Sri Lanka Law Reports
 2 Sri L.R.
HYDERABAD INDUSTRIES LTD.
ID AC TRADING (PVT) LTD., AND TWO OTHERS
COURT OF APPEAL.
S. N. SILVA. J. (P/CA)
JUNE 07, 1995.
Irrevocable or Confirmed Letter of Credit – Bill of Lading – Goods supplied not inconformity – Enjoining Order – Interim Injunction – Irreparable damage -Damages quantified – Contract of Indemnity – Fraud.
The 1st Respondent (Buyer) instituted action against the Petitioner (Supplier), the2nd Respondent (Shipping Company) and the 3rd Respondent (Bank), statingthat it imported 19 container loads of corrugated asbestos roofing sheets from thePetitioner for which purpose the Petitioner opened a irrevocable Letter of Creditwith the 3rd Respondent. This letter of Credit was amended, to include acondition that a certificate of the C.I.S.I.R. certifying that the goods conform to
S.L.S. 9 of Part II, should be provided. The goods were inspected by the CISIRand they certified that the goods were not in conformity with SLS 9 (ii). The 1stRespondent also issued a Letter of indemnity to the 2nd Respondent endorsedby the 3rd Respondent. It was pleaded that due to the failure of the Petitioner toduly sell and deliver goods to the 1st Respondent it had suffered damages in asum of Rs. 3.6 million. The 1st Respondent also averred that it would sufferirreparable loss and damage if the 3rd Respondent made payments on theLetters of Credit/lndemnity to the Petitioner and the 2nd Respondent. The 1stRespondent obtained an Enjoining Order ex Parte (i) preventing the 3rdRespondent (Bank) paying or causing to be paid any money to the Petitionerand/or the 2nd Respondent (Shipping Company) (ii) preventing the Petitionerand/or the 2nd Respondent from receiving any money upon the Letter ofCredit/lndemnity (iii) preventing the Petitioner from receiving or claiming anymoney from the 2nd Respondent and the 2nd Respondent from paying anyMoney to the Petitioner upon and/or in terms of the Letter of Indemnity. TheDistrict Court after inquiry granted an interim injunction.
The Bills of Lading show that the goods were shipped on 19.10.93. Theirrevocable Letter of Credit required a certificate of inspection issued by theIndian Export Council stating that the goods conform to SLS 9. (ii) except withregard to width to be produced before it could be honoured. On 10.11.93 thiscondition was unilaterally amended by the 1st Respondent requiring a Certificate
CA Hyderabad Industries Ltd. v. IDAC Trading (Pvt) Ltd. and Two Others
from CISIR. certifying that the goods conform to SLS 9 part 2 including width.Since the cargo was on Board ship as at that date the Petitioner could not in anyway fulfil that condition. Thus it shows that the said condition was included in Badfaith.
The 1st Respondent subsequently took delivery of the goods and sold themin the open Market. This was done without any attempt on its part to repudiate thecontract and return the goods to the Petitioner. Therefore it is difficult to fathomhow then the 1st Respondent could suffer irreparable damage.
Per Ranaraja, J.
“A fundamental rule of the law on injunction is that where the damages or losscaused to a party seeking injunctive relief is quantified in damages on a primafacie balance of convenience. Courts should refrain from granting injunctiverelief."
As in the case of an irrevocable or confirmed Letter of Credit, a Letter ofIndemnity obliges the 3rd Respondent Bank to pay the 2nd Respondent -Shipping Company on it irrespective of any dispute between the Petitioner andthe 1st Respondent on the contract regarding the goods. It is an irrevocableobligation with which courts will not interfere with except when there is fraud, byone of the parties to the underlying contract and the Bank had Notice of thatfraud.
The system of financing these operations would break down completely if adispute between the Vendor and the purchaser were to have the effect of“freezing” the sum in respect of which the Letter of Credit was opened.
The Courts jurisdiction to grant injunctions is wide, but this is not a case in whichin the exercise of the Courts discretion it ought to grant an injunction.
APPLICATION in Revision from the Order of the District Court of Colombo.
