Important point
Negotiating Bank’s duty is to examine with reasonable care if the documents on their face confirmed to the terms of and conditions of the Letter of Credit; once the issuing Bank confirmed the genuineness of the documents it cannot refuse to reimburse to negotiating Bank which had discounted Bill of exchange on basis of confirmation of issuing Bank.

Headnote:(i) Code of Civil Procedure, 1908-Order 39, Rule 1-Interim injunction-Against issuing bank of letter of credit restraining payment to negotiating Bank-Legality of-Appellant negotiating Bank on receiving documents from seller signed by buyer’s officer acknowledging receipt got confirmed genuineness of letter of credit from issuing Bank-Negotiating bank discounted bill of exchange on basis of confirmation of issuing Bank-Subsequent suit by buyer for permanent injunction alleging forgery against seller-Court granting temporary injunction restraining issuing Bank from releasing money to negotiating Bank-Court rejecting application of negotiating Bank to vacate injunction-Unjustified-No case of fraud against negotiating Bank-It took precaution in getting clearance for document from issuing Bank-Issuing Bank cannot contend that on fresh scrutiny it found document were not in confirmity with letters of credit-Issuing Bank bound by its own confirmation.
       (ii) Banking Law-Letter of credit-Negotiating Bank’s rights and liabilities-Negotiating bank must examine with reasonable case if documents are on their face in accordance with terms and conditions of letter of credit-Issuing Bank is bound by its confirmation of genuineness of letter of credit-In the instant case, negotiating bank sent documents received from seller purportedly signed by buyer’s officer to issuing Bank-Issuing Bank confirmed genuineness of letter of credit-Subsequent suit by seller alleging forgery on part of buyer-No allegation or knowledge of fraud against negotiating Bank-Court granting interim injunction restraining issuing Bank from releasing amount due under letter of credit to negotiating Bank-Not justified-Negotiating Bank in position of holder in due course-Issuing Bank cannot contend on fresh scrutiny documents were found to be not in confirmity with letter of credit-Injunction will not come in way of issuing Bank from complying with its obligation to reimburse negotiating Bank-Uniform customs and practice for Documentary credits (1983 Revision)-Articles 10, 11, 15 and 16.
       Under Article 11(d), of the UPC it is sufficient if the negotiating bank is satisfied that the documents which appear on their face to be in accordance with the terms and conditions of the credit. If the negotiating Bank then pays, the Issuing Bank is bound to reimburse the Negotiating Bank. All that is therefore necessary is to examine with reasonable care if the documents on their face conformed to the terms and conditions of the L/C. (Paras 38 and 40)
       In several judgments 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 comes 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 and the buyer. This is also clear from Arts. 3 and of the UCP (1983 Revision). In case of an irrevocable Bank guarantee or Letter of Credit the buyer cannot obtain injunction against the Banker on the ground that there was a breach of the contract by the seller. The Bank is to honour the demand for encashment if the seller prima 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 Guarantee or Letter of Credit and there is no discrepancy, it is bound to honour the demand of the seller for encashment. While doing so it must taken reasonable case. It is not permissible for the Bank to refuse payment on the ground that the buyer is claiming that there is a breach of contract. Nor can the Bank try to decide this question of breach at that stage and refuse payment to the seller. Its obligation under the document having nothing to do with any dispute as to breach of contract between the seller and the buyer. (Para 53)
       If the appellant Federal Bank was merely a collecting Bank or agent which had approached the Bank of Maharashtra (the issuing Bank) and if the Issuing Bank was sought to be restrained by the buyer before payment was made by the issuing Bank to the Collecting Bank, the Collecting Bank could not have compelled the Issuing Bank to release the money for collection if the buyer informed the Issuing Bank in his plaint that the documents to be presented to it by the Collecting Bank were forged or fraudulent. But where, on the other hand, the Negotiating Bank, i.e., the Federal Bank (appellant), has said on the basis of a clearance given by the Issuing 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. (Para 57)
       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 indemnity 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. (Para 58)
       The plaintiff buyer has no case that the appellant-Negotiating Bank had any knowledge of fraud, and when it took precaution in getting clearance for the document from the issuing Bank on 20.3.98 and such clearance was given on 23.3.98 by the latter, it was not open to the Issuing Bank to contend that on fresh scrutiny in May, 1998, it found that the documents were not in conformity with the letters of Credit or that the buyer had so informed them. Prima facie, the appellant was in the position of a holder in due course. (Para 63)
       Held, consequently, we allow the appeal and vacate the temporary injunction granted in favour of the plaintiff against the Bank of Maharashtra in so far as the said injunction precluded the Bank of Maharashtra from reimbursing the appellant-Federal Bank. It is clarified that the said injunction will not come in the way of the Bank of Maharashtra from complying with its obligation to reimburse the Federal Bank. (Para 64)

