{"id":18279,"date":"2000-09-29T00:00:00","date_gmt":"2000-09-28T18:30:00","guid":{"rendered":"https:\/\/www.legalindia.com\/judgments\/federal-bank-ltd-vs-v-m-jog-engineering-ltd-and-ors-on-29-september-2000"},"modified":"2017-07-07T22:31:49","modified_gmt":"2017-07-07T17:01:49","slug":"federal-bank-ltd-vs-v-m-jog-engineering-ltd-and-ors-on-29-september-2000","status":"publish","type":"post","link":"https:\/\/www.legalindia.com\/judgments\/federal-bank-ltd-vs-v-m-jog-engineering-ltd-and-ors-on-29-september-2000","title":{"rendered":"Federal Bank Ltd vs V.M Jog Engineering Ltd. And Ors on 29 September, 2000"},"content":{"rendered":"
Supreme Court of India<\/div>\n
Federal Bank Ltd vs V.M Jog Engineering Ltd. And Ors on 29 September, 2000<\/div>\n
Bench: M. Jagannadha Rao, U.C. Banerjee<\/div>\n
           CASE NO.:\nAppeal (civil)  5626 of 2000\n\nPETITIONER:\nFEDERAL BANK LTD.\n\nRESPONDENT:\nV.M JOG ENGINEERING LTD. AND ORS.\n\nDATE OF JUDGMENT: 29\/09\/2000\n\nBENCH:\nM. JAGANNADHA RAO & U.C. BANERJEE\n\nJUDGMENT:\n<\/pre>\n
JUDGMENT<\/p>\n
2000 Supp(3) SCR 542<\/p>\n
The Judgment of the Court was delivered by M. JAGANNADHA RAO, J. Leave
\ngranted.\n<\/p>\n
The appellant Federal Bank at Bombay was the 3rd defendant in the suit and
\nhas a branch at Pune. It has preferred this appeal against the order of the
\nHigh Court dated 8.10.99 summarily dismissing the appellant’s appeal AFO
\nNo. 818 of 1999. The appeal was preferred against the order of the trial
\nCourt dated 29,4.99 whereby the trial Court had confirmed an ex-pane
\ninterim injunction dated 20,5,98 granted by it earlier, rejecting the
\nappellant’s application to vacate the same. The matter relates to a Letter
\nof Credit issued by the 2nd defendant, Bank of Maharashtra, Pune (3rd
\nrespondent) at the instance of the plaintiff-buyers ( 1st respondent), M\/s.
\nV.M. Jog Engineering Co., Pune. The sellers are M\/s. Jaswant Steel, Nagpur
\n(1st defendant) (1st respondent). The appellant Federal bank was the
\nnegotiating Bank (3rd defendant) while the 3rd respondent, Bank of
\nMaharashtra was the Issuing Bank.\n<\/p>\n
The main point arising in the case can be stated briefly as follows :\n<\/p>\n
The appellant, the Negotiating Bank received documents from the sellers
\nwhich included five delivery challans purportedly signed by the buyers’
\nofficers acknowledging receipt Of goods. The seller sent a Bill of Exchange
\nfor encashment against the Letter of Credit for 2 crores, taken out by the
\nbuyers. The appellant sent the Bill of Exchange, with endorsement of the
\nbuyers and the Letter of Credit and the connected documents including the
\n‘delivery challan’ – as received from me seller – to the Issuing Bank and
\ngot the genuineness of the documents confirmed. The Negotiating bank then
\nreleased Rs. 1 ,9439,252 in favour of the sellers on 25.3.98, after
\ndeducting its commission. But the buyers have obtained a temporary
\ninjunction against the issuing Bank from honouring the Letter of Credit.
\nThis has resulted in the appellant Negotiating Bank not being able to
\nobtain reimbursement from the Issuing Bank. The trial Court and the High
\nCourt, after noting that the Negotiation Bank had released to the seller
\nthe above sum upon due certification of the seller’s documents by the
\nIssuing Bank – have thus precluded the Negotiating Bank from getting
\nreimbursement from the Issuing Bank, One other peculiar feature of the case
\nis mat while the appellant-, Negotiating Bank was impleaded as the 3rd
\ndefendant in the suit, specific relief was not sought against it either in
\nthe suit or in the interlocutory application. In fact, it was stated by the
\nplaintiff-purchaser that the Negotiating Bank need not be heard in the
\ninterlocutory application and that the said Bank had no locas standi Both
\nthe courts below thought it fit to accept this contention and grant
\ninjunction under Order 39 Rule 1 Code of Civil Procedure restraining the
\nIssuing Bank from paying any amount to anybody under the Letter of Credit,
\npending suit. In the plaint or in the interlocutory application, the
\nplaintiff has not alleged ‘fraud’ Or forgery against me Negotiating Bank
\nnor even knowledge of the fraud\/forgery which is alleged against me sellers
\nin respect of the delivery challans.\n<\/p>\n
Aggrieved by the order of temporary injunction passed under Order 39 Rule 1
\nCPC, the Negotiating Bank has come up in appeal.\n<\/p>\n
As the case involves issues relating to Banking Practice and interpretation
\nof the Uniform Customs and Practice of Documentary Credits (1983)
\n(hereinafter called the UCP) issued by the International Chamber of
\nCommerce, – relied upon by the Negotiating Bank in detail – we propose to
\ndeal with the articles in UCP (1983 revision) and their relevance.\n<\/p>\n
The following are the facts :\n<\/p>\n
The plaintiff-(buyers) at Pune entered into a contract in February 1998
\nwith the sellers at Nagpur for purchase of 1450 M.T. of reinforcement
\nsteel-bars and structural-steel, conforming to IS:1786. These were needed
\nfor the buyer’s works at two projects, one at Palm Beach, Andheri and
\nanother for a fly-over project at Bombay. Two purchase orders (Nos, 104,\n<\/p>\n
105) for supply of 1450 MT were placed upon the sellers by the buyers on
\n7,2.98 for each of these projects.  time for supply of material was
\n31.3.98. The buyer availed of a Letter of Credit dated 19.2.98 from the
\nIssuing Bank to the tune Of Rs. 2 crores with negotiation initially to be
\nrestricted to the State Bank of India, Wardha. The expiration date was
\n31.3.98 but was extended upto 30.4.98.\n<\/p>\n
The Letter of Credit issued by the Issuing Bank on 19.2,98 listed out the
\nvarious “documents” which had to be produced by the sellers for payment
\nunder the Letter of Credit opened by the buyer with the Issuing Bank: These
\nwere described as follows :\n<\/p>\n
(1)  “The Beneficiary drafts drawn on the applicant without recourse to the
\ndrawer and marked under bank of Maharashtra, Tilak Road, Pune branch\/in
\nland L\/C No. 1\/98 dated 19,2.98 for 100% of the Invoice value at 90 days
\nUsance from the date of receipt of material at Andheri and Palm Beach, Marg
\nBridge, Near Nenl Navi Murtbai sites.\n<\/p>\n
(2)  Invoices signed by the beneficiary or his constituted agent in copies
\nof gross value of the goods certifying goods are as per order\/ indent and
\nevidencing despatch of the undernoted goods,<\/p>\n
(3)  Receipt dated not later than 31.3.98 marked freight prepaid.\n<\/p>\n
(4)……………………..\n<\/p>\n
(5)……-………….,…….\n<\/p>\n
(6) Copies of Octroi receipts for the amount claimed in invoice. “(7) Copy
\nof Weigh Slip for empty and Loaded transport Vehicle. :.(8) Photocopy of
\nManufacturer’s test certificate.\n<\/p>\n
(9) Copy of Delivery Challans-cum-invoices issued by Jaswant Steel Rolling
\nMills Pvt Ltd, duly signed by Project Authorities with an endorsement as
\nthe material received in good condition and indicating the date of receipt
\nof material at sites.”\n<\/p>\n
Thereafter, it is stated in the L\/C in clause 10 “Last date of Negotiation
\nof documents 20.4.1998 but not later than 20 days from despatches-(This
\nclause was later deleted on 19.3.98 when the appellant was nominated as
\nNegotiating Bank in place of the State Bank of India). The Special
\nInstructions in the L\/C for the Negotiating Bank were as follows :\n<\/p>\n
Special instructions for the negotiating Bank.\n<\/p>\n
1. Negotiations under this credit are restricted to State Bank of India
\nHinganghat, Distt. Wardha (M.S.),<\/p>\n
2. Negotiations should be marked separately tin the back of the documentary
\ncredit N.A.\n<\/p>\n
3. To reimburse themselves, the negotiating bank will send us the full set
\nof original documents by Registered Post alongwith a certificate of
\ncompliance of the terms and conditions of the credit and request for demand
\ndrafts\/pay order.\n<\/p>\n
4………………………….\n<\/p>\n
5, …………………………\n<\/p>\n
6. Total drawings under this credit should not exceed Rs. 2,00,00,000
\n(Rupees two crores only)<\/p>\n
It was lastly stated in the L\/C as follows :\n<\/p>\n
“This credit carries oar confirmation and we hereby engage with the drawers
\nendorsers and\/or bonafide holders of draft(s) drawn under and negotiated in
\nconfirmity with the terms and conditions of this credit will be duty
\nhonoured on presentation of documents or at maturity.\n<\/p>\n
Except as otherwise expressly stated, this credit is subject to Uniform
\nCustoms and Practice-for documentary credits (1983 Revision), international
\nChamber of Commerce, Publication No, 409.\n<\/p>\n
Yours faithfully, for Bank of Maharashtra Copy to : (1) State Bank of
\nIndia,” Hinganghat Branch Distt Wardha (M.S.) (2) V.M, Jog Engineering Ltd.
