ORDER
AND BLANK ENDORSED MARKED 'FREIGHT PREPAID' INDICATING L/C NUMBER AND NOTIFY 1. APPLICANT AND 2. ICICI BANKING CORPORATION LIMITED, 9-A, CONNAUGHT PLACE, NEW DELHI - 110 001, INDIA EVIDENCING SHIPMENT OF MERCHANDISE DESCRIBED ABOVE. SHORT FORM, CLAUSED AND THIRD PARTY BILL OF LADING NOT ACCEPTABLE.
4. INSURANCE COVERED BY APPLICANT. COPY OF FAX INTIMATING THE INSURANCE COMPANY DIRECTLY AT THEIR FAX NUMBER 0091 1662 20476 OR 0091 1662 20499, CONVEYING FULL DETAILS OF SHIPMENT WITHIN 48 HOURS OF SHIPMENT, TO ACCOMPANY THE DOCUMENTS.
5. PACKING LIST CUM WEIGHTMENT CERTIFICATE GIVING THE NETT. TARE AND GROSS WEIGHTS OF EACH CONTAINER.
(ORIGINAL + 3 COPIES).
6. BENEFICIARY'S QUANTITY AND QUALITY CERTIFICATE GIVING COMPLETE Chemical ANALYSIS FOR ALL ELEMENTS AND CERTIFYING THAT THE MATERIAL CONFORMS TO THE APPLICANTS PO NO. 99300125 (ORIGINAL + 3 COPIES).
7. CERTIFICATE FROM THE BENEFICIARY THAT THE MATERAL DOES NOT CONTAIN ANY TYPE OF ARMS, AMMUNITION, MINES SHELLS, CARTRIDGES, RADIATION/WARHEAD CONTAMINATED ITEMS OR EXPLOSIVE MATERIALS.
8. CERTIFICATE FROM SHIPPING COMPANY OR ITS AGENT STATING THAT THE SHIPMENT HAS BEEN EFFECTED THROUGH CONFERENCE LINE VESSEL REGISTERED WITH AN APPROVED CLASSIFICATION SOCIETY AS PER INSTITUTE CLASSIFICATION CLAUSES MAINTAINED EQUAL TO LLOYDS 100 A 1 AND THAT ITS AGE DOES NOT EXCEED 20 YEARS AND IS SEA WORTHY THE CORRESPONDENCE ADDRESS OF THE SHIPPING LINE WITH PHONE AND FAX NO AND THEIR AGENT IN INDIA IF ANY, THE NO OF DETENTION FREE PERIOD AND INLAND HAULAGE CHARGES IN INDIAN RUPEES (INCLUDING THE) UP TO ICD NEW DELHI SHOULD ALSO BE MENTIONED ON THIS CERTIFICATE.
9. BENEFICIARY'S CERTIFICATE IN DUPLICATE CERTIFYING THAT THE GROSS WEIGHT OF EACH 20 FEET SEALED CONTAINER DOESN'T EXCEED 245 MT IN ANY CASE. THE NET WEIGHT OF THE MATERIAL IN EACH 20 FEET SEALED CONTAINER IS ABOUT 19 MET AVERAGE.
10. THIS L/C IS TRANSFERABLE AT THE REQUEST OF THE BENEFICIARY AND KBC BANK NETWORK IS AUTHORISED TO DO SO.
7A/ADDITIONAL CONDITIONS
1. ALL DOCUMENTS MUST BE IN ENGLISH AND MENTION OUR L/C NUMBER, DATE AND APPLICANT'S PO NUMBER.
2. BENEFICIARY TO COURIER/FAX THREE SETS OF NON NEGOTIABLE DOCUMENTS DIRECTLY TO THE APPLICANT WITHIN 7 WORKING DAYS FROM THE DATE OF SHIPMENT AND A CERTIFICATE TO THIS EFFECT MUST ACCOMPANY THE NEGOTIABLE SET OF DOCUMENTS.
3. BENEFICIARY TO FAX/COURIER FULL SHIPMENT PARTICULARS TO CONSIGNEE WITHIN 5 WORKING DAYS FROM THE DATE OF SHIPMENT AND A CERTIFICATE TO THIS EFFECT MUST ACCOMPANY THE DOCUMENTS.
4. DISCREPANT DOCUMENTS ARE TO BE FORWARDED FOR THE APPROVAL OF THE OPENING BANK.
5. THOUGH NHAVA SHEVA MUMBAI SHALL BE THE PORT OF DISCHARGE BUT FINAL PLACE OF DELIVERY HAS TO BE ICD, NEW DLEHI, INLAND TRANSPORTATION CHARGES IN INDIA IN INDIAN RUPEES FROM NHAVA SHEVA TO ICD, NEW DELHI TO BE BORNE BY THE APPLICANT.
