TaxTMI 
TaxTMI 
TaxTMI 
2000 (9) TMI 1039
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....ellant Federal bank was the negotiating Bank (3rd defendant) while the 3rd respondent, Bank of Maharashtra was the Issuing Bank. The main point arising in the case can be stated briefly as follows : The appellant, the Negotiating Bank received documents from the sellers which included five delivery challans purportedly signed by the buyers' officers acknowledging receipt Of goods. The seller sent a Bill of Exchange for encashment against the Letter of Credit for 2 crores, taken out by the buyers. The appellant sent the Bill of Exchange, with endorsement of the buyers and the Letter of Credit and the connected documents including the 'delivery challan' - as received from me seller - to the Issuing Bank and got the genuineness of the documents confirmed. The Negotiating bank then released ₹ 1 ,9439,252 in favour of the sellers on 25.3.98, after deducting its commission. But the buyers have obtained a temporary injunction against the issuing Bank from honouring the Letter of Credit. This has resulted in the appellant Negotiating Bank not being able to obtain reimbursement from the Issuing Bank. The trial Court and the High Court, after noting that the Negotiation B....
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....the Issuing Bank on 19.2,98 listed out the various "documents" which had to be produced by the sellers for payment under the Letter of Credit opened by the buyer with the Issuing Bank: These were described as follows : (1) "The Beneficiary drafts drawn on the applicant without recourse to the drawer and marked under bank of Maharashtra, Tilak Road, Pune branch/in land L/C No. 1/98 dated 19,2.98 for 100% of the Invoice value at 90 days Usance from the date of receipt of material at Andheri and Palm Beach, Marg Bridge, Near Nenl Navi Murtbai sites. (2) Invoices signed by the beneficiary or his constituted agent in copies of gross value of the goods certifying goods are as per order/ indent and evidencing despatch of the undernoted goods, (3) Receipt dated not later than 31.3.98 marked freight prepaid. (4).......................... (5)......-.............,....... (6) Copies of Octroi receipts for the amount claimed in invoice. " (7) Copy of Weigh Slip for empty and Loaded transport Vehicle. :. (8) Photocopy of Manufacturer's test certificate. (9) Copy of Delivery Challans-cum-invoices issued by Jaswant Steel Rolling Mills Pvt Ltd, duly signed by Projec....
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....y signed by Project Authorities, with an endorsement that the material was recovered in good condition and indicating the date of receipt of material at sites. On 19,3,98, the appellant became the Negotiating Bank in the place of State Bank of India. The Issuing bank informed the seller that the Negotiating Bank would be the Federal Bank (appellant) and not the State Bank of India, Further, it was stated that clause 10 of the Letter of Credit (referred to above) stood deleted. On the same day, 19.3,98 seller sent a Bill of Exchange (called technically as a Draft) to its dealer at Visakhapatnam against the Letter of Credit No. 1/98 dated 19.2.98 stating as fellows :. "At 90 (ninety) days from the date of invoice pay to M/s The Federal Bank Ltd., Bombay Samachar Marg; Fort, Mumbai of order a sum of Rs, 2,00,000.00 (Two crores only) towards value of material given as below : DD/Inv. No, Date Amount 104 19,2.98 Rs, 1,00,00,000 105 19,29.8 ₹ 1,00,00,000 Sd For Jas want Steel Roi I ing Ltd. This was addressed to the seller's agent at Vijag Steel Plant. Copies were sent to purchaser (Plantiff). This Bill of Exchange contains endorsements purported ....
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....by the sellers for confirmation. This is stated to be part of the Banking practice. The letter dated 20,3.98 by the appellant (Negotiating Bank) to the Issuing Bank stated that they were enclosing the original Letter of Credit for 2 crores, Usance 90 days, due date 20.5.98 (they were counting 90 days from 19.2.98) and that they were enclosing the "documents" sent to them by sellers along with L/C: "Draft dt, 19.3,98 Invoice dated 19.2,98 (5sheets) L/R-Delivery Challan dt. 19.2.98 (5 sheets) L/C: Above L/C in original is enclosed. Please return the same with the signatures duly verified and certified," It was also said in the said letter by the Negotiating Bank that they 'have negotiated the documents today' and they 'confirm having noted the drawings on the original LC,' The letter of the Negotiating Bank further states : Instructions'. 1. Acknowledge receipt quoting your and our reference number. 2. Confirm due date of payment. 3, Verify and certify the signatures on the LC and confirm that the signatories on the LC have the required authority to issue the same. 4, Confirm that the documents are in order and payment will be made....