\nPune<\/p>\n
Thus, the L\/C confirms the rights of bonafide holders of the drafts that
\nmay be issued by the drawers-sellers and to honour -on presentation of
\ndocuments or at maturity. It is also clear that the L\/C is subject to UCP
\n(1983 Revision).\n<\/p>\n
For me purposes of the main point arising in the case, it is important to
\nnote clause 9 of the Letter of Credit That clause requires that one of the
\ndocument to be produced by the seller for payment should be the “copies of
\nthe delivery Challans-cum-invoices” issued by Jaswant Steel Rotting Mills
\nPvt. Ltd. (Plaintiff-buyer) duly signed by Project Authorities, with an
\nendorsement that the material was recovered in good condition and
\nindicating the date of receipt of material at sites.\n<\/p>\n
On 19,3,98, the appellant became the Negotiating Bank in the place of State
\nBank of India. The Issuing bank informed the seller that the Negotiating
\nBank would be the Federal Bank (appellant) and not the State Bank of India,
\nFurther, it was stated that clause 10 of the Letter of Credit (referred to
\nabove) stood deleted.\n<\/p>\n
On the same day, 19.3,98 seller sent a Bill of Exchange (called technically
\nas a Draft) to its dealer at Visakhapatnam against the Letter of Credit No.
\n1\/98 dated 19.2.98 stating as fellows :.\n<\/p>\n
“At 90 (ninety) days from the date of invoice pay to M\/s The Federal Bank
\nLtd., Bombay Samachar Marg; Fort, Mumbai of order a sum of Rs, 2,00,000.00
\n(Two crores only) towards value of material given as below :\n<\/p>\n
DD\/Inv. No,      Date                         Amount\n\n104                    19,2.98                    Rs, 1,00,00,000\n\n105                    19,29.8                    Rs. 1,00,00,000\n\nSd For Jas want Steel Roi I ing Ltd.\n\n<\/pre>\n
This was addressed to the seller’s agent at Vijag Steel Plant. Copies were
\nsent to purchaser (Plantiff). This Bill of Exchange contains endorsements
\npurported signed by the Vice-President of the buyers as follows :\n<\/p>\n
“accepted for payment on maturity”\n<\/p>\n
Sd<\/p>\n
Vice-President (Accounts) for V.M. Jog Engineering Co: (Buyer)<\/p>\n
and<\/p>\n
“We confirm having received the despatch documents”,<\/p>\n
Sd<\/p>\n
Vice-President (Accounts) for V.M. Jog Engineering Co. (Buyer)<\/p>\n
It will be noticed that ninety days from 19.2.98 would be 26.5,1999. That
\nwould be the date on which the Negotiating Bank could claim from the
\nIssuing Bank, the monies if any, it might have paid to the seller.\n<\/p>\n
But if is the contention of the buyer-plaintiff that the first despatch of
\nthe goods was on 28.3.98 and that payment would be due to the Negotiating
\nSank only on 26.6.98, The appellant Bank on the other hand contended mat
\nOnce the Vice President of the buyer company confirmed the despatch
\ndocument dated 19.2.98, ninety days would expire by 20.5.98 and the
\nappellant Bank, in case it paid to the sellers under the Bill of Exchange
\nissued by the sellers, me appellant should be repaid on 20.5.98 and not on
\n26.6,98,<\/p>\n
On 20.3.98, the sellers wrote to the appellant Bank (through their dealers
\nat Visakhapatnam, Shriram Investment Services Ltd.) to discount the Bill of
\nExchange for Rs. 2 crores and pay the proceeds. The till along with other
\n“documents” so sent by or on behalf of th6 sellers were received by the
\nappellant Bank. The above letter of the sellers to the appellant Bank reads
\nas follows:\n<\/p>\n
“Please find enclosed herewith the documents drawn under Bank of
\nMaharashtra, Pune L\/C No, 1\/98 dated 19.2,98.<\/p>\n
\n\nDrawer        Jaswant Steel Rolling Mills Pvt. Ltd. Nagpur (sellers)\n\nDmawee        V.M. Jog Engineering Ltd., Pune (buyers)\n\nAmount      Rs. 2,00,00,000 (Rupees two crores only)\n\nUsance       90 days\n\nDue date     .......\n\n<\/pre>\n
Kindly discount the same @ 15.25% p.a. and issue the cheque in favour of
\nthe Federal Bank Ltd.- A\/c. Jaswant Steel Rolling Mill Pvt. Ltd. payable at
\nMumbai.”\n<\/p>\n
In other words, the sellers demanded payment on the Bill of Exchange
\nagainst the L\/C by producing these documents before the Negotiating Bank.
