2004 (8) TMI 763 - SC - Indian Laws

Supreme Court rules bank not compelled to extend Letter of Credit

The Supreme Court upheld the Division Bench's judgment, ruling that the issuing bank could not be compelled to extend the Letter of Credit or make ... - Issues Involved:1. Liability for demurrage charges.2. Validity and extension of the irrevocable Standby Letter of Credit.3. Enforcement of the arbitration award.4. Discrepancies in the documents presented under the Letter of Credit.5. Jurisdiction and propriety of court orders affecting third parties (issuing bank).Issue-wise Detailed Analysis:1. Liability for Demurrage Charges:The Appellants, owners of the vessel 'DEKHODA', chartered it to the 1st Respondent. Disputes arose concerning demurrage charges amounting to USD 267,000. The Appellants invoked arbitration as per the Charter Party Agreement, leading to an award in their favor for USD 291,634.61 and lb29,368.24 plus interest. The Appellants filed an Enforcement Petition for this award.2. Validity and Extension of the Irrevocable Standby Letter of Credit:The 1st Respondent provided an irrevocable Standby Letter of Credit issued by the 3rd Respondent. The Delhi High Court initially directed the Respondents to keep the Letter of Credit alive beyond its expiry date of 15th August 1996. The 3rd Respondent, as the issuer, was not involved in the underlying dispute and contended that they should not be directed to extend the Letter of Credit. The Court later confirmed the order without addressing the 3rd Respondent's concerns.3. Enforcement of the Arbitration Award:The Appellants sought to enforce the award through the Delhi High Court, which granted a decree in terms of the award and allowed the Appellants to apply to the Reserve Bank of India (RBI) for remittance approval. The RBI granted 'in principle' approval subject to no pending appeals. The 3rd Respondent argued that they were not bound to make payments under the expired Letter of Credit.4. Discrepancies in the Documents Presented Under the Letter of Credit:The Appellants presented documents to the 3rd Respondent for payment under the Letter of Credit. The 3rd Respondent identified discrepancies and refused payment. The Negotiating Bank disagreed, but the 3rd Respondent returned the documents. The Delhi High Court initially ruled that there were no discrepancies and directed payment, which was later contested by the 3rd Respondent.5. Jurisdiction and Propriety of Court Orders Affecting Third Parties (Issuing Bank):The Division Bench of the Delhi High Court set aside the Single Judge's orders, noting that the 3rd Respondent, as the issuing bank, was not concerned with the disputes between the parties and should not have been directed to extend the Letter of Credit. The Division Bench held that the issuing bank's liability is independent and cannot be adjudicated in enforcement proceedings under Sections 46 to 49 of the Arbitration and Conciliation Act, 1996. The proper procedure would have been garnishee proceedings under Order 21 Rule 46 of the CPC, but even this was deemed inappropriate for a Letter of Credit.Conclusion:The Supreme Court upheld the Division Bench's judgment, affirming that the 3rd Respondent, as the issuing bank, could not be compelled to extend the Letter of Credit or make payments under it in the enforcement proceedings. The Appellants accepted the 3rd Respondent's offer of Rs. 28 lacs and 63,600 shares in full discharge of the liability under the Letter of Credit, with the balance to be recovered from the 1st Respondent as per the arbitration award. The appeals were disposed of accordingly, with no order as to costs.