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....nk certified the signatures and assured the Negotiating Bank, that it would reimburse the Negotiating Bank on the due date, 20.5.98. Obviously, the Issuing Bank proceeded on the basis that the delivery was on 19:2.98 as stated in the document (and not on 28,3.98, as contended by the buyers in the plaint), On the basis of the above letter dated 23,3-98 sent by the Issuing Bank to the Negotiating Bank, the latter discounted the Bill of Exchange drawn from the seller and paid ₹ 1,94,39,252 under the L/C on 25,3.98 to the sellers. On 24.3,98 the Negotiating Bank wrote to the Issuing Bank that the latter had returned the L/C, along with confirmation and also the documents. It said that the Negotiating Bank shall be delivering the documents again to the Issuing Bank on due date and that "the same is returned herewith which you may kindly acknowledge". 'Encl : as above'. (A contention was raised by the Issuing Bank in its affidavits in the trial Court that by this letter, the Negotiating Bank was agreeing to send some other documents and they were hot sent later at the time of seeking reimbursement on 20.5.98). The Negotiating Bank, haying parted with ₹ 1,....
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....having been supplied and not die full quantity. A further contention was that, in fact, only 523 MT was supplied and not 654 MT; On 18.5.98, the buyers informed the Issuing Bank tot forgeries had been committed by "some persons" in the documents presented to the Issuing Bank. , The buyer was conscious that on 20.5.98, the Negotiating Bank would press for payment from the issuing Bank. The buyer then filed the suit against the sellers (1st defendant), the Issuing Bank (2nd defendant) and the Negotiating Bank (3rd defendant) for permanent injunction. No specific relief was claimed against the Negotiating Bank but it was prayed that the Issuing Bank should not release any amount under the L/C. In the entire body of the plaint there is no allegation imputing any fraud to the Negotiating Bank, much less even knowledge of fraud. Allegation of fraud and forgery were made only against the sellers, in the interlocutory application, though injunction was prayed against the Issuing Bank, the Negotiating Bank was not brought into the array. Injunction was obtained on 20.5.98 by the buyers against the Issuing Bank not to honour the L/C. The said Bank then wrote on 20:5,98 to the Negot....
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....mitting forgery of documents. Learned counsel pointed out that not even knowledge of fraud or forgery was attributed to the appellant. The appellant had obtained, by way of caution, the confirmation from the Issuing Bank as per Banking Practice in regard to the genuineness of the endorsements on the Bill of Exchange and L/C and on the documents (including the delivery chailans) produced by the sellers and that the Issuing Bank had confirmed the genuineness of the same and had, in fact, promised to reimburse the Negotiating Bank on the due date i.e. 20.5.98 i.e. 90th day after the date of delivery 19.2:98). The Bill of Exchange was also signed by the Vice President of the buyer and necessary endorsement was made. Counsel also referred us to Articles Of the Uniform Customs arid Practice for Documentary Credits (1983 Revision) which stood incorporated in the Letter Of Credit dated 19.2.98 (and in particular Article 16(b) and (e) and pointed out that even in cases where Issuing Bank did not refuse to certify the documents in reasonable time, me Article states that the Issuing Bank "shall, be precluded from claiming that the documents are not in accordance with the terms and condit....
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.... Exchange, against the L/C? (3) Whether, once the Issuing Bank had certified the documents which were presented to the Negotiating Bank by the sellers, the Said Bank could turn round and refuse reimbursement on the ground that on further scrutiny made by its - long after the Negotiating Bank parted with monies - was not correct or was mistaken ? Point 1 This point mainly deals with the UCP Code (1983 Revision) which was incorporated by reference into the L/C. As the interpretation of the UCP is commercially of considerable importance, we would like to deal with the relevance of the UCP Code in Some detail. This Court had occasion in United Commercial Bank v. Bank of India, 13981] 2 SCC 766 (at 780} to refer to the Uniform Customs and Practices for Documentary Credits (UCP for short) by which the 'General provisions and Definitions arid the Articles following are to apply to all documentary credit and binding upon all parties thereto unless otherwise expressly agreed'. The UCP states that it shall be deemed incorporated into each documentary credit if there are words in the Credit indicating that such credit was issued subject to Uniform Customs and Practices of Documenta....