6. BILLS OF LADING AND INVOICES MUST BEAR THE FOLLOWING ADDITIONAL PARTICULARS:
A) NO AND DATE OF THE INSURANCE COVER NOTE
B) NAME OF THE INSURANCE COMPANY
C) THE GOODS ARE FREELY IMPORTABLE AND NOT COVERED IN THE NEGATIVE LIST UNDER IMPORT POLICY 1997-2000.
D) THE CONSIGNEES IMPORTER CODE NO. 19 0588085146.
E) THE NAME AND ADDRESS OF THE APPLICANT.
7. INTEREST FOR THE USANCE PERIOD I.E. FROM THE DATE OF NEGOTIATION TILL 180 DAYS FROM THE DATE OF BILL OF LADING IS PAYABLE BY THE APPLICANT AT THE RATE OF LIBOR + 0.25 PERCENT P.A. OR USD PRIME RATE WHICHEVER IS LOWER PREVAILING ON THE DATE OF NEGOTIATION.
8. SINCE THE DRAFTS UNDER THIS L/C ARE FOR THE 90 PER CENT OF THE INVOICE VALUE, THE BALANCE 10 PER CENT IS TO BE SETTLED BETWEEN APPLICANT AND BENEFICARY AND IT IS OUTSIDE THE SCOPE OF THIS L/C.
:71B/CHARGES
ALL CHARGES OUTSIDE INDIA ARE FOR THE ACCOUNT OF BENEFICIARY EXCEPT THE USANCE PERIOD INTEREST WHICH IS TO BE BORNE BY THE APPLICANT.
49/CONFIRMATION INSTRUCTIONS CONFIRM
53A/REIMBURSING BANK
/001-1-427374
CHASU33
CHASE MANHATTAN BANK, THE
NEW YORK, NY
:78/INSTR TO PAY/ACCEPT/NEGOTNG BK
+ NEGOTIATING BANK CAN CLAIM REIMBURSEMENT FROM THE ABOVE BANK AFTER CERTIFYING TO US AND THE REIMBURSING BANK THAT THE DOCUMENTS ARE STRICTLY IN COMPLIANCE TO L/C TERMS AND CONFIRMING THE DUE DATE FROM US. THE NEGOTIATING BANK IS REQUIRED TO GIVE THREE WORKING DAYS NOTICE TO US BEFORE LODGING THE CLAIM.
+ DOCUMENTS TO BE COURIERED IN ONE LOT ADDRESSED TO - ICICI BANKING CORPORATION LIMITED, 9-A, CONNAUGHT PLACE, NEW DELHI - 110 001, INDIA
+ THIS CREDIT IS SUBJECT TO UCPDC (1993 REVISION)
(5: (MAC: 5A9A1590) (CHK EDCF3FEDE12)
(S: (SAC) ***AUTHENTICATION CORRECT***).
4. In Paragraph 8 of the Plaint it has been stated 'that it is pertinent to mention here that it was sole and exclusive duty of defendant No.3 i.e. the beneficiary to check and verify the genuineness of the third party documents to be presented to KBC Bank, New York, i.e. the negotiating Bank of this Letter of Credit before substituting his own invoice and draft/Bill of Exchange'. Paragraph 9 of the Plaint states - 'That the sequence of events which occurred after negotiation of documents led the plaintiff to believe that the intention of the beneficiary i.e. Surya Impex, New York i.e. defendant No.3 was bad, mala-fide and fraudulent from the day one. It transpire that the proprietor of the Defendant No.3 had no arrangement for supply of the ordered goods, thereforee, he connived and colluded with another company known as Invercomer S.A. De. C.V. San Salvador, EL Salvador of USA/Central America in whose favor the L/C was transferred for part amount by KBC Bank at the request of the Defendant No.3 but the name of Invercomer S.A. De. C .V. San Salvador, EL Salvador of USA was not disclosed to the plaintiff company till both the beneficiaries got the documents negotiated by KBC Bank, New York'.
5. It requires to be emphasised that there are no allegations of any fraudulent or unbusinesslike conduct ascribable to the NEGOTIATING BANK. The Plaintiff's assertion is that out of the total Letter of Credit amount of USD 4,48,500 SURYA IMPEX retained USD 82,709.79 for itself, the remaining balance amount having been transferred to Invercomer S.A. De. C .V. San Salvador, EL Salvador of USA, although the actual transfer of these funds is nebulous.