Cases referred to:
Jinadasa v. Weerasinghe 31NLR33.
Amerasekera v. Mitsui & Co. Ltd., and Others 1993 1 SLR 22.
Malas v. British Imex Industries Ltd., 1959 1 AER 262 at 263.
Harbottle (Mercantile) Ltd., and Another v. National Westminster Bank Ltd.,1977 2 AER 862.
Edward Owen Engineers Ltd., v. Barclays Bank International Ltd., 1978 1 AER976.
Sri Lanka Law Reports
 2 Sri L.R.
Faiz Musthapha P.C., with Kushan de Alwis for Petitioner.
Romesh de Silva, PC., with Dinal Phillips for 1st Respondent.
S. A. Parathalingam for 3rd Respondent.
The 1st respondent (buyer of goods), instituted action against thepetitioner (supplier of goods), the 2nd respondent (shipping Co.),and the 3rd respondeqt (Bank issuing the letters of credit/indemnity)stating that it imported 18 container loads of corrugated asbestosroofing sheets (goods), from the petitioner for which purpose thepetitioner opened an irrevocable letter of credit (X6) with the 3rdrespondent. The letter of credit was amended (X7) on 10.11.93,including a condition that a certificate of the C.I.S.I.R. certifying thatthe goods should conform to SLS 9 of Part II. The 1st respondent alsoissued letters of indemnity to the 2nd respondent indorsed by the 3rdrespondent (X8A to X8E). The goods were inspected by the C.I.S.I.R.and certified that they were not in conformity with SLS 9 part 11. Inthe circumstances, the 1st respondent pleaded that due to the failureof the petitioner to duly sell and deliver goods to the 1st respondent,it had suffered damages in a sum of Rs. 3,600,000/-. The 1strespondent also averred that it would suffer irreparable loss a!iddamage if the 3rd respondent made payments on the letters ofcredit/indemnity to the petitioner and 2nd respondent respectively.The 1st respondent therefore applied for and obtained ex parte anenjoining order,
preventing the 3rd respondent paying and/or causing to bepaid any money to the petitioner and/or the 2nd respondent in termsof the letters of credit/indemnity,
preventing the petitioner and/or the 2nd respondent fromreceiving any money upon the letters of credit/indemnity and,
preventing the petitioner from receiving or claiming anymoney from the 2nd respondent and the 2nd respondent from payingany money to the petitioner upon and/or in terms of the letter ofindemnity,
and also applied for an interim injunction in the same terms.
Hyderabad Industries Ltd. v. IDAC Trading (Pvt) Ltd. and Two Others
The petitioner and the 3rd respondent filed objections praying thatthe enjoining order be vacated and the application for the interiminjunction be dismissed. The 2nd respondent prayed that theapplication for an interim injunction be refused. After the parties filedwritten submissions and documents Court made order on 16.12.94granting the interim injunction as prayed. These applications are tohave that order set aside.
The Learned District Judge has based his order purportedly onthe irreparable damage that the 1st respondent would suffer ifpayment by the 3rd respondent on the irrevocable letter ofcredit/indemnity to the petitioner and the 2nd respondent respectivelyis not restrained, because the 1st respondent would be unable tomarket the goods due to their inferior quality.
The Bills of lading X1 to X5 show that the goods were shipped onboard on 19.10.93. The irrevocable letter of credit X6 dated 22.9.93required inter alia, a certificate of inspection issued by the IndianExport Council stating that the goods conform to SLS 9 part!), exceptwith regard to width, which is 1.05 metres, to be produced before itcould be honoured. On 10.11.93, this condition was unilaterallyamended by the 1st respondent requiring a certificate from C.I.S.I.R.certifying that the goods conform to SLS 9 part 2, including width.Since the cargo was on board ship, as at that date the petitionercould not in any way fulfil that condition. There is therefore substancein the submission made by learned President counsel for thepetitioner that the condition was included in the amended letter ofcredit by the 1st respondent in bad faith. The District Judge hadfailed to consider this matter in its proper light. He has also wronglyconcluded that the petitioner had acquiesced in the amendment.
