TMI Blog2000 (9) TMI 1039X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Bank had released to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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 Project Authoritie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers 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: 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 Ban ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or ₹ 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 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e '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 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 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 Cust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 Lloy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his 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 .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].9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tiating 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 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 'T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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