6. A fortnight later, on 3.11.1999, a Bill of Lading dated 28.10.1999 was presented by SURYA IMPEX to NEGOTIATING BANK. The Bill of Lading No.C67JL893VN6 confirms that stainless steel scrap had been shipped on Vessel SKODSBORG V-834 of Nordana Lines SA along with the requisite certifications. Payment was immediately made to SURYA IMPEX by NEGOTIATING BANK, which, on the following day, forwarded the negotiated documents to ISSUING BANK for making payments on maturity, that is, 180 days from the date of shipment. The said letter was received by ISSUING BANK on the same date, that is, 4.11.1999 and reads as follows:-
KBC Bank NVNEW YORK BRANCHTO: ICICI Banking Corporation Limited, Date: Nov. 04, 19999-A, Connaught PlaceNew Delhi-110 001IndiaAttn.: Letter of Credit Dept.Your L/C No.:07MLC34099Our ref.: C-50071/99Documents for USD 423,832.50Terms: 180 days from the date of shipmentCovering shipment of 630 mt stainless steel scrapFrom: Acajutla port, El Salvador to:New Delhi, IndiaDear Sir/Madam,
We enclose herewith documents drawn under the captioned letter of credit for payment at maturity April 25, 2000 as follows:
Invoice Amoun: USD 470,925.0090 Pct of Invoice value: USD 423,832.50Plus interestInterest at libor + 25% for 173 days USD 12,933.37(Libor at 6.10% + .25% = 6.35%)--------------Total: USD 436,765.87--------------At maturity (April 25, 2000) kindly authorize Chase Manhattan Bank, New York to honor our claim for USD 436,765.87.
Unless otherwise stated, we hereby certify documents have been presented to us within the terms and conditions of the letter of credit and within the expiry date or within the specified period of time after the date of issuance of shipping documents in accordance with Article 43a of UCP 500.
We do not assume any responsibility for the validity or genuineness of the enclosed documents.
This transaction is subject to the Uniform Customs and Practice for documentary Credits (1993 Rev.) International Chamber of Commerce Publication 500.
Authorized Signature
7. It appears that JINDAL addressed a letter to ISSUING BANK on 10.11.1999 stating that - 'With reference to the above letter of credit, we understand that the original documents has reached in your office. We confirm that original documents would be acceptable to us even if there will be any discrepancy. You may debit our account with equivalent on due date'. This letter is obviously of far reaching consequence and significance.
8. After this sequence of events the NEGOTIATING BANK addressed the following letter dated 29.11.1999 to SURYA IMPEX:
KBC BANK NVNEW YORK BRANCH125 WEST 55TH STREETNEW YORK, NY 100 10TO: SURYA IMPEX15501 BRUCH B DOWNS 808TAMPS FL 33647ATTN : MUTTY AZZARPURE: L/C NO. 07MLC34088DOCUMETNS FOR USD 42383250B/L NO. C57 JL892 VNG DATED OCTOBER 28, 1999VESSEL : SKOTABORG V - 834MR. AZZARPU,
WE HAVE RECORDED CONFIRMATION FROM NORDANA LINE. AS STATING THAT THE ABOVE MENTIONED SHIPMENT WAS NOT EFFECTED AND THE ABOVE MENTIONED BILLS OF LADING ARE FRAUDULENT.
WE REUQEST REFUND OF USD 82,709.70 IMEDIATELY, PLEASE ATTRACT PAYMENT AS FOLLOWS.
VIA FIND FURTHER: AB & 028-008-248KBC BANK, N.V. NEW YORK, NYFAVOR : A/C # 900 27348ATTN : GTFGUPON RECEIPT OF FUNDS FROM YOU WE SHOULD ADVICE THE ISSUING BANK, ICICI BANKING CORP. ACCORDINGLY.
KINDLY CONFIRM TO US WHEN PAYMENTS IS EFFECTED.
IF YOU HAVE ANY QUESTIONS CONCERNING THIS
REMITTANCE INSTRUCTION, KINDLY CONTACT US AT (212) 541-0779 (212) 541-0779 .
AUTHORISE SIGNATURE
9. It is not disputed that SURYA IMPEX has, in fact, refunded the sum of US$ 82,709.79, which is stated by it to be the entire amount in its coffers as a consequence of the said transaction. Thereafter, on 23.12.1999, contrary to and in complete reversal of its letter dated 10.11.1999 JINDAL had requested the ISSUING BANK not to honour the claim of the NEGOTIATING BANK. The response of the ISSUING BANK was as follows:-
ICICI BankICBK/ND/FX December 30, 1999Jindal Strips Limited.,Jindal Centre, 12, Bhikaji Cama Place,New Delhi 110 066Dear Sir,
Sub:- Letter of Credit No. 07MLC34099
We refer to your letter dated 23 December, 1999.
