhi High Court held that the principle of independence of Bank's obligation under the Letters of Credit was not to be extended to protect unscrupulous sellers and that in the case before him there was good ground for an ad interim injunction. (xiv) Braja Kishore Dikshit…
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