TaxTMI 
TaxTMI 
2000 (9) TMI 1039
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....fendant) (1st respondent). The appellant 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 Rs. 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, a....
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....4.98. The Letter of Credit issued by 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 Rollin....
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....vt. Ltd. (Plaintiff-buyer) duly 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 ....
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.... Rs. 2,00,00,000 (Rupees two crores only) Usance 90 days Due date ....... Kindly discount the same @ 15.25% p.a. and issue the cheque in favour of the Federal Bank Ltd.- A/c. Jaswant Steel Rolling Mill Pvt. Ltd. payable at Mumbai." In other words, the sellers demanded payment on the Bill of Exchange against the L/C by producing these documents before the Negotiating Bank. The Negotiating Bank Was to pay the amount minus its commission. I could draw the released amount from the Issuing Bank on the 90 day from 19.2.98 the date of despatch document i.e. 20.5,98. The appellant-Negotiating Bank men took the extra precaution of sending to the Issuing Bank - the L/C and the "documents" sent 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: ....
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....nt (Accounts) of the buyer dated 21,2,98 and 28.2,98 respectively. The office stamp of the buyer's company was found on all the five delivery challan. The endorsement of Mr. Waghmode on the delivery challans also stated that goods were received in good condition. the Issuing Bank, after receiving the documents, wrote back to me Negotiating Bank in its crucial letter on 23.3.98 as follows : "Re: Our inland L/C No. 1/98 dated 192,98 For Rs. 2,00,00,000 fvg. Jaswant Steel Rolling Pvt. Ltd. We have received the above said L/C in original along with your covering letter. We have confirmed the due date on 20.5,98 and the documents are in order and payment of the above mentioned L/C 1/98 will be made on 20.5.98. We have verified and certified the signatures on the L/C and confirm that the signatories to the L/C have the required authority to issue the same. We returned herewith the above mentioned L/C 1/98." In other words, the Issuing Bank 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 ....
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....r its letter dated 233:98 addressed to the Negotiating Bank. Meanwhile, the Issuing Bank had alerted the buyers on 15.5.98 that the Negotiating Bank had produced certain documents purportedly dated 19.2.98 containing an endorsement that the material was received in good condition as per order. The buyers stated in their plaint that it was only then that they learnt that the "sellers" had committed 'forgery' by showing that one 'Mr. P, Waghmode' had made the said fraudulent endorsements on the demand vouchers on behalf of the buyers. They contended that there was nobody by the name Mr. P. Waghmode in their service much Jess with necessary authorisation, to act or receive the goods on behalf of the buyers. They stated that on 17.5.98, Mr. Bhapkar, Project Manager of the buyers visited the factory of me sellers and found that only 654 MT of steel was shown in the sellers' accounts as 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 ....
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....vacate the injunction in its Order dated 29,4.99. This order was confirmed by the High Court; The Negotiating Bank has come up in appeal by Special leave. In this appeal, we have heard the submissions of learned counsel for the appellant Sri S, Ganesh and of the learned Senior counsel for the buyers Sri V,A. Mohta and of Sri Rajesh Kumar, for the Bank of Maharashtra. Learned counsel for the appellant :Sri S. Ganesh contended that the plaintiff-buyers had deliberately not impteaded the appellant in the injunction application and they obtained injunction in collusion with the Issuing Bank. They could not have stated in the trial Court that the Negotiating Bank need hot be heard. Learned counsel pointed out that no allegation of fraud was made in the plaint nor in the injunction application against the Negotiating Bank and the allegations were made only on the sellers for allegedly committing 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 th....
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....vent, the Issuing Bank should not debit the buyer for the amount the said Bank would reimburse to the Negotiating Bank. Counsel was informed mat that question does not arise in this appeal. The following points arise for consideration in this appeial : (1) In the context of the need for Banks to take reasonable care to scrutinise the documents produced before it for honouring the L/C, what is the relevance of the UCP Code issued by the International Chamber of Commerce, which was here expressly incorporated in the L/C? (2) If it is the case of the plaintiff-buyer that there is 'fraud' on the part of the sellers in relation to the documents and if it is not its case that the Negotiating Bank was guilty of fraud or had knowledge of fraud by the seller, could the Negotiating Bank not seek reimbursement from the Issuing Bank, as a holder in due course of the Bill of 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 m....
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.... in UCP must yield to the parties' expressed intention." We are here concerned with the I Uniform Commercial Practice of Documentary Credits (1983) (which is referred to in the L/C). It states in Article 3: "credits, by their nature are separate transactions from the sales or other contracts (&) on which they may be based and banks are in no way concerned with or bound by such contracts), even if any refuse whatsoever to such contracts(s) is included in the credit. Article 4 states mat: 'in credit operations, all parties concerned deal in documents, and not in goods, services and/or other performances to which the documents may relate". This is also declared by this Court in several cases. Article 1.0 refers to the duty of the Bank to honour the commitment. It states; "An irretrievable credit constitutes a definite undertaking of the Issuing Bank, provided 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 acc....
