2006 Supreme(SC) 473

2006(5) Supreme 503
SUPREME COURT OF INDIA
(From Bombay High Court)
B.P. Singh and Altamas Kabir, JJ.
UBS AG — Appellant
versus
State Bank of Patiala — Respondent
Civil Appeal No. 2578 of 2006
(Arising out of SLP (C) No. 5639 of 2006)
With
Civil Appeal No. 2579 of 2006
(Arising out of SLP (C) No. 6134 of 2006)
And
Civil Appeal No. 2580 of 2006
(Arising out of SLP (C) No. 6141 of 2006)
Decided on 10-5-2006
Counsel for the Parties :
For the Appellant : Ashok Desai, Sr. Advocate, Ravinder Nath, Ms. Kumkum Sen, Rajesh Roshan, Diwakar Maheshwari (for M/s. Rajinder Narain & Co.), Advocates.
For the Respondent : R.F. Nariman, Sr. Advocate, Virag Tulzapurkar, Mahesh Agarwal, Rishi Agarwal, Manu Krishnan, Ms. Bindi Dave, Kunal and E.C. Agrawala Advocates.

IMPORTANT POINT
Even if the constituent of the Bank, which issued Letter of Credit, had committed fraud in obtaining Letter of Credit, same would not be a triable issue to decide whether Bank in whose favour Letter of Credit was issued was entitled to reimbursement under the Letter of Credit before such fraud was brought to its notice and beneficiary under the Letter of Credit had already negotiated documents under the transaction with plaintiff bank.

Headnote:Civil Procedure Code, 1908 — Order XXXVII — Summary suit in respect of Letters of Credit — Grant of unconditional leave to defend — Appeal — Respondent Bank issued an irrevocable Letter of Credit for U.S. Dollars 1,320,900/- to petitioner bank on request of its client constituent — It was issued for import of 255.00 MT of Tin Ingots by client of respondent bank — Letter of Credit was valid till 23-9-1998 — On 6-4-1998 on production of relevant documents by beneficiary, petitioner Bank made payments under said L.O.C. to beneficiary — Maturity date of Letter of Credit was extended on request of respondent bank till 21-3-1999 — On 3-2-1999 Advocate for respondent bank wrote to petitioner bank that constituent of respondent bank had perpetrated fraud and that beneficiary had not shipped any goods and bills of lading negotiated were fraudulent — Question whether unconditional leave could have been granted to defend the suit for refusal to reimburse the appellant bank in respect of amount disbursed to beneficiary of Letter of Credit before being informed of fraud allegedly perpetrated by beneficiary and constituent of Respondent Bank? — No — Fraud was detected after the Letters of Credit had been negotiated and thus fraud alleged to have been committed by constituent of Respondent Bank could not be set up as plausible defence in the suit — Even if constituent of Respondent Bank committed fraud in obtaining Letter of Credit same would not be triable issue to decide whether appellant bank was entitled to reimbursement under Letter of Credit before such fraud was brought to its notice — Impugned judgment was liable to be set aside and leave to defend was liable to be revoked.

       Held : While the principles indicated by Mr. Nariman in matters relating to grant of leave to a defendant to defend a suit under Order XXXVII of the Code of Civil Procedure are undoubtedly sound, in the facts of this case, however, no triable issue can be raised which would warrant grant of unconditional leave to the Respondent-Bank to defend the suit filed by the Appellant-Bank. International commerce operates on trust and relies to a large extent on arrangements between banks on behalf of their respective clients, giving rise to ‘UCP 500’ which governs the Letter of Credit involved in the instant case. Prior to 3rd February, 1999, when the advocate for the Respondent-Bank wrote to the petitioner-bank, there is nothing on record to suggest that any fraud had been perpetrated by the applicant and the beneficiary or that the Appellant-Bank had been requested not to negotiate the documents to be presented by the beneficiary. In fact, four and a half months after 6th April, 1998, when the Letter of Credit had already been negotiated, the Respondent-Bank requested the Appellant-Bank to extend the maturity date of the Letter of Credit from 23rd September, 1998 to 21st March, 1999. The facts of these three appeals are clear and simple. The Letters of Credit were issued by the issuing-bank to the confirming-bank with a request to inform the beneficiary that an irrevocable Letter of Credit had been established for the sum indicated therein to be paid by the Appellant-Bank on negotiation of documents to be presented by the beneficiary. Such documents having been presented by the beneficiary to the Appellant-Bank, it made payment under the Letter of Credit to the beneficiary and was entitled to receive reimbursement for the same from the Respondent-Bank. If the fraud had been detected earlier and the Appellant-Bank had been informed of such fraud and put on caution prior to making payment, the Respondent-Bank may have had a triable issue to go to trial. That is not so in these three cases. In these cases, the fraud was detected after the Letters of Credit had been negotiated and hence such fraud alleged to have been committed by the constituent of the Respondent-Bank cannot be set up even as a plausible defence in the suit filed by the Appellant-Bank.(Paras 34 and 35)

       Even if the constituent of the Respondent-Bank had committed fraud in obtaining the Letter of Credit, the same would not be a triable issue to decide whether the Appellant-Bank was entitled to reimbursement under the Letter of Credit before such fraud was brought to its notice. The High Court has wrongly interpreted Clause 8 of the Letter of Credit in holding that the plaintiff’s claim for encashment of the Letter of Credit could not be accepted because prima facie Clause 8 of the said Letter of Credit did not provide for discounting of the said Letter of Credit and in view of such discounting the plaintiff would not be entitled to claim reimbursement on the ground that the said amount had been paid to the beneficiary. The Letter of Credit itself shows that the same was to be negotiated as had been done by the Appellant-Bank.(Para 36)