While we noted that your trading partner has not been able to keep the commitment, it will be difficult to seek a remedy under the LC transaction in view of the following reasons:-
The captioned LC was issued subject to the provisions of Uniform Customs And Practice for Documentary Credits, ICC Brochure 500 (1993 revision) and some of the relevant provisions governing transactions under LCs are given below:-
Article 4
In credit operations, all parties concerned deal with documents and not with goods, services and/other performances to which the documents may relate.
Article 15
Banks assume no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal affect of any document(s) or for the general and/or particular conditions stipulated in the documents or superimposed thereon, nor do they assume any liability or responsibility for the description, quantity, weight, quality, conditions, packing, delivery, value or existence of the goods represented by any document(s) or for the good faith or acts and/or omissions, solvency, performance or standing of the consignors, the carriers, the forwarders, the consignees or the importer of the goods or any other persons whomsoever.
In as much as the fact the documents received on their face, have conformed to the terms and conditions of the LC, we as the LC issuing bank has no other alternative but to reimburse the negotiating bank on due date. It is worth mentioning here that you had given your acceptance to the documents irrespective of the discrepancies. We will be honouring the payment on the due date and would like you to provide adequate funds in the account.
We trust that the matter stands clarified from our point of view.
Yours faithfully
For ICICI Bank Ltd.,
Sd/-
Authorised Signatories.
10. It appears that a Suit was filed by JINDAL before the Civil Judge, Senior Division, Hisar on 15.2.2000 and as a sequel to these proceedings JINDAL had approached the Hon'ble Supreme Court assailing the observations made by the Hon'ble Single Judge of the High Court of Punjab and Haryana. This Court is not concerned with the legal proceedings that had culminated in Hisar, Haryana. The present Suit has been filed on 1.9.2003. The short question is whether the prayers contained in the Plaint can be granted, and if not, should the interim Orders be recalled.
LEGAL REGIME PERTAINING TO LETTERS OF CREDIT
11. The Hon'ble Supreme Court has explained and enunciated the law on this interesting and important aspect of law on several occasions. In Centax (India) Ltd. vs . Vinmar Impex Inc. and Others : AIR1986SC1924 it has been stated that a Bank Guarantee resembles and is analogous to Letters of Credit and would thereforee attract similar jural considerations and handling. The Hon'ble Supreme Court has in M/s. Tarapore and Co., Madras vs . M/s. V.O Tractors Export Moscow and another : [1969]2SCR920 elaborately and perspicuously explained the scope and ambit of judicial interference in matters concerning Letter of Credit and Bank Guarantee in these words--
The scope of an irrevocable letter of credit is explained thus in Halsbury's Laws of England (Vol.34, Paragraph 319 at page 185):
'It is often made a condition of a mercantile contract that the buyer shall pay for the goods by means of a confirmed credit, and it is then the duty of the buyer to procure his bank, known as the issuing or originating bank, to issue an irrevocable credit in favor of the seller by which the bank undertakes to the seller, either directly or through another bank in the seller's country known as the correspondent or negotiating bank, to accept drafts drawn upon it for the price of the goods, against tender by the seller of the shipping documents. The contractual relationship between the issuing bank and the buyer is defined by the terms of the agreement between them under which the letter opening the credit is issued; and as between the seller and the bank, the issue of the credit duly notified to the seller creates a new contractual nexus and renders the bank directly liable to the seller to pay the purchase price or to accept the bill of exchange upon tender of the documents. The contract thus created between the seller and the bank is separate from, although ancillary to, the original contract between the buyer and the seller, by reason of the bank's undertaking to the seller, which is absolute. Thus the bank is not entitled to rely upon terms of the contract between the buyer and the seller which might permit the buyer to reject the goods and to refuse payment therefore; and, conversely, the buyer is not entitled to an injunction restraining the seller from dealing with the letter of credit if the goods are defective.'
Chalmers on 'Bills of Exchange' explains the legal position in these words
'The modern commercial credit serves to interpose between a buyer and seller a third person of un-questioned solvency, almost invariably a banker of international repute; the banker on the instructions of the buyer issues the letter of credit and thereby undertakes to act as paymaster upon the seller performing the conditions set out in it. A letter of credit may be in any one of a number of specialised forms and contains the undertaking of the banker to honour all bills of exchange drawn there under. It can hardly be over-emphasised that the banker is not bound or entitled to honour such bills of exchange unless they, and such accompanying documents as may be required there under, are in exact compliance with the terms of the credit. Such documents must be scrutinised with meticulous care, the maxim de minimis non curat lex cannot be invoked where payment is made by the letter of credit. If the seller has complied with the terms of the letter of credit, however, there is an absolute obligation upon the banker to pay irrespective of any disputes there may be between the buyer and the seller as to whether the goods are up to contract or not'
Similar are the views expressed in `Practice and Law of Banking' by H.B. Sheldon, 'the Law of Bankers Commercial Credits' by H.C. Gutteridge,'the Law relating to Commercial Letters of Credit' by A.G. Devis' 'the Law Relating to Bankers' Letters of Credit' by B.C. Mitra and in several other text books read to us by Mr. Mohan Kumaramangalam, learned Counsel for the Russian Firm. The legal position as set out above was not controverter by Mr. M.C. Satalvad, learned Counsel for the Indian Firm. So far as the Bank of India is concerned it admitted its liability to honour the letter of credit and expressed its willingness to abide by its terms. It took the same position before the High Court.