It is to be noted that the 1st respondent subsequently took deliveryof the goods and sold them in the open market. It has done sowithout any attempt on its part to repudiate the contract and returnthe goods to the petitioner. It is difficult to fathom how then the 1strespondent could suffer irreparable damage. Yet he has claimed asum of Rs. 3,600,000/- in damages from the petitioner. A fundamentalrule of the law on injunctions is that where the damages or loss
Sri Lanka Law Reports
 2 Sri LR.
caused to a party seeking injunctive relief is quantified in damages,on a prima facie balance of convenience, Courts should refrain fromgranting injunctive relief. Jinadasa v. Weerasinghe (,). The DistrictJudge has not observed this rule. If he had considered the mattersreferred to, he may have been less confident in accepting the 1strespondent’s contention that it had a prima facie arguable case anda reasonable chance of success in the light of the defences raised inthe pleadings objections, documents filed and submissions ofcounsel. Amerassekera v. Mitsui & Co. Ltd., and Others<2).
There is a more substantial reason why the interim injunctionshould not have been granted. As Jenkins L.J. expressed clearly inMalas v. British Imex Industries Ltd.l3>
“A confirmed letter of credit constitutes a bargain between thebanker and the vendor of the goods, which imposes on thebanker an absolute obligation to pay irrespective of any disputewhich there may be between the parties on the questionwhether the goods are up to contract or not. An elaboratecommercial system has been built up on the footing thatbanker’s confirmed credits are of that character and it would bewrong for Court to interfere with that established practice. Thesystem of financing these operations would breakdowncompletely if a dispute between the vendor and the purchaserwere to have the effect of “freezing” the sum in respect of whichthe letter of credit was opened. The courts jurisdiction to grantinjunctions is wide, but this is not a case in which in the exerciseof the Court's discretion it ought to grant an injunction."
Similar views have been expressed in Harbottle (Mercantile) Ltd.and Another v. National Westminster Bank Ltd. w.
Although the 2nd respondent was not represented at the hearingof this application, the facts that concern it are briefly; when thegoods arrived at the Port of Colombo the 1st respondent requestedthe 2nd respondent to deliver the cargo without the tender of the Billsof Lading. The 2nd respondent agreed to deliver the cargo onproduction of an acceptable letter of indemnity. The 1 st respondentthen issued letter of indemnity XBA to XBE indorsed by the 3rdrespondent bank and took possession of the goods.
Hyderabad Industries Ltd. v. IDAC Trading (Pvt) Ltd. and Two Others
A contract of indemnity is a contract express or implied, to keep aperson who has entered into or who is about to enter into a contractor incur any other liability, indemnified against loss, independent ofthe question whether a 3rd person makes default (Halsbury’s Laws ofEngland). The letters of indemnity issued by the 1st respondent to the2nd respondent as carrier of the cargo guaranteed by the 3rdrespondent is independent of the contract between the petitioner andthe 1st respondent.
As in the case of an irrevocable or confirmed letter of credit, aletter of indemnity obliges the 3rd respondent bank to pay the 2ndrespondent on it irrespective of any dispute between the petitionerand the 1st respondent on the contract regarding the goods. It is anirrevocable obligation with which Courts will not interfere with exceptwhen there is fraud by one of the parties to the underlying contractand the bank had notice of that fraud. Edward Owen Engineers Ltd.v. Barclay's Bank International Ltd. <5). In the instant case, thoughthere is an allegation of fraud on the part of the petitioner there is noprima facie evidence that the 3rd respondent bank was aware of anysuch fraud. Fraud must be clearly proved.
On a consideration of the principles laid down in the judgmentscited, it is clear the Learned District Judge has misled himself ingranting an interim injunction as prayed for by the 1st respondent.Accordingly the order of the District Judge dated 16.12.94 is setaside. The applications of the petitioner in revision is allowed withcosts.
This order will bind the parties in CALA 2/95.
S. N. SILVA, J. -1 agree.
HYDERABAD INDUSTRIES LTD. IDAC TRADING (PVT) LTD., AND TWO OTHERS