\nThe Negotiating Bank Was to pay the amount minus its commission. I could
\ndraw the released amount from the Issuing Bank on the 90 day from 19.2.98
\nthe date of despatch document i.e. 20.5,98.\n<\/p>\n
The appellant-Negotiating Bank men took the extra precaution of sending to
\nthe Issuing Bank – the L\/C and the “documents” sent by the sellers for
\nconfirmation. This is stated to be part of the Banking practice.\n<\/p>\n
The letter dated 20,3.98 by the appellant (Negotiating Bank) to the Issuing
\nBank stated that they were enclosing the original Letter of Credit for 2
\ncrores, Usance 90 days, due date 20.5.98 (they were counting 90 days from
\n19.2.98) and that they were enclosing the “documents” sent to them by
\nsellers along with L\/C:\n<\/p>\n
\"Draft dt, 19.3,98                           Invoice dated 19.2,98 (5\nsheets)\n\nL\/R-Delivery Challan dt. 19.2.98 (5 sheets)\n\n<\/pre>\n
L\/C: Above L\/C in original is enclosed. Please return the same with the
\nsignatures duly verified and certified,”\n<\/p>\n
It was also said in the said letter by the Negotiating Bank that they ‘have
\nnegotiated the documents today’ and they ‘confirm having noted the drawings
\non the original LC,’ The letter of the Negotiating Bank further states :\n<\/p>\n
Instructions’.\n<\/p>\n
1.  Acknowledge receipt quoting your and our reference number.\n<\/p>\n
2.  Confirm due date of payment.\n<\/p>\n
3,  Verify and certify the signatures on the LC and confirm that the
\nsignatories on the LC have the required authority to issue the same.\n<\/p>\n
4,  Confirm that the documents are in order and payment will be made on due
\ndate.\n<\/p>\n
Reimbursement:\n<\/p>\n
(i) Remit Bill amount on due date itself by your Pay Order drawn in our
\nfavour.\n<\/p>\n
(ii) Remit Bill amount by Telephonic\/Telegraphictransfer (TT) through your
\nbranch at Bombay with instructions to reimburse to US on due date itself.”\n<\/p>\n
We have already stated that the Bi11 of Exchange (or draft) was also sent
\nby the sellers to the Negotiating Bank, through their dealer. This Bill was
\none of the documents thus received by the Negotiating Bank. It contained
\nthe two endorsements purported to have been made by or behalf of the buyers
\n(to which we have already made reference) and purporting to be signed by
\nthe Vice-President (Accounts) of the buyers. These endorsements read as
\nfollows<\/p>\n
“Accepted for the payment on maturity.\n<\/p>\n
Sd\\-\n<\/p>\n
Vice-President (Accounts) for V.M.- Jog Engineering Ltd, (buyers)<\/p>\n
We confirm having received the despatch documents.\n<\/p>\n
.Sd\\-\n<\/p>\n
Vice-President (Accounts) for V,M. Jog Engineering Ltd.” (buyers)<\/p>\n
As far as proof of delivery of the despatched goods is concerned, the
\nposition was as follows. Among the documents accompanying the L\/C were the
\nfive invoices dated 19.2,98 (5 sheets) and the five delivery challans dated
\n19.2.98 (5 sheets). The five delivery challaos contained the signature of
\none Mr, P. Waghmode who purported to sign on behalf of the buyers and two
\nof the five delivery challans purportedly contained the counter-signature
\nof the Vice-President (Accounts) of the buyer dated 21,2,98 and 28.2,98
\nrespectively. The office stamp of the buyer’s company was found on all the
\nfive delivery challan. The endorsement of Mr. Waghmode on the delivery
\nchallans also stated that goods were received in good condition.\n<\/p>\n
the Issuing Bank, after receiving the documents, wrote back to me
\nNegotiating Bank in its crucial letter on 23.3.98 as follows :\n<\/p>\n
“Re:      Our inland L\/C No. 1\/98 dated 192,98<\/p>\n
For Rs. 2,00,00,000 fvg. Jaswant Steel Rolling Pvt. Ltd.\n<\/p>\n
We have received the above said L\/C in original along with your covering
\nletter. We have confirmed the due date on 20.5,98 and the documents are in
\norder and payment of the above mentioned L\/C 1\/98 will be made on 20.5.98.\n<\/p>\n
We have verified and certified the signatures on the L\/C and confirm that
\nthe signatories to the L\/C have the required authority to issue the same.\n<\/p>\n
We returned herewith the above mentioned L\/C 1\/98.”\n<\/p>\n
In other words, the Issuing Bank certified the signatures and assured the
\nNegotiating Bank, that it would reimburse the Negotiating Bank on the due
\ndate, 20.5.98. Obviously, the Issuing Bank proceeded on the basis that the
\ndelivery was on 19:2.98 as stated in the document (and not on 28,3.98, as
\ncontended by the buyers in the plaint),<\/p>\n
On the basis of the above letter dated 23,3-98 sent by the Issuing Bank to
\nthe Negotiating Bank, the latter discounted the Bill of Exchange drawn from
\nthe seller and paid Rs 1,94,39,252 under the L\/C on 25,3.98 to the sellers.\n<\/p>\n
On 24.3,98 the Negotiating Bank wrote to the Issuing Bank that the latter
\nhad returned the L\/C, along with confirmation and also the documents. It
\nsaid that the Negotiating Bank shall be delivering the documents again to
\nthe Issuing Bank on due date and that “the same is returned herewith which
\nyou may kindly acknowledge”. ‘Encl : as above’. (A contention was raised by
\nthe Issuing Bank in its affidavits in the trial Court that by this letter,
\nthe Negotiating Bank was agreeing to send some other documents and they
\nwere hot sent later at the time of seeking reimbursement on 20.5.98).\n<\/p>\n
The Negotiating Bank, haying parted with Rs. 1,94,39,252 upon confirmation
\nof the genuineness of the documents by the Issuing Bank, was waiting to
\nclaim reimbursement by the Issuing Bank on me ‘due dateV2G.5,98.\n<\/p>\n
But then, there was a sudden surprise. It received a letter from the
\nIssuing Bank on I9;5.1:998 that the Issuing Bank had found on “scrutiny in
\nMay 1998”, that the Negotiating Bank had not submitted (1) “Delivery
\nchallan-cum-invoices issued by sellers duly signed by project authorities
\nwith an endorsement that the material is received in good condition and
\nindicating that the date of receipt of material at sites as per clause No.
\n10 of our L\/C (2) All relevant motor transport receipts as per clause No; 3
\nof our LC. They stated that after receipt of the above documents as per
\nterms of L\/C, they would be able to consider further.” This has obvious
\nreferred to clause 9 of the L\/C extracted above.\n<\/p>\n
On 20.5.98, there was a further letter by the Issuing Bank to the
\nNegotiating Bank that (1) As per special instructions for the Negotiating
\nBank, “clause No. 3 of our L\/C, full set of original documents along with a
\ncertificate of compliance of the terms and conditions of credit is not
\nreceived by us”. “Original L\/C, duly discharged has not been received by
\nus. You are requested to send the above documents”. According to the
\nappellant, by the letter the issuing Bank was going back on its earlier
\ncertification and assurance to reimburse the appellant as per its letter
\ndated 233:98 addressed to the Negotiating Bank.\n<\/p>\n
Meanwhile, the Issuing Bank had alerted the buyers on 15.5.98 that the
\nNegotiating Bank had produced certain documents purportedly dated 19.2.98
\ncontaining an endorsement that the material was received in good condition
\nas per order. The buyers stated in their plaint that it was only then that
\nthey learnt that the “sellers” had committed ‘forgery’ by showing that one
\n‘Mr. P, Waghmode’ had made the said fraudulent endorsements on the demand
\nvouchers on behalf of the buyers. They contended that there was nobody by
\nthe name Mr. P. Waghmode in their service much Jess with necessary
\nauthorisation, to act or receive the goods on behalf of the buyers. They
\nstated that on 17.5.98, Mr. Bhapkar, Project Manager of the buyers visited
\nthe factory of me sellers and found that only 654 MT of steel was shown in
\nthe sellers’ accounts as having been supplied and not die full quantity. A
\nfurther contention was that, in fact, only 523 MT was supplied and not 654
\nMT; On 18.5.98, the buyers informed the Issuing Bank tot forgeries had been
\ncommitted by “some persons” in the documents presented to the Issuing Bank.