10. A case somewhat similar to the one before us came up for consideration before the Queens Bench Division in England in Hamzeh Walas and Sons v. British Imex Industries Ltd. 1958-2 QB 127. Therein the plaintiffs, a Jordanian firm contracted to purchase from the defendants, a British firm, a large quantity of reinforced steel rods, to be delivered in two Installments. Payment was to be effected by opening in favor of the defendants of two confirmed letters of credit with the Midland Bank Ltd., in London, one in respect of each Installment. The letters of credit were duly opened and the first was realised by the defendants on the delivery of the first Installment. The plaintiffs complained that that Installment was defective and sought an injunction to bar the defendants from realizing the second letter of credit. Donovan, J., the Trial Judge refused the application. In appeal Jenkins, Sellers and Pearce L., JJ. Confirmed the decision of the Trial Judge. In the course of his judgment Jenkins, L.J., who spoke for the Court observed thus:
'We have been referred to a number of authorities, and it seems to be plain enough that the opening of a confirmed letter of credit constitutes a bargain between the banker and the vendor of the goods, which imposes upon the banker an absolute obligation to pay, irrespective of any dispute there may be between the parties as to whether the goods are up to contract or not. An elaborate commercial system has been built up on the footing that bankers' confirmed credits are of that character, and, in my judgment, it would be wrong for this Court in the present case to interfere with that established practice.
There is this to be remembered, too. A vendor of goods selling against a confirmed letter of credit is selling under the assurance that nothing will prevent him from receiving the price. That is of no mean advantage when goods manufactured in one country are being sold in another. It is, furthermore, to be observed that vendors are often reselling goods bought from third parties. When they are doing that, and when they are being paid by a confirmed letter of credit, their practice is - and I think it was followed by the defendants in this case--to finance the payments necessary to be made to their suppliers against the letter of credit. That system of financing these operations, as I see it, would break down completely if a dispute as between the vendor and the purchaser was to have the effect of 'freezing' if I may use that expression the sum in respect of which the letter of credit was opened.'
In Urquhart Lindsay and Co. Ltd. v. Eastern Bank Ltd. 1922 1 KB 318 the King's Bench held that the refusal of the defendants bank to take and pay for the particular bills on presentation of the proper documents constituted a repudiation of the contract as a whole and that the plaintiffs were entitled to damages arising from such a breach. It may be noted that in that case the price quoted in the invoices was objected to by the buyer and he had notified his objection to the bank. But under the terms of the letter of credit the bank was required to make payments on the basis of the invoices tendered by the seller. The court held that if the buyers had an enforceable claim that adjustment must be made by way of refund by the seller and not by the way of retention by the buyer.
11. Similar opinions have been expressed by the American Courts. The leading American case on the subject is Dulien Steel Products Inc., of Washington v. Bankers Trust Co., Federal Reporter 2nd Series, 298 p.836. The facts of that case are as follows:
The plaintiffs, Dulien Steel Products Inc., of Washington, contracted to sell steel scrap to the European Iron and Steel Company. The transaction was put through M/s. Marco Polo Group Project, Ltd. who were entitled to commission for arranging the transaction. For the payment of the the commission to Marco Polo, plaintiffs procured an irrevocable letter of credit from Seattle First National Bank. As desired by Marco Polo this letter of credit was opened in favor of one Sica. The defendant-bankers confirmed that letter of credit. The credit stipulated for payment against (1) a receipt of Sica for the amount of the credit and (2) a notification of Seattle Bank to the defendants that the plaintiffs had negotiated documents evidencing the shipment of the goods. Sica tendered the stipulated receipt and Seattle Bank informed the defendants that the Dulien had negotiated documentary drafts. Meanwhile after further negotiations between the plaintiffs and the vendees the price of the goods sold was reduced and consequently the commission payable to Marco Polo stood reduced but the defendants were not informed of this fact. Only after notifying the defendants about the negotiation of the drafts drawn under the contract of sale, the Seattle Bank informed the defendants about the changes underlying the transaction and asked them not to pay Sica the full amount of the credit. The defendants were also informed that Sica was merely a nominee of Marco Polo and has no rights of his own to the sum of the credit. Sica, however, claimed payment of the full amount of the credit. The defendants asked further instructions from Seattle Bank but despite Seattle Bank's instructions decided to comply with Sica's request. After informing Seattle Bank of their intention, they paid Sica the full amount of the credit. Plaintiffs thereupon brought an action in the District Court of New York for the recovery of the moneys paid to Sica. The action was dismissed by the trial Court and that decision was affirmed by the Court of Appeals. That decision establishes the well known principle that the letter of credit is independent of and unqualified by the contract of sale or underlying transaction. The autonomy of an irrevocable letter of credit is entitled to protection. As a rule Courts refrain from interfering with that autonomy.
