2000 (9) TMI 1039 - SC - Indian Laws

Summary

Issues Involved:
1. Relevance of the Uniform Customs and Practice for Documentary Credits (UCP) Code.
2. Fraud by the sellers and the Negotiating Bank's entitlement to reimbursement.
3. Issuing Bank's refusal to reimburse after certifying documents.

Summary:

Issue 1: Relevance of the UCP Code
The UCP Code (1983 Revision) was incorporated by reference into the Letter of Credit (L/C). The UCP Code is a set of standardized rules issued by the International Chamber of Commerce, governing documentary credits and binding upon all parties unless otherwise expressly agreed. Article 3 of the UCP states that credits are separate transactions from the sales or other contracts on which they may be based, and banks deal in documents, not in goods, services, or performances. Article 11(d) stipulates that the Issuing Bank authorizes the Negotiating Bank to pay against documents that appear on their face to be in accordance with the terms and conditions of the credit and undertakes to reimburse such bank. Article 15 mandates that banks 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. Article 16(b) and (e) state that refusal by the Issuing Bank to pay must be based on the documents alone and that the Issuing Bank shall be precluded from claiming that the documents are not in accordance with the terms and conditions of the credit if it fails to act within a reasonable time.

Issue 2: Fraud by the Sellers and the Negotiating Bank's Entitlement to Reimbursement
The plaintiff-buyers alleged fraud by the sellers in presenting forged documents but did not allege fraud or knowledge of fraud by the Negotiating Bank. The Supreme Court reiterated that injunctions to restrain encashment of Bank guarantees or Letters of Credit are generally not granted unless there is proven fraud or irretrievable damage. The contract of the Bank guarantee or the Letter of Credit is independent of the main contract between the seller and the buyer. The Negotiating Bank's obligation is to honor the demand for encashment if the seller complies with the terms of the Bank Guarantee or Letter of Credit. The Negotiating Bank had obtained confirmation from the Issuing Bank about the genuineness of the documents before paying the sellers. The Issuing Bank's certification on 23.3.98 assured the Negotiating Bank of reimbursement on the due date, and the Negotiating Bank paid the sellers based on this confirmation.

Issue 3: Issuing Bank's Refusal to Reimburse After Certifying Documents
The Issuing Bank initially certified the documents on 23.3.98 but later refused reimbursement, claiming discrepancies upon further scrutiny in May 1998. The Supreme Court held that once the Issuing Bank had certified the documents, it could not turn around and refuse reimbursement on the ground of discrepancies discovered later. The Negotiating Bank, having acted in good faith and based on the Issuing Bank's confirmation, was entitled to reimbursement as a holder in due course. The Court emphasized that the Issuing Bank's refusal to reimburse after certifying the documents was not justified.

Conclusion:
The Supreme Court allowed the appeal, vacating the temporary injunction that precluded the Bank of Maharashtra (Issuing Bank) from reimbursing the Federal Bank (Negotiating Bank). The Court clarified that the injunction would not prevent the Issuing Bank from fulfilling its obligation to reimburse the Negotiating Bank. The appeal was allowed with no costs.