\n,<\/p>\n
The buyer was conscious that on 20.5.98, the Negotiating Bank would press
\nfor payment from the issuing Bank. The buyer then filed the suit against
\nthe sellers (1st defendant), the Issuing Bank (2nd defendant) and the
\nNegotiating Bank (3rd defendant) for permanent injunction. No specific
\nrelief was claimed against the Negotiating Bank but it was prayed that the
\nIssuing Bank should not release any amount under the L\/C. In the entire
\nbody of the plaint there is no allegation imputing any fraud to the
\nNegotiating Bank, much less even knowledge of fraud. Allegation of fraud
\nand forgery were made only against the sellers, in the interlocutory
\napplication, though injunction was prayed against the Issuing Bank, the
\nNegotiating Bank was not brought into the array. Injunction was obtained on
\n20.5.98 by the buyers against the Issuing Bank not to honour the L\/C. The
\nsaid Bank then wrote on 20:5,98 to the Negotiating Bank that In view of the
\nCourt’s order, they would not be able to release any amount in favour of
\nthe Negotiating Bank, after the due date ie. 20.5.98.\n<\/p>\n
It was only then that the Negotiating Bank came to know that though it had
\nbeen impleaded is the suit as the 3rd defendant, it had not been impleaded
\nin the application for injunction. It moved the Court for vacation of the
\norder stating that they had sent the L\/C and documents including the
\ndelivery challans dated 19.2.78 to the Issuing Bank for due checking and
\nthat the Issuing Bank in their crucial letter dated 23.3.98 had certified
\nthe genuineness of the endorsements on. the L\/C and the signatures on the
\ndocuments, Further, the Bill of Exchange drawn by the sellers against the
\n‘L\/C contained the signature of the Vice-president of the buyers (we have
\nalready extracted the endorsement) and the delivery, challans were signed
\nby Mr. P. Waghmode, with the endorsement “received material in good
\ncondition” and two of these endorsements were counter signed by Vice
\nPresident of the buyer with his stamp and that once the Issuing Bank had
\ncertified the above documents presented by the sellers to the Negotiating
\nBank, the Negotiating Bank could not but pay the sellers and they had paid
\nRs. 1,94,39,252 to the sellers on 25.3.98. The Negotiating Bank pointed out
\nthat no allegations of fraud or forgery were made against it nor even
\nknowledge thereof attributed to it.\n<\/p>\n
On these facts, the trial Court refused to vacate the injunction in its
\nOrder dated 29,4.99. This order was confirmed by the High Court; The
\nNegotiating Bank has come up in appeal by Special leave.\n<\/p>\n
In this appeal, we have heard the submissions of learned counsel for the
\nappellant Sri S, Ganesh and of the learned Senior counsel for the buyers
\nSri V,A. Mohta and of Sri Rajesh Kumar, for the Bank of Maharashtra.\n<\/p>\n
Learned counsel for the appellant :Sri S. Ganesh contended that the
\nplaintiff-buyers had deliberately not impteaded the appellant in the
\ninjunction application and they obtained injunction in collusion with the
\nIssuing Bank. They could not have stated in the trial Court that the
\nNegotiating Bank need hot be heard. Learned counsel pointed out that no
\nallegation of fraud was made in the plaint nor in the injunction
\napplication against the Negotiating Bank and the allegations were made only
\non the sellers for allegedly committing forgery of documents. Learned
\ncounsel pointed out that not even knowledge  of fraud or forgery was
\nattributed to the appellant. The appellant had obtained, by way of caution,
\nthe confirmation from the Issuing Bank as per Banking Practice in regard to
\nthe genuineness of the endorsements on the Bill of Exchange and L\/C and on
\nthe documents (including the delivery chailans) produced by the sellers and
\nthat the Issuing Bank had confirmed the genuineness of the same and had, in
\nfact, promised to reimburse the Negotiating Bank on the due date i.e.
\n20.5.98 i.e. 90th day after the date of delivery 19.2:98). The Bill of
\nExchange was also signed by the Vice President of the buyer and necessary
\nendorsement was made. Counsel also referred us to Articles Of the Uniform
\nCustoms arid Practice for Documentary Credits (1983 Revision) which stood
\nincorporated in the Letter Of Credit dated 19.2.98 (and in particular
\nArticle 16(b) and (e) and pointed out that even in cases where Issuing Bank
\ndid not refuse to certify the documents in reasonable time, me Article
\nstates that the Issuing Bank “shall, be precluded from claiming that the
\ndocuments are not in accordance with the terms and conditions Of the
\ncredit” Here, on facts, there is an express acceptance of the genuineness
\nof the documents and this is an afortiori case. The Banks are governed by a
\nseparate contract and were not concerned with disputes as to non-
\nperformance – Or non-delivery of goods-  by the seller to the buyer.\n<\/p>\n
On the other hand, the learned counsel for the Issuing Bank, Sri Rajesh
\nKumar contended before us (and in their written submissions) that it was
\ntrue that on 23.3.98 the Issuing Bank had certified to the Negotiating Bank
\nthat the documents were in order. “But when in May, 1988, the Negotiating
\nBank claimed to be reimbursed, the Issuing Bank scrutinised and it was
\nrevealed that the documents were not in order”. It also contended (hat the
\nprimary duty to verify the documents was that of the Negotiating Bank and
\nthat the confirmation obtained from the Issuing Bank of no value.\n<\/p>\n
Sri V.A. Mohta, learned senior counsel for the buyers-plaintiff wanted to
\ncontend that the injunction obtained by the plaintiff had to be maintained.
\nLearned counsel was confronted with his client’s stand in the trial Court
\nthat the Negotiating Bank had no concern with the injunction. Learned
\nsenior counsel was told in view of the peculiar stand taken by his client
\nin the trial Court, in case this Court declared that the injunction would
\nnot come in the way of the Negotiating Bank getting reimbursed by the
\nissuing Bank, his clients could not have any objection to it. Counsel,
\nhowever, submitted that, in that event, the Issuing Bank should not debit
\nthe buyer for the amount the said Bank would reimburse to the Negotiating
\nBank. Counsel was informed mat that question does not arise in this appeal.\n<\/p>\n
The following points arise for consideration in this appeial :\n<\/p>\n
(1)  In the context of the need for Banks to take reasonable care to
\nscrutinise the documents produced before it for honouring the L\/C, what is
\nthe relevance of the UCP Code issued by the International Chamber of
\nCommerce, which was here expressly incorporated in the L\/C?\n<\/p>\n
(2) If it is the case of the plaintiff-buyer that there is ‘fraud’ on the
\npart of the sellers in relation to the documents and if it is not its case
\nthat the Negotiating Bank was guilty of fraud or had knowledge of fraud by
\nthe seller, could the Negotiating Bank not seek reimbursement from the
\nIssuing Bank, as a holder in due course of the Bill of Exchange, against
\nthe L\/C?\n<\/p>\n
(3) Whether, once the Issuing Bank had certified the documents which were
\npresented to the Negotiating Bank by the sellers, the Said Bank could turn
\nround and refuse reimbursement on the ground that on further scrutiny made
\nby its – long after the Negotiating Bank parted with monies – was not
\ncorrect or was mistaken ?\n<\/p>\n
Point 1<\/p>\n
This point mainly deals with the UCP Code (1983 Revision) which was
\nincorporated by reference into the L\/C. As the interpretation of the UCP is
\ncommercially of considerable importance, we would like to deal with the
\nrelevance of the UCP Code in Some detail.\n<\/p>\n
This Court had occasion in United Commercial Bank v. Bank of India,<\/a> 13981]
\n2 SCC 766 (at 780} to refer to the Uniform Customs and Practices for
\nDocumentary Credits (UCP for short) by which the ‘General provisions and
\nDefinitions arid the Articles following are to apply to all documentary
\ncredit and binding upon all parties thereto unless otherwise expressly
\nagreed’. The UCP states that it shall be deemed incorporated into each
\ndocumentary credit if there are words in the Credit indicating that such
\ncredit was issued subject to Uniform Customs and Practices of Documentary
\nCredits.\n<\/p>\n
The UCP has been formulated by the international Chamber of Commerce, Prof.