12. Thereafter from amidst the plethora of precedents we may move on to the pronouncement in United Commercial Bank vs. Bank of India and Others, : [1981]3SCR300 where the Apex Court has reiterated that Courts ought not to grant injunctions restraining the performance of the contractual obligations flowing out of a Letter of Credit or a Bank Guarantee between one Bank and another. It observed that -
The opening of a confirmed letter of credit constitutes a bargain between the banker and the vendor of the goods which imposes on the banker an absolute obligation to pay. A banker issuing or confirming an irrevocable credit usually undertakes to honour drafts negotiated, or to reimburse in respect of drafts paid, by the paying or negotiating intermediate banker and the credit is thus in the hands of the beneficiary binding against the banker. A letter of credit constitute the sole contract with the banker and a bank issuing or confirming a letter of credit is not concerned with the underlying contract between the buyer an seller. Duties of a bank under a letter of credit are created by the document itself, but in any case it has the power and is subject to the limitations which are given or imposed by it, in the absence of the appropriate provisions in the letter of credit. The banker owes a duty to the buyer to ensure that the documents tendered by the sellers under a credit are complied with those for which the credit calls and which are embodied in terms of paying or negotiating bank The description of the goods in the relative bill of exchange must be the same description in the letter of credit, that it, the goods themselves must in each be described in identical terms, even though the goods differently described in the two documents are, in fact, the same. It is the description of the goods that is all important and if the description is not identical it is the paying bank's duty to refuse payment.
13. I find the following paragraphs of the Judgment in U.P. Coop. Federation v. Singh Consultants & Engineers (P) Ltd. : [1988]1SCR1124 to be extremely instructive:
45. The letter of credit has been developed over hundreds of years of international trade. It was most commonly used in conjunction with the sale of goods between geographically distant parties. It was intended to facilitate the transfer of goods between distant and unfamiliar buyer and seller. It was found difficult for the seller to rely upon the credit of an unknown customer. It was also found difficult for a buyer to pay for goods prior to their delivery. The Bank's letter of credit came into existence to bridge this gap. In such transactions, the seller (beneficiary) received payment from issuing bank when he presents a demand as per terms of the documents. The bank must pay if the documents are in order and the terms of credit are satisfied. The bank, however, was not allowed to determine whether the seller had actually shipped the goods or whether the goods conformed to the requirements of the contract. Any dispute between the buyer and the seller must be settled between themselves. The courts, however, carved out an exception to this rule of absolute independence. The courts held that if there has been fraud in the transaction the bank could dishonour beneficiary's demand for payment. The courts have generally permitted dishonour only on the fraud of the beneficiary, not the fraud of somebody else.
46 . It was perhaps for the first time the said exception of fraud to the rule of absolute independence of the letter of credit has been applied by Shientag, J. in the American case of Sztejn v. J.Henry Schroder Banking Corporation 31 NYS 2d 631. Mr.Sztejn wanted to buy some bristles from India and so he entered into a deal with an Indian seller to sell him a quantity. The issuing Bank issued a letter of credit to the Indian seller that provided that, upon receipt of appropriate documents, the bank would pay for the shipment. Somehow, Mr.Sztejn discovered that the shipment made was not crates of bristles, but creates of worthless material and rubbish. He went to his bank which probably informed him that the letter of credit was an independent undertaking of the bank and it must pay.
53 . Whether it is a traditional letter of credit or a new device like performance bond or performance guarantee, the obligation of banks appears to be the same. If documentary credits are irrevocable and independent, the banks must pay when demand is made. Since the bank pledges its own credit involving its reputation, it has no defense except in the case of fraud. The bank's obligations of course should not be extended to protect the unscrupulous seller, that is, the seller who is responsible for the fraud. But, the banker must be sure of his ground before declining to pay. The nature of the fraud that the courts talk about is fraud of an egregious nature as to vitiate the entire underlying transaction. It is fraud of the beneficiary, not the fraud of somebody else. If the bank detects with a minimal investigation the fraudulent action of the seller, the payment could be refused. The bank cannot be compelled to honour the credit in such cases. But it may be very difficult for the bank to take a decision on the alleged fraudulent action. In such cases, it would be proper for the bank to ask the buyer to approach the court for an injunction.