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....ded that the stipulated documents are presented and mat the terms and conditions of the credit are complied with: (i) if the credit provides for sight payment - to pay, or mat payment will be made (ii) if the credit provides for deferred payment - to pay or that payment will be made on the date(s) determinable in accordance with the stipulations of the creditor (iii) if the credit provides for acceptance - to accept drafts drawn by the beneficiaries if the credit stipulates that they are to he drawn on the Issuing Bank, or to be responsible for mat acceptance and payment at maturity if the credit stipulates that they are to be drawn on the applicant for the credit or any other drawee stipulated in the credit; (iv) if the credit provides for negotiation - to pay without recourse to drawer and/or bona fide, holders, drafts drawn by the beneficiary, at sight or at a tenor, on the applicant for the credit or on any other drawee stipulated in the credit other than the Issuing Bank itself, or to provide for negotiation by another bank and to pay as above, if such negotiation is not affected (b)......(c).........(d)....,...''. Article 11 (a) stipulates that 'All credits must ....
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....ne, (1974) 1 WLR 1234, The Bank has to examine with reasonable Care to ascertain if they appear on their face to be in accordance with the terms arid letters Of Credit. In that case, the reference was made to Article 7 of the UCP (1962). It was observed that the said Article did no more than restate the duty of the bank at common law. It was further held that in the ordinary course, visual inspection of the actual documents presented is all that is called for, (p, 1252). In Basse and Selve v.Bank of Australia, (1904) 20 TLR431 = 90 L.T. 618, the defendant bank was instructed to negotiate the drafts of a shipper in Sydney against a Certificate of Dr. Hehns for 100 tons of Cobalt ore analysis not less than 5% pretoxide. The shipper shipped worthless ore which was described in the bill of loading as 'P.M. 2680 bags containing 100 tons of Cobalt ore". The sample initially submitted did not refer to the bill of lading goods. But later, the shipper marked the sample in the same way as the goods were described in the Bill of lading quantity and obtained a second, certificate showing [satisfactory tests of "a sample of Cobalt ore marked P.M. 2680 bags representing 100 tons&qu....
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....se documents have to be handled by the banks, they have to be taken up or rejected promptly and without any opportunity for prolonged inquiry". Two judgments as to whether the Issuing Bank can consult its customer appear to be conflicting. In Bankers Trust Co. v. State Bank of India, (1991) Lloyds Rep, 443, it was held that the Banker's Trust was barred from refusing the documents because it had taken unreasonable time to examine and reject them, some nine days. By that time the State Bank of India had paid to the Steel Authority of India. There were no doubt, 967 sheets to be verified. But it was held that the time taken to consult the customer could not be excluded. A different view was expressed earlier in Co-operative Central etc- v, Sumitomu Bank Ltd. The Roy an, (1987) 1 Lloyds Rep. 345 (on appeal, see (1988)2 Lloyds Rep. 250), However, Article 14(c) of the UCP (1993 Revision) appears to accept the view in the Bankers' Trust case for it says that if the Sank "approaches the applicant for waiver of discrepancy" that shall not extend the seven days time set in Article 13(b) of the UCP (1993 Revision), In deciding whether the time taken is reasonable or n....
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....t of the High Court in a case involving the meaning of the word 'original'. There the documents were produced by word-processor and laser printed oh headed paper without bearing the word 'original'. The Midland Bank refused to treat the copy of the insurance policy as the L/C required 'original insurance policy Or certification. The Bank relied an upon Glencore International AG v. Bank of China, (1996) I Lloyds' Rep. 135 to say that me absence of the word 'original' in any document produced on rd processor was a document produced by a computerised system within Article 20(b) and was required to be marked as original. But this case was distinguished by the High Court (see 1998 Lloyds Rep. Bank 173) (1997 Current Law Year Book 328). It was held by the learned Judge that a document could be regarded as "marked as original" if, either it was expressly marked with the word 'original', or if it was a necessary implication Of the terms and markings of the document that it was original. Here, the document complied with the latter test arid therefore conformed to the credit. On appeal, the Court of Appeal, as recently as 1999 accepted this v....
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....e any such vouchers. In several judgment of this Court, it has been held that Courts ought not to grant injunction to restrain encashment of Bank guarantees or Letters of Credit, Two exceptions have been mentioned-(i) fraud and (ii) irretrievable damage. If the plaintiff is prima facie able to establish that the case conies within these two exceptions, temporary injunction under Order 39, Rule 1, CPC can be issued. It has also been held that the contract of the Bank guarantee or the Letter of Credit is independent of the main contract between the seller arid the buyer. This is; also clear from Arts. 3 and 4 of the UCP (1983 Revision). In case of an irrevocable Bank guarantee or Letter of Credit the buyer cannot obtain injunction against the Banker 0n the ground that there was a breach of the contract by the seller. The Bank is to honour the demand for encashment if the sellet pima facie complies with the terms of the Bank Guarantee or Letter of Credit, namely, if the seller produces the documents enumerated in the Bank Guarantee or Letter of Credit If the Bank is satisfied on the face of the documents that they are in conformity with the list of documents mentioned in the Bank Gua....
