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SUPREME COURT OF INDIA
A.C. GUPTA AND A.P. SEN, JJ.
United Commercial Bank, Appellant
Versus
Bank of India and others, Respondents.
Civil Appeal No. 132 of 1980, D/- 26-3-1981.
Advocates appeared
Mr. F.S. Nariman Sr. Advocate Mr. P.H. Parekh, K.R. Modi, R.A. Kapadia Rajan Karnjawala and M.H. Shah, Advocates, for Appellant; Mr. K.K. Venugopal Sr. Advocate, 1428 M/s. Vinay Bhasin, Rakesh Sahani and Vineet Kumar Advocates and M/s. G.E. Vahanvati and S.J. Thacker Advocates, (for No. 1); Mr. Soli J. Sorabjee Sr. Advocate E. J. Balsaras S. Ganesh, Sri Narain and P.H. Amin (for No. 2) and Mr. Lal Narain Sinha Attorney General of India, Mr. Ram Balak Mahto Sr. Advocate and B.P. Singh Advocate (for No. 3), for Respondents.
The decision in this case hinges on the principles governing the contractual obligations under an irrevocable letter of credit and the associated bank guarantees or indemnities. The court emphasized that the obligations of the issuing bank are absolute and independent of the underlying sales contract between the buyer and seller. The bank's duty is to honor the documents strictly in accordance with the terms of the letter of credit, and it is not concerned with the actual goods or the sales contract details, provided the documents conform precisely to the credit’s stipulations (!) (!) .
Furthermore, the court highlighted that the courts generally refrain from interfering with the contractual obligations of banks under irrevocable letters of credit or bank guarantees, especially through interlocutory injunctions. Such obligations are considered collateral to the underlying commercial transactions, and courts recognize the importance of maintaining the integrity and trust in international banking and commerce systems. Interference, particularly in the form of injunctions restraining a bank from executing its contractual obligations, is viewed as an exceptional measure and is usually unwarranted unless there is clear evidence of fraud or other extraordinary circumstances (!) (!) .
In the present case, the court found that the High Court’s grant of an injunction was unwarranted because the appellant bank was acting within its contractual rights to recall funds paid under reserve or guarantee, especially when discrepancies in the documents were identified, and the underlying bills of exchange were dishonored. The court observed that the bank's obligation to honor the documents was independent of the dispute over the goods’ description or the alleged discrepancies, which were matters to be resolved between the buyer and seller, not the bank (!) (!) .
The court further clarified that the primary role of the bank is to ensure strict compliance with the terms of the letter of credit, and it is not its function to verify the quality or condition of the goods. The bank’s duty is limited to examining the documents for conformity, and if they comply exactly with the credit’s terms, the bank is obliged to honor the payment, regardless of disputes about the underlying goods (!) (!) .
Based on these principles, the court concluded that the order of the High Court granting temporary injunction was unjustified and should be set aside. The appeal was allowed, and the injunction restraining the bank from recalling the funds was vacated. The court emphasized that courts should exercise restraint in interfering with the contractual obligations of banks under irrevocable credits and guarantees, except in cases of fraud or other exceptional circumstances (!) (!) .
In summary, the decision underscores the importance of the independent nature of bank obligations under letters of credit and bank guarantees, and it affirms that courts should generally not interfere with these contractual obligations through interlocutory reliefs, maintaining the stability and trust essential for international banking transactions.
Judgment
SEN. J.:- This appeal by special leave is from an order of the Bombay High Court dated August 24, 1979, granting a temporary injunction restraining the appellant, the United Commercial Bank. By this order the appellant has been restrained from making a recall of a sum of Rs. 85,84,456/- paid by it under reserve against the relative bills of exchange drawn against the letter of credit issued by it, from the respondent No. 1, the Bank of India and in terms of the letter of guarantee or indemnity executed by that Bank, in a suit based an a bankers letter of credit.
2. The facts are somewhat complicated, but it is necessary to disentangle the facts to bring out the point of law involved.
3. The respondent No. 2. Messrs Godrej Soaps Limited hereinafter referred to as the plaintiffs" by a contract dated February 2, 1978, agreed to supply to the respondent No. 3, the Bihar State Food and Civil Supplies Corporation Limited, hereinafter referred to as the Bihar Corporation one thousand metric tonnes of Sizola Brand Pure Mustard Oil the total value of which was approximately Rs. 86 lacs, packed in brand new leakproof 62,040 tins of net 16 kg. each at the rate of Rs. 137/- per tin. The contract provided inter alia that the Bihar Corporation were to open a letter of credit with the appellant, the United Commercial Bank, for the said amount, which the Bihar Corporation duly did.
4. The letter of credit issued by the appellant was in the following terms :
United Commercial Bank
Nariman Point Branch
United Commercial Bank
Frazer Road. Patna Branch. 13th June, 1978.
Office :
Malbourne Road,
Calcutta-1.
To
M/s. Godrej Soaps Ltd..
Eastern Express Highway,
Vikhroli, Bombay 400 079.
Dear Sir,
LETTER OF CREDIT NO. 1/78.
At the request of Bihar State Food and Civil Supplies Corpn. Ltd., Patna we hereby establish our Confirmed irrevocable Letter of Credit in favour of your goodself for account of Messrs Bihar State Food and Civil Supplies Corpn. Ltd., East Borning Road, Patna. for any, sum or sums not exceeding in all Rs. 86,00,000/-, (say Rupees eighty Six lakhs only) outstanding at any one time available by your drafts at sight drawn on Messrs Bihar State Food & Civil Supplies Corpn. Ltd. without recourse to drawers for full invoice value of merchandise to be described in the invoice as : 62040 tins of Sizola Brand Pure Mustard Oil packed in brand new leak proof tins of net 16 kgs. each @ Rs. 137/- (Rupees one hundred thirty seven only) per tin. Despatched from Bombay accompanied by the following documents :
(i) Signed detailed invoices in duplicate.
(ii) Railway Receipts consigned to or endorsed in favour of United Commercial Bank marked Freight/To Pay evidencing despatch by Railway of the merchandise as stated above.
Signed Delivery order on your godown at ................. fvg. United Commercial Bank covering the delivery of the abovementioned merchandise.
(iii) Insurance Policies or Certificate covering usual transit risks and rail issued in duplicate and endorsed in blanks by Transit Insurance at the cost of openers not exceeding one per cent of value of goods to be effected by beneficiary and to be included in the invoice.
Railway Receipt/Delivery Order must be dated not later than 13-7-1987.
Bills of Exchange must be dated and negotiated not later than 20-7-1978.
sd. Accountant
sd. Manager.
5. The schedule annexed specified the various destinations to which the goods were to be despatched.
6. Between June 22, 1978 and June 26, 1978, the plaintiff from time to time despatched an aggregate of 24,400 tins of their mustard oil by invoices bearing Nos. 4501 to 4520 of the aggregate value of Rs. 36,52,960/- to various destinations mentioned in the schedule annexed to the letter of credit. Between June 17, to July 1, 1978 the plaintiffs further despatched an aggregate of 23,080 tins of the said goods covered by invoices Nos. 4521 to 4539 of the aggregate value of Rs, 34,70,312/-. On July 7 and 8, 1978 the plaintiffs also despatched an aggregate of 10,560 tins covere
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