14. In Hindustan Steel Works Construction Ltd. v. Tarapore & Co. : AIR1996SC2268 , the following observations are made:
We are, thereforee, of the opinion that the correct position of law is that commitment of banks must be honoured free from interference by the courts and it is only in exceptional cases, that is to say, in case of fraud or in a case where irretrievable injustice would be done if bank guarantee is allowed to be encashed, the court should interfere. In this case fraud has not been pleaded and the relief for injunction was sought by the contractor/Respondent 1 on the ground that special equities or the special circumstances of the case required it. The special circumstances and/or special equities which have been pleaded in this case are that there is a serious dispute on the question as to who has committed breach of the contract, that the contractor has a counter-claim against the appellant, that the disputes between the parties have been referred to the arbitrators and that no amount can be said to be due and payable by the contractor to the appellant till the arbitrators declare their award. In our opinion, these factors are not sufficient to make this case an exceptional case justifying interference by restraining the appellant from enforcing the bank guarantees. The High Court was, thereforee, not right in restraining the appellant from enforcing the bank guarantees.
15. In U.P. State Sugar Corporation v. M/s. Sumac International Limited : AIR1997SC1644 the circumstances in which the invocation of a Bank Guarantee or payments made pursuant thereto could be interdicted, had been Restated. While spelling out the essentials of fraud and/or irretrievable injustice in this context, the Apex Court had returned the following observations:-
12 The law relating to invocation of such bank guarantees is by now well settled. When in the course of commercial dealings an unconditional bank guarantee is given or accepted, the beneficiary is entitled to realize such a bank guarantee in terms thereof irrespective of any pending disputes. The bank giving such a guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer. The very purpose of giving such a bank guarantee would otherwise be defeated. The courts should, thereforee, be slow in granting an injunction to restrain the realization of such a bank guarantee. The courts have carved out only two exceptions. A fraud in connection with such a bank guarantee would vitiate the very foundation of such a bank guarantee. Hence if there is such a fraud of which the beneficiary seeks to take advantage, he can be restrained from doing so. The second exception relates to cases where allowing the encashment of an unconditional bank guarantee would result in irretrievable harm or injustice to one of the parties concerned. Since in most cases payment of money under such a bank guarantee would adversely affect the bank and its customer at whose instance the guarantee is given, the harm or injustice contemplated under this head must be of such an exceptional and irretrievable nature as would override the terms of the guarantee and the adverse effect of such an injunction on commercial dealings in the country. The two grounds are not necessarily connected, though both may coexist in some cases.
14. On the question of irretrievable injury which is the second exception to the rule against granting of injunctions when unconditional bank guarantees are sought to be realised the court said in the above case that the irretrievable injury must be of the kind which was the subject-matter of the decision in the Itek Corpn. case, 566 Fed Supp 1210. In that case an exporter in USA entered into an agreement with the Imperial Government of Iran and sought an order terminating its liability on stand by letters of credit issued by an American Bank in favor of an Iranian Bank as part of the contract. The relief was sought on account of the situation created after the Iranian revolution when the American Government cancelled the export licenses in relation to Iran and the Iranian Government had forcibly taken 52 American citizens as hostages. The US Government had blocked all Iranian assets under the jurisdiction of United States and had cancelled the export contract. The Court upheld the contention of the exporter that any claim for damages against the purchaser if decreed by the American Courts would not be executable in Iran under these circumstances and realisation of the bank guarantee/letters of credit would cause irreparable harm to the plaintiff. This contention was upheld. To avail of this exception, thereforee, exceptional circumstances which make it impossible for the guarantor to reimburse himself if he ultimately succeeds, will have to be decisively established. Clearly, a mere apprehension that the other party will not be able to pay, is not enough. In Itek case (supra) there was a certainty on this issue. Secondly, there was good reason, in that case for the Court to be prima facie satisfied that the guarantors i.e. the bank and its customer would be found entitled to receive the amount paid under the guarantee.
15. Our attention was invited to a number of decisions on this issue -- among them, to Larsen & Toubro Ltd. v. Maharashtra SEB : AIR1996SC334 and Hindustan Steel Workers Construction Ltd. v. G.S. Atwal & Co. (Engineers) (P) Ltd. : AIR1996SC131 as also to National Thermal Power Corpn. Ltd. v. Flowmore (P) Ltd. : AIR1996SC445 . The latest decision is in the case of State of Maharashtra v. National Construction Co. : [1996]1SCR293 where this Court has summed up the position by stating: 'The rule is well established that a bank issuing a guarantee is not concerned with the underlying contract between the parties to the contract. The duty of the bank under a performance guarantee is created by the document itself. Once the documents are in order the bank giving the guarantee must honour the same and make payment ordinarily unless there is an allegation of fraud or the like. The courts will not interfere directly or indirectly to withhold payment, otherwise trust in commerce internal and international would be irreparably damaged. But that does not mean that the parties to the underlying contract cannot settle the disputes with respect to allegations of breach by resorting to litigation or arbitration as stipulated in the contract. The remedy arising ex contractu is not barred and the cause of action for the same is independent of enforcement of the guarantee.'