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.....A. v. Allied Ards Bank, (1985) 2 Lloyds Rep, 554, it was stated that there must be proof of knowledge of fraud on the part of the Bank at any time before payment. It was also observed that it "would be sufficient if the corroborated evidence of the plaintiff usually in the form of contemporary documents and the unexplained failure of a beneficiary to respond to the attack, lead to the conclusion that the .only realistic inference to draw was 'fraud'". In Guarantee Trust Co, of New York v, Hanney, (1918) 2 K.B. 623 (KB), the Banker accepted the documents without any knowledge of fraud or falsify and it was held that me defendants could not counter-claim from the Bank. However, it would be the 'Banker's duty to refuse the documents which oh their face bear signs of having been altered (See Re Salomon and Nandszus, [l899].92' L.T. 325. that was a c.i.f. contract. This Court in ITC Ltd. v. Debts Record Appellate Tribunal, [1998] .2 :SCC 70 (at 79) also held that knowledge Of the Bank as to the fraud or forgery had to be prima facie established. The foundation of English law in this area is the American case of Sztejn v. j. Heney Schroder Banking Corpn., ....
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....count of the sellers. The Chartered Bank could not compel the issuing Bank, Schroder Banking Corporation, to pay by seeking a dismissal of the buyer's application by way of a demurrer. The plaintiff was entitled to injunction for it had brought the allegation to the knowledge of the Issuing Bank, before the payment was made. Shientag, J. further observed: "As one Court has stated: obviously, when the issuer of a letter of Credit knows that a document, although correct in form, is, in point of fact, false or illegal, he cannot be called upon to recognise such a document as complying with the terms of a letter of credit" No hardship will be caused by permitting the bank to refuse payment where frauds is Claimed, where the merchandise is not merely inferior in quality but consists of worthless rubbish, where the draft and the accompany document are in the hands of one who stands in the same position as the fraudulent seller, where the bank has been given notice of fraud before being presented with the drafts and documents for payment, and where the bank itself does not wish to pay pending an adjudication of the rights and obligations of the other parties." The Cou....
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....t or the indemnify of an agent, the intermediary banker must obey strictly, the instructions he receives, for by acting on them, he accepts then and thus enters into contractual relations with the issuing Bank. The instructions may take the form of an authority either to pay against documents or drafts accompanied by document; or to negotiate drafts drawn either on the issuing banker or on the buyer. The authority may be accompanied by instructions to the intermediary banker to confirm the credit, that is, to place himself in binding contractual relationship with the beneficiary. There is ordinarily no privity between the intermediary banker and the buyer. But the intermediary banker, though initially the agent of the Issuing Bank, may also act as principal in relation to him. (Pagets' Law of Banking, 9th Ed., (1982) p. 543, 544). A.G. Davis in his 'The Law Relating to Commercial Letters of Credit' (2nd Ed.) (1954) (p. 92 et see) deals with the rights of a negotiating Bank. These rights are partly based on the law relating to negotiable instruments and partly on the law applicable strictly to letters of credit. So far as the rights of the negotiating Banker against the....
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....uently, the UCO Bank found that Virgo Steels, in connivance with some officials of the Branch, got the L/Cs opened much in excess of the limit authorised by UCO Bade The UCO Bank disowned liability to pay the Bank of Rajasthan on due date, M.B. Shah, J. (as he then was) speaking for the Bench, rejected the plea of UCO Bank and found it liable to the Bank of Rajasthan. It was held : "whether the drawer or the acceptor or some officers of the UCO Bank committed fraud would hardly be a defence for non- payment of the amount due to the Bills of Exchange negotiated by the Bank of Rajasthan, a third party," and that "UCO bank has never raised any contention that some officers of Bank of Rajasthan, which is altogether a third party, was involved in any alleged fraud or conspiracy." The Court relied upon a circular of the Reserve Bank of India dated 1.4.1992. UCO Bank was held bound by its own confirmation of the documents. We are in respectful agreement with the judgment. In view of the above reasons, this appeal is to be allowed. Summarising, we hold that when the plaintiff buyer has no case that the appellant-Negotiating Bank had any knowledge of fraud, and when ....