\nR.M. Goode described it as the ‘most successful harmonising measure in the
\nhistory of international commerce’. Prof, E.P. Ellinger stated that the UCP
\nwas the result of necessity and the need for use of banks as; agents in
\ninternational trade. The first UCP was drafted in 1929, the next one in
\n1933, then in 1951, 1962 and 1974 and 1983. The 1983 version (relevant in
\nthe case before us) was used in 170 countries, (It was revised in 1990 and
\n1993), (The New York version of if revised in 1993). (See Principles of
\nInternational Trade Law by Indira Carr, 2nd Ed, 1999).\n<\/p>\n
In the absence of incorporation, the UCP will not apply but it can be taken
\ninto account as part of mercantile customs and practices and most of if is
\nalso treated as part of common law, barring a few differences. If an
\nexpress term in the contract contradicts the UCP terms, the contract
\nprevails, Mustill, J. in Royal Bank of Scotland plc. v. Cassa di Ris
\nparimio delie Provincie Lombard, (1993) (Financial Times 21 Jan, 1992) said
\n: i “……it must be recognised that (the UCP) terms do not constitute a<\/p>\n
statutory code. As the title marks blear, they constitute a formulation of
\ncustoms and practices, which the parties to a letter of Credit can
\nincorporated into their contracts by reference. If it is found that the
\nparties have explicitly agreed such a term, then the search need go no
\nfurther, since any contrary provision in UCP must yield to the parties’
\nexpressed intention.”\n<\/p>\n
We are here concerned with the I Uniform Commercial Practice of Documentary
\nCredits (1983) (which is referred to in the L\/C).\n<\/p>\n
It states in Article 3: “credits, by their nature are separate transactions
\nfrom the sales or other contracts (&) on which they may be based and banks
\nare in no way concerned with or bound by such contracts), even if any
\nrefuse whatsoever to such contracts(s) is included in the credit. Article 4
\nstates mat: ‘in credit operations, all parties concerned deal in documents,
\nand not in goods, services and\/or other performances to which the documents
\nmay relate”. This is also declared by this Court in several cases.\n<\/p>\n
Article 1.0 refers to the duty of the Bank to honour the commitment. It
\nstates; “An irretrievable credit constitutes a definite undertaking of the
\nIssuing Bank, provided that the stipulated documents are presented and mat
\nthe terms and conditions of the credit are complied with: (i) if the credit
\nprovides for sight payment – to pay, or mat payment will be made (ii) if
\nthe credit provides for deferred payment – to pay or that payment will be
\nmade on the date(s) determinable in accordance with the stipulations of the
\ncreditor (iii) if the credit provides for acceptance – to accept drafts
\ndrawn by the beneficiaries if the credit stipulates that they are to he
\ndrawn on the Issuing Bank, or to be responsible for mat acceptance and
\npayment at maturity if the credit stipulates that they are to be drawn on
\nthe applicant for the credit or any other drawee stipulated in the credit;\n<\/p>\n
(iv) if the credit provides for negotiation – to pay without recourse to
\ndrawer and\/or bona fide, holders, drafts drawn by the beneficiary, at sight
\nor at a tenor, on the applicant for the credit or on any other drawee
\nstipulated in the credit other than the Issuing Bank itself, or to provide
\nfor negotiation by another bank and to pay as above, if such negotiation is
\nnot affected (b)……(c)………(d)….,…”. Article 11 (a) stipulates<\/p>\n
that ‘All credits must clearly indicate whether they are available by sight
\npayment, by deferred payment, by acceptance or by negotiation……Clause\n<\/p>\n
(b)<\/p>\n
states that: ‘All credits must nominate the bank (nominated bank) which is
\nauthorised to pay (paying bank), or to accept drafts (accepting bank), or
\nto negotiate (negotiating bank) unless the predit allows negotiation by any
\nbank (negotiating bank). (e)….Clause (d) of Article 11 is relevant and it
\nreads ;\n<\/p>\n
“Article ll(d) : By nominating a bank other than; itself or by allowing for
\nnegotiation by any bank or by authorising or requesting a bank to add its
\nconfirmation, the issuing bank authorises such bank to pay, accept or
\nnegotiate, as the case may be, against documents which appear on their face
\nto be in accordance with the terms and conditions of the credit and
\nundertakes to reimburse such bank in accordance with the provisions of
\nthese Articles”.\n<\/p>\n
It is, therefore, clear that under Article 11 (d), it is sufficient if the
\nnegotiating bank is satisfied that the documents which appear on their face
\nto be in accordance with the terms and conditions of the credit. If the
\nNegotiating Bank then pays, the Issuing Bank is bound to reimburse the
\nNegotiating Bank,<\/p>\n
We have to refer to another important Article, i.e. Article 15, which
\nconcerns the ‘reasonable care’ with which documents have to be examined.
\nThis Article has relevance on the question of’ ‘fraud’. It refers to the
\nsafeguards to be taken by the Bank, It states :\n<\/p>\n
“Article 15 : Bank must examine all documents with reasonable care to
\nascertain that they appear on their face to be in accordance With the terms
\nand conditions of the credit. Documents which appear on their face to be
\ninconsistent With one another will be considered as riot appearing on their
\nface to be in accordance with the terms and conditions of the credit”.\n<\/p>\n
Once the Bank takes such reasonable care as above stated, Article 16 states
\nthat the Bank will have to be reimbursed by the party giving such
\nauthority. Clause (b) of Article 16 states that refusal by the Issuing Bank
\nto pay must be “on the documents alone” as appear on their face to be
\ninconsistent with the terms and conditions of the credit.\n<\/p>\n
At common law, the position is no different. The principle of reasonable
\ncare has been applied by Lord Dipiock in Gian Singh & Co, Ltd. v. Banqae
\ndeL’ lndochine, (1974) 1 WLR 1234, The Bank has to examine with reasonable
\nCare to ascertain if they appear on their face to be in accordance with the
\nterms arid letters Of Credit. In that case, the reference was made to
\nArticle 7 of the UCP (1962). It was observed that the said Article did no
\nmore than restate the duty of the bank at common law. It was further held
\nthat in the ordinary course, visual inspection of the actual documents
\npresented is all that is called for, (p, 1252). In Basse and Selve v.Bank
\nof Australia, (1904) 20 TLR431 = 90 L.T. 618, the defendant bank was
\ninstructed to negotiate the drafts of a shipper in Sydney against a
\nCertificate of Dr. Hehns for 100 tons of Cobalt ore analysis not less than
\n5% pretoxide. The shipper shipped worthless ore which was described in the
\nbill of loading as ‘P.M. 2680 bags containing 100 tons of Cobalt ore”. The
\nsample initially submitted did not refer to the bill of lading goods. But
\nlater, the shipper marked the sample in the same way as the goods were
\ndescribed in the Bill of lading quantity and obtained a second, certificate
\nshowing [satisfactory tests of “a sample of Cobalt ore marked P.M. 2680
\nbags representing 100 tons”. The Bank this time accepted the shipper’s
\ndrafts and was held to be entitled to recover from the plaintiffs. The
\nCertificate on its face was regular and came within the meaning of the
\nmandate. Bigham, J. said:\n<\/p>\n
“Once they were in touch with the right man, the defendants’ only remaining
\nduty was to see that the documents which be brought purported on their face
\nto be documents described In the mandate. It was no part of their duty to
\nverify the genuineness of the documents”.\n<\/p>\n
All that is therefore necessary is to examine with reasonable if the
\ndocuments on their face conformed to the terms and conditions of the L\/C.\n<\/p>\n
One other important Article that is important OH the question of
\n‘reasonable care’ of the Bank in examining the documents is Article 17. It
\nreads :\n<\/p>\n
“Article 17 : Banks assume no liability or responsibility for the form,
\nsufficiency, accuracy, genuineness, falsification or legal effect of any
\ndocument, or for the general and\/or particular conditions stipulated in the
\ndocuments or superimposed thereon; nor do they assume any liability or
\nresponsibility for the description, quantity, weight, quality, condition