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....nk must examine all documents with reasonable care to ascertain that they appear on their face to be in accordance With the terms and conditions of the credit. Documents which appear on their face to be inconsistent With one another will be considered as riot appearing on their face to be in accordance with the terms and conditions of the credit". Once the Bank takes such reasonable care as above stated, Article 16 states that the Bank will have to be reimbursed by the party giving such authority. Clause (b) of Article 16 states that refusal by the Issuing Bank to pay must be "on the documents alone" as appear on their face to be inconsistent with the terms and conditions of the credit. At common law, the position is no different. The principle of reasonable care has been applied by Lord Dipiock in Gian Singh & Co, Ltd. v. Banqae deL' lndochine, (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.....
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....ibility for the falsity of the documents. (However, we shall presently deal with, question of fraud separately). Learned counsel for the appellant Sri Ganesh has contended that if the Issuing Bank does not certify the documents within reasonable time, if will be deemed that it had accepted the documents. Counsel relied on clauses (c) and (e) of Article 16, Clause (c) states : "Article I6(c) : The Issuing Bank shall have reasonable time in which to examine the documents and to determine as above whether to take up or to refuse the documents", If the Issuing Bank does not return them within reasonable time, it may be deemed that it has ratified the genuineness of the documents. These clauses are based on principles of common law. In Hansson v, Hamel and Horley Ltd, (1922) 2 AC 36 (HL), Lord Sumner stated (at p. 46): "these 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 ba....
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.... credit, banks will accept as original documents produced or appearing to have been produced: (i) by reprographic system (ii) by or as the result of, automated or computerised System (iii) as carbon copies- provided if these type of documents are marked as 'originals', provided they have been, where necessary, authenticated. Under Article 20(b) of the UCP 1993 Revision, "unless Otherwise stipulated in the Credit, banks will also accept as ah original document, a document produced or appearing to have been produced (i) by reprographic, automated or computerised systems; (ii) as carbon copies, provided that it is marked as original and, where necessary, appears to be signed. Recently in Karaganda Ltd. y. Midland Bank, (1999) 1 All ER 801 (Commercial Court) (CA) the Court of Appeal affirmed the judgment 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 ....
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....specifically refers to forgery and fraud. This US Code was noticed by Jagannath Shetty, J, in UP Co-operative Federation Ltd v, Singh Consultant & Engineers Pvt. ltd, [1988] 1 SCC 174 (at p. 48). Points 2 and 3 : We have set out the facts in sufficient detail to highlight that the plaintiff-buyers have no plea that the Negotiating Bank which paid the monies to the sellers committed any 'fraud'. The allegations in me plaint are that the sellers in connivance with some persons presented forged or false documents to the Negotiating Bank which include delivery-vouchers parported issued & signed on behalf of the buyers (signed by one Mr. Waghmode and counter signed toy its Vice President (Accounts), the case of the buyers was, however, that Mr. Waghmode was not in their service nor authorised to issue 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 u....
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.... in such circumstances, I should say, very clearly established", in Bolvinter Oil S.A.v. Chase Manhattan Bank, (1984) 1 All E.R, 351 at P. 352, it was said 'where it is proved that the Bank knows that any demand for payment already made or which may thereafter be made, will clearly be fraudulent. But the evidence must be.clear both as to the fact of fraud and as to the bank's knowledge. It would certainly not be sufficient that this rests Upon the uncorroborated statement of the customer,, for irreparable damage can be done to a bank's credit in the relatively brief time "before the injunction is vacated". Thus, not only must 'fraud' be clearly proved but so far as the Bank is concerned, it must prove that it had knowledge of the fraud. In United Trading Corp. S.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....
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....9;s attention before the drafts and documents have been presented for payment the principle of the independence of the bank's obligation under the Letter of Credit should not be extended to protect the unscrupulous seller. It is true that even though the documents are forged or fraudulent, if the issuing bank has already paid the draft before receiving notice of the seller's fraud, it will be protected if it exercised reasonable diligence before making such payment." The facts, as stated above, were that the sellers had drawn the draft under the letter of Credit to the order of the Chartered Bank of India, Australia and China and delivered the draft and the fraudulent documents to the said Chartered Bank's branch at Kanpur for 'collection' on account 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....
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....suing Bank as to genuineness of documents, and seeks reimbursement, then the Negotiating Bank is in the position of a holder in due course and can claim that the suit of the buyer must fail if it sought to restrain the Issuing Bank.from reimbursing the Negotiating Bank- These principles prima facie flow from Shientag, J's judgment which has been followed both in England and by this Court, in several cases. Legal relation of a Negotiating Bank vis--vis the Issuing Bank: The contract between the issuing banker and the paying or negotiating (intermediary) banker may partake of a dual nature. The relationship is mainly that of principal and agent, mandator and mandatory. In order that he may claim reimbursement for any payment he makes under the credit 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 accompan....
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....nk of a liability it would otherwise have. One ruling referred to by the learned counsel Sri S. Ganesh for the appellant is directly in point In Virgo Steels v. Bank of Rajasthan, AIR (1998) Bom, 82. In that case the UCO Bank issued a letter of Credit at request of Virgo Steel in favour of Western Mini-steel Ltd. It provided that documents under the credit could be negotiated through any Bank. The drawer drew the Bill of Exchange which was negotiated by the Bank of Rajasthan, On receipt of the said drafts, the Bank of Rajasthan wrote to the UGO Bank, sending the documents for its confirmation, The UCO Bank confirmed the signature of the partner as per their records and said that they could release payment directly to the Bank of Rajasthan. Subsequently, 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 ....