1981 (3) TMI 249 - SC - Indian Laws

Supreme Court sets aside injunction, emphasizes letter of credit compliance

UNITED COMMERCIAL BANK Versus BANK OF INDIA

The Supreme Court allowed the appeal, setting aside the High Court's order granting a temporary injunction. It directed the rejection of the injunction ... - Issues Involved:1. Whether the appellant bank was justified in making a recall of the amount paid under reserve.2. Whether the discrepancies in the documents justified the appellant's refusal to make payment.3. Whether the grant of a temporary injunction by the High Court was warranted.4. The obligations of banks under irrevocable letters of credit and the nature of such transactions.Detailed Analysis:1. Justification for Recall of Amount Paid Under Reserve:The appellant, United Commercial Bank, was restrained by the Bombay High Court from recalling Rs. 85,84,456 paid under reserve against bills of exchange drawn against a letter of credit. The appellant argued that the payment was made under reserve due to discrepancies in the documents, specifically the description of the goods in the railway receipts as 'Sizola Brand Pure Mustard Oil 'Unrefined''. The Supreme Court held that the appellant was within its rights to recall the amount as the payment was made under reserve, and the discrepancies were not resolved to the satisfaction of the appellant. The payment under reserve meant that the recipient must be prepared to return the amount on demand.2. Discrepancies in Documents:The main discrepancy cited was the description of the goods in the railway receipts. The letter of credit required 'Sizola Brand Pure Mustard Oil', but the railway receipts described the goods as 'Sizola Brand Pure Mustard Oil 'Unrefined''. The Supreme Court emphasized that the documents must strictly comply with the terms of the letter of credit. The appellant bank's refusal to make payment except under reserve was justified as the documents did not conform to the letter of credit. The Court reiterated that banks deal in documents, not goods, and the description in the documents must match exactly with the terms of the letter of credit.3. Grant of Temporary Injunction:The High Court granted a temporary injunction restraining the appellant from recalling the amount, which was later made absolute. The Supreme Court found this to be unwarranted. It stated that courts usually refrain from granting injunctions that interfere with the performance of contractual obligations arising from letters of credit or bank guarantees between banks. The grant of such an injunction could disrupt the entire banking system. The Supreme Court held that the High Court had pre-judged the issue by assuming that the appellant was in breach and that the documents were clean, which were issues to be determined in the trial.4. Obligations Under Irrevocable Letters of Credit:The Supreme Court reiterated the principles governing letters of credit, emphasizing that they are separate transactions from the underlying sales contracts. The issuing bank's obligation is to pay against documents that strictly comply with the terms of the letter of credit. The bank is not concerned with the actual goods or any disputes between the buyer and seller. The Court cited several authorities and cases to support the principle that the documents must exactly match the terms of the letter of credit, and any discrepancies justify the bank's refusal to pay.Conclusion:The Supreme Court allowed the appeal, setting aside the High Court's order granting a temporary injunction. It directed that the application for the temporary injunction be rejected and the suit be disposed of expeditiously. The costs of the appellant were to be borne equally by Respondents Nos. 1 and 2. The judgment reinforced the strict compliance required in transactions involving letters of credit and the limited role of courts in interfering with such commercial transactions.