\npacking, delivery, value or existence of the goods represented by any
\ndocument, or for the good faith or acts and\/or omissions, solvency,
\nperformance or standing of the consignor, the carriers, or the insurers of
\nthe goods or any other person whomsoever” .\n<\/p>\n
This shows that the Bank does not  if it is not clear from the face of the
\ndocuments – owe any liability or responsibility for the falsity of the
\ndocuments. (However, we shall presently deal with, question of fraud
\nseparately).\n<\/p>\n
Learned counsel for the appellant Sri Ganesh has contended that if the
\nIssuing Bank does not certify the documents within reasonable time, if will
\nbe deemed that it had accepted the documents. Counsel relied on clauses (c)
\nand (e) of Article 16, Clause (c) states :\n<\/p>\n
“Article I6(c) : The Issuing Bank shall have reasonable time in which to
\nexamine the documents and to determine as above whether to take up or to
\nrefuse the documents”,<\/p>\n
If the Issuing Bank does not return them within reasonable time, it may be
\ndeemed that it has ratified the genuineness of the documents. These clauses
\nare based on principles of common law.\n<\/p>\n
In Hansson v, Hamel and Horley Ltd, (1922) 2 AC 36 (HL), Lord Sumner stated
\n(at p. 46):\n<\/p>\n
“these documents have to be handled by the banks, they have to be taken up
\nor rejected promptly and without any opportunity for prolonged inquiry”.\n<\/p>\n
Two judgments as to whether the Issuing Bank can consult its customer
\nappear to be conflicting. In Bankers Trust Co. v. State Bank of India,
\n(1991) Lloyds Rep, 443, it was held that the Banker’s Trust was barred from
\nrefusing the documents because it had taken unreasonable time to examine
\nand reject them, some nine days. By that time the State Bank of India had
\npaid to the Steel Authority of India. There were no doubt, 967 sheets to be
\nverified. But it was held that the time taken to consult the customer could
\nnot be excluded. A different view was expressed earlier in Co-operative
\nCentral etc- v, Sumitomu Bank Ltd. The Roy an, (1987) 1 Lloyds Rep. 345 (on
\nappeal, see (1988)2 Lloyds Rep. 250), However, Article 14(c) of the UCP
\n(1993 Revision) appears to accept the view in the Bankers’ Trust case for
\nit says that if the Sank “approaches the applicant for waiver of
\ndiscrepancy” that shall not extend the seven days time set in Article 13(b)
\nof the UCP (1993 Revision),<\/p>\n
In deciding whether the time taken is reasonable or not, English Courts
\nused to take into account banking practice. The Bank in England, normally
\nused to take three days. (Banker’s Trust Ltd v. State Bank of India, (1991)
\n2 Lloyd. 443).\n<\/p>\n
Clause (d) of Article 16 of the 1983 Revision states that, if the issuing
\nbank decides to refuse, it must give notice to the bank from which it
\nreceived the documents or to the beneficiary, if it directly received from
\nhim. Such notice must state the discrepancies in respect of which the
\nIssuing Bank refuses the documents and must also state whether it is
\nholding the documents at the disposal of or is returning them to, the
\npresentator (remitting bank or the beneficiary, as the case may be). Sub-
\nclause (e) reads :\n<\/p>\n
“Article I6(e): If the Issuing Blank fails to act in accordance with the
\nprovisions of paragraphs (c) and (d) of this Article and\/or fails to hold
\nthe documents at me disposal of, or to return them to, the presentator, the
\nIssuing Bank shall be prechuded from claiming that the documents are not in
\naccordance with the terms and conditions of the credit”,<\/p>\n
thus; where the Issuing Bank does not respond within reasonable time it
\ncannot, under the UCP, cannot dispute the documents later.\n<\/p>\n
This sub-clause (e) of Article 16 has been relied upon heavily by the
\nlearned counsel for the appellant to show that where the Issuing Bank
\nexpressly accepts the documents sent by the Negotiating Bank, no other
\nquestion can arise.\n<\/p>\n
As to what type of documents; are to be accepted as ‘originals’ Article
\n22(c) states that unless otherwise stipulated in the credit, banks will
\naccept as original documents produced or appearing to have been produced:\n<\/p>\n
(i) by reprographic system (ii) by or as the result of, automated or
\ncomputerised System (iii) as carbon copies- provided if these type of
\ndocuments are marked as ‘originals’, provided they have been, where
\nnecessary, authenticated. Under Article 20(b) of the UCP 1993 Revision,
\n“unless Otherwise stipulated in the Credit, banks will also accept as ah
\noriginal document, a document produced or appearing  to have been produced\n<\/p>\n
– (i) by reprographic, automated or computerised systems; (ii) as carbon
\ncopies, provided that it is marked as original and, where necessary,
\nappears to be signed.\n<\/p>\n
Recently in Karaganda Ltd. y. Midland Bank, (1999) 1 All ER 801 (Commercial
\nCourt) (CA) the Court of Appeal affirmed the judgment of the High Court in
\na case involving the meaning of the word ‘original’. There the documents
\nwere produced by word-processor and laser printed oh headed paper without
\nbearing the word ‘original’. The Midland Bank refused to treat the copy of
\nthe insurance policy as the L\/C required ‘original insurance policy Or
\ncertification. The Bank relied an upon Glencore International AG v. Bank of
\nChina, (1996) I Lloyds’ Rep. 135 to say that me absence of the word
\n‘original’ in any document produced on  rd processor was a document
\nproduced by a computerised system within Article 20(b) and was required to
\nbe marked as original. But this case was distinguished by the High Court
\n(see 1998 Lloyds Rep. Bank 173) (1997 Current Law Year Book 328). It was
\nheld by the learned Judge that a document could be regarded as “marked as
\noriginal” if, either it was expressly marked with the word ‘original’, or
\nif it was a necessary implication Of the terms and markings of the document
\nthat it was original. Here, the document complied with the latter test arid
\ntherefore conformed to the credit. On appeal, the Court of Appeal, as
\nrecently as 1999 accepted this view holding that ‘a document containing –
\nall the details of the contract and Which was patently not a reprographic
\nor carbon copy of another document could constitute an original for
\npurposes of the UCP 1993 Revision’. We are only referring to the view of
\nthe English Court as a mark of interest. That question does not, however,
\narise in this case.\n<\/p>\n
As to the source from which the documents emanate. Article 23 states “that-
\nwhere documents (other than transport documents, insurance documents and
\ncommercial invoices called for) are called for, the credit should stipulate
\nby whom such documents are to be issued and their wording or debtor
\ncontent, If the credit does not so stipulate, banks will accept such
\ndocuments as presented, provided that their debtor content makes it
\npossible to relate the goods and\/or servicing referred to therein to those
\nreferred to in the commercial invoice(s) presented, or to those referred to
\nin the credit if the credit does not stipulate presentation of a commercial
\ninvoice.”\n<\/p>\n
With regard to expiry date and presentation, Articles 46 to 48 deal With
\nthe principles applicable.\n<\/p>\n
Before parting with Point 1, we may add that the UCP (1983 revision) or
\neven the 1993 Revision did not refer to fraud as an exception. That is why
\nIndira Carr says in ‘international Trade Law, 2nd Ed, 1999 at p. 266-267
\nthat the UCP is not comprehensive as it does not address itself to the
\neffect of fraud or illegality in the documentary credit arrangement. We may
\nhere add that the Uniform Civil Code (USA) in clause (2 of Articles 5-114
\nspecifically refers to forgery and fraud. This US Code was noticed by
\nJagannath Shetty, J, in UP Co-operative Federation Ltd v, Singh Consultant
\n& Engineers Pvt. ltd, [1988] 1 SCC 174 (at p. 48).\n<\/p>\n
Points 2 and 3 :\n<\/p>\n
We have set out the facts in sufficient detail to highlight that the
\nplaintiff-buyers have no plea that the Negotiating Bank which paid the
\nmonies to the sellers committed any ‘fraud’. The allegations in me plaint
\nare that the sellers in connivance with some persons presented forged or
\nfalse documents to the Negotiating Bank which include delivery-vouchers
\nparported issued & signed on behalf of the buyers (signed by one Mr.