Judgment

M. Jagannadha Rao, J.-Leave granted.

2. The appellant Federal Bank at Bombay was the 3rd defendant in the suit and has a branch at Pune. It has preferred this appeal against the order of the High Court dated 8.10.99 summarily dismissing the appellant’s appeal AFO No. 818 of 1999. The appeal was preferred against the order of the trial Court dated 29.4.99 whereby the trial Court had confirmed an ex-parte interim injunction dated 20.5.98 granted by it earlier, rejecting the appellant’s application to vacate the same. The matter relates to a Letter of Credit issued by the 2nd defendant, Bank of Maharashtra, Pune (3rd respondent) at the instance of the plaintiff-buyers (1st respondent) , M/s. V.M. Jog Engineering Co., Pune. The sellers are M/s. Jaswant Steel, Nagpur (1st defendant) (1st respondent). The appellant Federal Bank was the Negotiating Bank (3rd defendant) while the 3rd respondent, Bank of Maharashtra was the Issuing Bank.

3. 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 the Seller - to the Issuing Bank and got the genuineness of the documents confirmed. The Negotiating Bank then released Rs. 1,94,39,252 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 Negotiating Bank had released to the seller the above sum upon due certification of the seller’s documents by the Issuing Bank - have thus precluded the Negotiating bank from getting reimbursement from the Issuing Bank. One other peculiar feature of the case is that while the appellant-, Negotiating Bank was impleaded as the 3rd defendant in the suit, specific relief was not sought against it either in the suit or in the interlocutory application. In fact, it was stated by the plaintiff - purchaser that the Negotiating Bank need not be heard in the interlocutory application and that the said Bank had no locus standi. Both the courts below thought it fit to accept this contention and grant injunction under Order 39 Rule 1, Code of Civil Procedure restraining the Issuing Bank from paying any amount to anybody under the Letter of Credit, pending suit. In the plaint or in the interlocutory application, the plaintiff has not alleged ‘fraud’ or forgery against the Negotiating Bank nor even knowledge of the fraud/forgery which is alleged against the sellers in respect of the delivery challans.

4. Aggrieved by the order of temporary injunction passed under Order 39 Rule 1 CPC, the Negotiating Bank has come up in appeal.

5. As the case involves issues relating to Banking Practice and interpretation of the Uniform Customs and Practice of Documentary Credits (1983) (hereinafter called the UCP) issued by the International Chamber of Commerce, - relied upon by the Negotiating Bank in detail - we propose to deal with the articles in UCP (1983 revision) and their relevance.

6. The following are the facts :

The plaintiff-(buyers) at Pune entered into a contract in February 1998 with the sellers at Nagpur for purchase of 1450 M.R. of reinforcement steel-bars and structural-steel, conforming to IS : 1786. These were needed for the buyers’ works at two projects, one at Palm Beach, Andheri and another for a fly-over project at Bombay. Two purchase orders (Nos. 104, 105) for supply of 1450 MT were

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2000 Supreme(SC) 1621

Cases Referred (5)