COVID 19: Force Majeure Clause Applicable Only To Steel Supplier And Not Importer – Steel Importer Denied Ad-Interim Stay on Encashment of Letters of Credit

The Hon’ble Bombay High Court vide its order dated April 8, 2020 denied ad interim protection to Standard Retail Pvt. Ltd.  and other steel importers  from encashment of letters of credit. The said order was passed by Hon’ble Mr. Justice AA Sayed in petitions filed by the steel importers under Section 9 of the Arbitration and Conciliation Act, 1996. The proceedings were held via video conference from within the Bombay High Court complex.

The Petitioners had inter alia sought a direction to restrain the Banks involved from negotiating / encashing the Letters of Credit (“LCs”). They had contended that: (i) they had invoked the Force Majeure clause and had terminated their contracts with Hyundai Corporation and GS Global Corp.; (ii) the contracts had been rendered unenforceable on account of frustration as they could not receive the steel product shipments on account of the COVID 19 related lockdown imposed by the Government.

Kochhar & Co. led by Senior Partner, Krishna Vijay Singh and Partner, Manish Dembla represented Wells Fargo Bank, N.A. (“Wells Fargo”) who was the negotiating bank with respect to some of the LCs. Wells Fargo Bank had already made payment against some of the LCs and any ad interim injunction would have prevented Wells Fargo from claiming reimbursement of the amounts paid against the LCs from the issuing bank. Apart from the arguments on the general law relating to injunction on letters of credit / bank guarantees, it was additionally argued on behalf of Wells Fargo that once the negotiating bank has released payment against an LC, there cannot be any injunction on the issuing bank from reimbursing the negotiating bank unless there was a fraud to the knowledge of the negotiating bank which was not the case.

 

The Hon’ble Court held the following while denying the injunction:

(1) The Letters of Credit are an independent transaction with the Bank and the Bank is not concerned with underlying disputes between the Petitioners who are buyers and the Respondent No. 1 who is the seller;

(2) The Force Majeure clause in the present contracts is applicable only to the Respondent No. 1 and cannot come to the aid of the Petitioners.

(3) The contract terms are on Cost and Freight basis (CFR) and Respondent No. 1 has complied with its obligations and performed its part of the contracts and the goods have been already shipped from South Korea. The fact that the Petitioners would not be able to perform its obligations so far as its own purchasers are concerned and/or it would suffer damages, is not a factor which can be considered and held against the Respondent No. 1.

(4) The Notifications/Advisories relied upon do suggest that distribution of steel has been declared as an essential service. There are no restrictions on its movement and all ports and port related activities including the movement of vehicles and manpower, operations of Container Freight Station and warehouses and offices of Custom Houses Agents have also been declared as essential services. The Notification of the Director General of Shipping, Mumbai, states that there would be no container detention charges on import and export shipments during the lockdown period.

(5) In any event, the lockdown would be for a limited period and the lockdown cannot come to the rescue of the Petitioners so as to resile from its contractual obligations with Respondent No.1 of making payments

The order passed by the Hon’ble High Court reiterates the existing law on injunction against encashment of Letters of Credit, Force Majeure clauses and Frustration of Contracts under Section 56 of the Indian Contract Act, 1872.

The team of Kochhar & Co. was led by Senior Partner, Krishna Vijay Singh and Partner, Manish Dembla. The other Kochhar & Co. Attorneys involved in the matter were Rajarshi Chakrabarty, Senior Resident Partner, Kochhar & Co. Mumbai, Avinav Mukherjee, Rushil Mathur and Nachiketa Goyal.

 

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