\nWaghmode and counter signed toy its Vice President (Accounts), the case of
\nthe buyers was, however, that Mr. Waghmode was not in their service nor
\nauthorised to issue any such vouchers.\n<\/p>\n
In several judgment of this Court, it has been held that Courts ought not
\nto grant injunction to restrain encashment of Bank guarantees or Letters of
\nCredit, Two exceptions have been mentioned-(i) fraud and (ii) irretrievable
\ndamage. If the plaintiff is prima facie able to establish that the case
\nconies within these two exceptions, temporary injunction under Order 39,
\nRule 1, CPC can be issued. It has also been held that the contract of the
\nBank guarantee or the Letter of Credit is independent of the main contract
\nbetween the seller arid the buyer. This is; also clear from Arts. 3 and 4
\nof the UCP (1983 Revision). In case of an irrevocable Bank guarantee or
\nLetter of Credit the buyer cannot obtain injunction against the Banker 0n
\nthe ground that there was a breach of the contract by the seller. The Bank
\nis to honour the demand for encashment if the sellet pima facie complies
\nwith the terms of the Bank Guarantee or Letter of Credit, namely, if the
\nseller produces the documents enumerated in the Bank Guarantee or Letter of
\nCredit If the Bank is satisfied on the face of the documents that they are
\nin conformity with the list of documents mentioned in the Bank Guarantee or
\nLetter of Credit and there is no discrepancy, it is bound to honour the
\ndemand of the seller for encashment. While doing so it must take reasonable
\ncare. It is not permissible for the Bank to refuse payment on the ground
\nthat the buyer is claiming that there is a breach of contract. Nor can the
\nBank try to decide this question of breach at that stage and refuse payment
\nto the seller. Its obligation under the document having nothing to do with
\nany dispute as to breach of contract between the seller and the buyer. As
\nto its knowledge of fraud or forgery, we shall presently deal with it,<\/p>\n
Knowledge of fraud :\n<\/p>\n
Decided cases hold that In order to obtain an injunction against the
\nIssuing Bank, it is necessary to prove that the Bank had knowledge of the
\nfraud.\n<\/p>\n
Kerr, J. said in R.D, Harbottle (Mercantile) Lid v. National Westminister
\nBank Ltd., (1978) Q.B, 146 at 155 at irrevocable Letters of Credit are ‘the
\nlife blood of international commerce”. He said :\n<\/p>\n
“Except possibly in clear cases of fraud of which the banks have notice,
\nthe Courts will leave the merchants to settle their disputes under the
\ncontracts by litigation or arbitration……..Otherwise, trust in
\ninternational commerce could be irreparably damaged.”\n<\/p>\n
Denning M,R, .stated In Edward and Owen Engineering Ltd. v. Barclays Sank
\nInternational Lid. (1978) Q.B. 159 that ‘the only exception is where there
\nis a clear fraud of which the bank had notice”: Browne, LJ. said in the
\nsame case : “but it is certainly not enough to alleged fraud, it mast be
\nestablished” and in such circumstances, I should say, very clearly
\nestablished”, in Bolvinter Oil S.A.v. Chase Manhattan Bank, (1984) 1 All
\nE.R, 351 at P. 352, it was said ‘where it is proved that the Bank knows
\nthat any demand for payment already made or which may thereafter be made,
\nwill clearly be fraudulent. But the evidence must be.clear both as to the
\nfact of fraud and as to the bank’s knowledge. It would certainly not be
\nsufficient that this rests Upon the uncorroborated statement of the
\ncustomer,, for irreparable damage can be done to a bank’s credit in the
\nrelatively brief time “before the injunction is vacated”. Thus, not only
\nmust ‘fraud’ be clearly proved but so far as the Bank is concerned, it must
\nprove that it had knowledge of the fraud. In United Trading Corp. S.A. v.
\nAllied Ards Bank, (1985) 2 Lloyds Rep, 554, it was stated that there must
\nbe proof of knowledge of fraud on the part of the Bank at any time before
\npayment. It was also observed that it “would be sufficient if the
\ncorroborated evidence of the plaintiff usually in the form of contemporary
\ndocuments and the unexplained failure of a beneficiary to respond to the
\nattack, lead to the conclusion that the .only realistic inference to draw
\nwas ‘fraud'”. In Guarantee Trust Co, of New York v, Hanney, (1918) 2 K.B.
\n623 (KB), the Banker accepted the documents without any knowledge of fraud
\nor falsify and it was held that me defendants could not counter-claim from
\nthe Bank. However, it would be the ‘Banker’s duty to refuse the documents
\nwhich oh their face bear signs of having been altered (See Re Salomon and
\nNandszus, [l899].92’ L.T. 325. that was a c.i.f. contract. This Court in
\nITC Ltd. v. Debts Record Appellate Tribunal, [1998] .2 :SCC 70 (at 79) also
\nheld that knowledge Of the Bank as to the fraud or forgery had to be prima
\nfacie established.\n<\/p>\n
The foundation of English law in this area is the American case of Sztejn
\nv. j. Heney Schroder Banking Corpn., (1941) 31 NYS 2d, 631, (Extensive
\ndetails of this case are available in ‘Documentary Credits’ by Raymond
\nJack, 1991 pp. 191-192); This case has been cited in more than one judgment
\nof this Court and the English Courts but we shall give more facts of that
\ncase and the principle Of ‘holder in due course’ laid down therein which
\narises in the case before us, as per the appellant’s pleadings. In that
\ncase, the applicant for a credit (i.e. the buyer) claimed injunction
\nagainst the Issuing Bank Schroder Banking Corporation to prevent it paying
\non the documents which had been presented. The credit had been advised to
\nthe seller in, India by the Issuing Bank’s correspondent in India, the
\nChartered Bank of India, Australia and China, The correspondent had not
\nconfirmed the credit The applicant alleged that what had been shipped was
\nrubbish rather than the bristles contracted to be supplied. The Chartered
\nBatik (the Collecting Bank) which received the documents from the seller
\nfor ‘collection’, applied for dismissing the buyer’s claim. (This was a
\nproceeding similar to Order 7 Rule 11 CPC)for an injunction on the ground
\nthat there was no cause of action. The buyer’s, in their application for
\ninjunction, informed the Issuing Bank about the fraud of the sellers. For
\nthe purpose of hearing tot application of the Collecting Bank, the Court
\nassumed the facts stated in the application of the buyer as to fraud to be
\ntrue. (Otherwise, this was a difficult burden of proof normally). Shientag,
\nJ. held that:\n<\/p>\n
“Where the seller’s fraud has been called to the bank’s attention before
\nthe drafts and documents have been presented for payment the principle of
\nthe independence of the bank’s obligation under the Letter of Credit should
\nnot be extended to protect the unscrupulous seller. It is true that even
\nthough the documents are forged or fraudulent, if the issuing bank has
\nalready paid the draft before receiving notice of the seller’s fraud, it
\nwill be protected if it exercised reasonable diligence before making such
\npayment.”\n<\/p>\n
The facts, as stated above, were that the sellers had drawn the draft under
\nthe letter of Credit to the order of the Chartered Bank of India, Australia
\nand China and delivered the draft and the fraudulent documents to the said
\nChartered Bank’s branch at Kanpur for ‘collection’ on account of the
\nsellers. The Chartered Bank could not compel the issuing Bank, Schroder
\nBanking Corporation, to pay by seeking a dismissal of the buyer’s
\napplication by way of a demurrer. The plaintiff was entitled to injunction
\nfor it had brought the allegation to the knowledge of the Issuing Bank,
\nbefore the payment was made. Shientag, J. further observed:\n<\/p>\n
“As one Court has stated: obviously, when the issuer of a letter of Credit
\nknows that a document, although correct in form, is, in point of fact,
\nfalse or illegal, he cannot be called upon to recognise such a document as
\ncomplying with the terms of a letter of credit” No hardship will be caused
\nby permitting the bank to refuse payment where frauds is Claimed, where the
\nmerchandise is not merely inferior in quality but consists of worthless
\nrubbish, where the draft and the accompany document are in the hands of one
\nwho stands in the same position as the fraudulent seller, where the bank
\nhas been given notice of fraud before being presented with the drafts and
\ndocuments for payment, and where the bank itself does not wish to pay
\npending an adjudication of the rights and obligations of the other
\nparties.”\n<\/p>\n
The Court also noticed that, on facts, the Collecting Bank, Chartered Bank
\nwas not a holder in due course but was a mere agent for collection for the
\naccount of the seller who was charged by the buyer with fraud. Therefore
\nthe Chartered Bank’s motion to dismiss the complaint (similar to Order 7
\nRule 11 CPC) must be denied. Shientage, J. referred to the principle of
\n‘holder in due course’ and said as follows:\n<\/p>\n
“If it had appeared from the face of the complaint that the Bank presenting
\nthe draft for payment (i.e. Chartered Bank) was a holder in due course, its
\nclaim against the Bank issuing the letter of credit would not be defeated
\neven though the primary transaction was tainted by fraud.”\n<\/p>\n
‘This passage lays down the law as to when a person becomes a holder in due
\ncourse in the case of a fraud by the sellers. This last paragraph from the
\njudgment of Shientag, J. is directly applicable to the facts of the case.\n<\/p>\n
Applying the said principle, we may state that if the appellant Federal
\nBank was merely a collecting bank or agent which had approached the Bank of
\nMaharashtra (the issuing Bank) and if the Issuing Bank was sought to be
\nrestrained by the buyer before payment was made by the Issuing Bank to the
\nCollecting Bank, the collecting Bank could not have compelled the Issuing
\nBank to release the money for collection if the buyer informed the Issuing
\nBank in his plaint that the documents to be presented to it by the
\nCollecting Bank were forged or fraudulent. But where, on the other hand,
\nthe Negotiating Bank, i.e. the Federal Bank (appellant), has said on the
\nbasis of a clearance given by the Issuing Bank as to genuineness of
\ndocuments, and seeks reimbursement, then the Negotiating Bank is in the
\nposition of a holder in due course and can claim that the suit of the buyer
\nmust fail if it sought to restrain the Issuing Bank.from reimbursing the
\nNegotiating Bank- These principles prima facie flow from Shientag, J’s
\njudgment which has been followed both in England and by this Court, in
\nseveral cases.\n<\/p>\n
Legal relation of a Negotiating Bank vis–vis the Issuing Bank:\n<\/p>\n
The contract between the issuing banker and the paying or negotiating
\n(intermediary) banker may partake of a dual nature. The relationship is
\nmainly that of principal and agent, mandator and mandatory. In order that
\nhe may claim reimbursement for any payment he makes under the credit or the
\nindemnify of an agent, the intermediary banker must obey strictly, the
\ninstructions he receives, for by acting on them, he accepts then and thus
\nenters into contractual relations with the issuing Bank. The instructions
\nmay take the form of an authority either to pay against documents or drafts
\naccompanied by document; or to negotiate drafts drawn either on the issuing
\nbanker or on the buyer. The authority may be accompanied by instructions to
\nthe intermediary banker to confirm the credit, that is, to place himself in
\nbinding contractual relationship with the beneficiary. There is ordinarily
\nno privity between the intermediary banker and the buyer. But the
\nintermediary banker, though initially the agent of the Issuing Bank, may
\nalso act as principal in relation to him. (Pagets’ Law of Banking, 9th Ed.,
\n(1982) p. 543, 544).\n<\/p>\n
A.G. Davis in his ‘The Law Relating to Commercial Letters of Credit’ (2nd
\nEd.) (1954) (p. 92 et see) deals with the rights of a negotiating Bank.
\nThese rights are partly based on the law relating to negotiable instruments
\nand partly on the law applicable strictly to letters of credit. So far as
\nthe rights of the negotiating Banker against the seller are concerned, his
\nposition will be that as in the case of a ‘bill of exchange’ as against the
\ndrawer. The author deals with its rights against the seller as a holder in
\ndue course unless the seller drew the bill ‘sans recourse’. He also deals
\nwith the risks of the Negotiation Bank in cases of revocable credits. But
\nso far as irrevocable credits are concerned, he says that the terms of the
\ncredit have to be looked into. Some terms indeed contain an undertaking by
\nthe Issuing Bank with the seller and purchasers for value of drafts on
\ncredits, to honour those drafts if, of course, the terms of the credit are
\ncomplied with. He says :\n<\/p>\n
“But even in the absence of express words, a promise in favour of such
\nthird persons may be implied from the terms of the letter of credit<\/p>\n
and surrounding circumstances…………where an intermediary banker<\/p>\n
pays against documents other than those for which the credit calls and
\ntenders them to the issuing banker, he may nevertheless be able to recover
\nfrom the issuing banker if the latter delays in deciding whether he will
\nrepudiate or accept.”\n<\/p>\n
Roche, J. in Westminister Bank Ltd. v, Banca Nazionale di Credito, (1928)
\n32; LL Rep, 306 at 312 said :\n<\/p>\n
“if parties keep documents -which are sent them,.,..in consequence of some
\nmandate which they themselves have issued, and keep them for an
\nunreasonable time, that may amount to a ratification of what has been done
\nas being done within their mandate.”\n<\/p>\n
The issuing Bank as principal may ratify the acts of its agent, the
\ncorrespondent bank which is its agent and by doing so, relieve the
\ncorrespondent bank of a liability it would otherwise have.\n<\/p>\n
One ruling referred to by the learned counsel Sri S. Ganesh for the
\nappellant is directly in point In Virgo Steels v. Bank of Rajasthan, AIR
\n(1998) Bom, 82. In that case the UCO Bank issued a letter of Credit at
\nrequest of Virgo Steel in favour of Western Mini-steel Ltd. It provided
\nthat documents under the credit could be negotiated through any Bank. The
\ndrawer drew the Bill of Exchange which was negotiated by the Bank of
\nRajasthan, On receipt of the said drafts, the Bank of Rajasthan wrote to
\nthe UGO Bank, sending the documents for its confirmation, The UCO Bank
\nconfirmed the signature of the partner as per their records and said that
\nthey could release payment directly to the Bank of Rajasthan. Subsequently,
\nthe UCO Bank found that Virgo Steels, in connivance with some officials of
\nthe Branch, got the L\/Cs opened much in excess of the limit authorised by
\nUCO Bade The UCO Bank disowned liability to pay the Bank of Rajasthan on
\ndue date, M.B. Shah, J. (as he then was) speaking for the Bench, rejected
\nthe plea of UCO Bank and found it liable to the Bank of Rajasthan. It was
\nheld :\n<\/p>\n
“whether the drawer or the acceptor or some officers of the UCO Bank
\ncommitted fraud would hardly be a defence for non- payment of the amount
\ndue to the Bills of Exchange negotiated by the Bank of Rajasthan, a third
\nparty,” and that<\/p>\n
“UCO bank has never raised any contention that some officers of Bank of
\nRajasthan, which is altogether a third party, was involved in any alleged
\nfraud or conspiracy.”\n<\/p>\n
The Court relied upon a circular of the Reserve Bank of India dated
\n1.4.1992. UCO Bank was held bound by its own confirmation of the documents.
\nWe are in respectful agreement with the judgment.\n<\/p>\n
In view of the above reasons, this appeal is to be allowed.\n<\/p>\n
Summarising, we hold that when the plaintiff buyer has no case that the
\nappellant-Negotiating Bank had any knowledge of fraud, and when it took
\nprecaution in getting clearance for the document from the issuing Bank on
\n203.98 and such clearance was given on 23.3.98 by me latter, it was not
\nopen to the Issuing Bank to contend that on fresh scrutiny in May, 1998, it
\nfound that the documents were not in conformity with the letters of Credit
\nor that the buyer had so informed them. Prima facie, the appellant was in
\nthe position of a holder in due course. Points 2 and 3 are decided in
\nfavour of me appellant<\/p>\n
For me aforesaid reasons, we allow me appeal and vacate me temporary
\ninjunction granted in favour of the plaintiff against the Bank of
\nMaharashtra in so far as the said injunction precluded the Bank of
\nMaharashtra from reimbursing the appellant-Federal Bank: It Is clarified
\nthat me said injunction will not come in the way of the Bank of Maharashtra
\nfrom complying with its obligation to reimburse the Federal Bank. The
\nAppeal is allowed. No costs.\n<\/p>\n
Before parting with the case, we may state that we are now living in ap era
\nof advanced technology of e-mail and internet. It is possible that in the
\nnear future we must take greater pare and impose less rigorous standards of
\nproof of fraud for otherwise plaintiffs might find it impossible to make
\nout a serious liable issue or prima facie case. Indira Carr says that
\ndocumentary fraud is on the increase and more so, due to electronic data
\ntransfers. She says there is a case for a fresh reassessment of the narrow
\nexception of fraud (Principles of International Trade Law, 2nd Ed,, 199 p.\n<\/p>\n
298).<\/p>\n","protected":false},"excerpt":{"rendered":"
Supreme Court of India Federal Bank Ltd vs V.M Jog Engineering Ltd. And Ors on 29 September, 2000 Bench: M. Jagannadha Rao, U.C. Banerjee CASE NO.: Appeal (civil) 5626 of 2000 PETITIONER: FEDERAL BANK LTD. RESPONDENT: V.M JOG ENGINEERING LTD. AND ORS. DATE OF JUDGMENT: 29\/09\/2000 BENCH: M. JAGANNADHA RAO & U.C. BANERJEE JUDGMENT: JUDGMENT […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"","_lmt_disable":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[30],"tags":[],"class_list":["post-18279","post","type-post","status-publish","format-standard","hentry","category-supreme-court-of-india"],"yoast_head":"\nFederal Bank Ltd vs V.M Jog Engineering Ltd. 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