16. Quite recently, in the Federal Bank Limited v. V.M. Jog Engineering Limited and others (2001) 1 SCC 663 the Apex Court had in circumstances strikingly similar to the present recorded the following enunciation of law --
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 Articles 3 and 4 of 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 bank guarantee or the letter of credit, namely, if the seller produces the documents enumerated in the bank guarantee or the 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 the 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 take reasonable care. 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.
The Federal Bank was the negotiating Bank on behalf of Bank of Maharashtra which was the author of the Letter of Credit. The relation between the two Banks was held to be that of principal and agent. The Federal Bank had sent copies of the documents received by it from the seller to the issuing banker, namely, Bank of Maharashtra. The latter spent an inordinate time in responding and in the meanwhile, strictly in conformity with the Letter of Credit, Federal Bank paid the Seller. It was subsequently discovered that the Seller had allegedly committed a forgery on the documents. Nevertheless, since there was no infraction of the terms of the Letter of Credit, the Apex Court held that the Federal Bank, namely, the paying or negotiating (intermediary) Bank would be entitled to reimbursements from the Bank of Maharashtra. The Apex Court affirmed the Judgment of the Division Bench of the Bombay High Court authored by Hon'ble M.B. Shah, J., as his Lordship then was, in Virgo Steels v. Bank of Rajasthan Ltd. & others AIR 1998 Bom 82. In that case UCO Bank had issued a Letter of Credit at its request, on the foundation of which the Bank of Rajasthan Limited had made disbursements. The Bank of Rajasthan had sought confirmation from the UCO Bank, and had received it. The Division Bench found it irrelevant that some officers of the UCO Bank had committed fraud. It affirmed the Order of the Single Judge refusing to grant unconditional Leave to Defend to UCO Bank. The Division Bench had also referred to a Circular of the Reserve Bank of India dated April 1, 1992 in which it recommended the honouring of Letters of Credit even where the transaction involved a conspiracy between the beneficiary and the constituents. The RBI had opined that 'if the bills drawn under LCs are not honoured, it will adversely affect the character of LCs and the relative bills as an accepted means of payment. This could also affect the credibility of the entire payment mechanism through banks and affect the image of the Banks'. The Apex Court has relied on its earlier judgment in United Commercial Bank case (supra) as has been succinctly condensed the law in the first Head Note of the Report, which reads thus:
The opening of a confirmed letter of credit constitutes a bargain between the banker and the vendor of the goods which imposes on the banker an absolute obligation to pay. A banker issuing or confirming an irrevocable credit usually undertakes to honour drafts negotiated, or to reimburse in respect of drafts paid, by the paying or negotiating intermediate banker and the credit is thus in the hands of the beneficiary binding against the banker. A letter of credit constitute the sole contract with the banker and a bank issuing or confirming a letter of credit is not concerned with the underlying contract between the buyer an seller. Duties of a bank under a letter of credit are created by the document itself, but in any case it has the power and is subject to the limitations which are given or imposed by it, in the absence of the appropriate provisions in the letter of credit. The banker owes a duty to the buyer to ensure that the documents tendered by the sellers under a credit are complied with those for which the credit calls and which are embodied in terms of paying or negotiating bank. The description of the goods in the relative bill of exchange must be the same description in the letter of credit, that it, the goods themselves must in each be described in identical terms, even though the goods differently described in the two documents are, in fact, the same. It is the description of the goods that is all important and if the description is not identical it is the paying bank's duty to refuse payment.
17. On first principles, the Hon'ble Supreme Court has made the following observations in respect of letters of credit in Hira Lall and Sons and Others v. Lakshmi Commercial Bank : [2002]SUPP1SCR444 :- 'This is an application based on a letter of credit. The settled legal position is that a letter of credit constitutes sole contract with the banker and its authorising the bank issuing letter of credit has no concern with any question that may arise between the seller and the purchaser of goods in respect of the purchase price; that there should, however, be strict compliance both by the customer at whose instance letter of credit was issued and by the banker, with his instructions; that in a claim on letter of credit, defense of fraud or apprehension of irretrievable injustice or non-compliance with instructions could also be raised. All such defenses could be urged or agitated before the Tribunal by the petitioner and on a decision by it, an appeal also could be filed'.
18. An analysis of these pronouncements discloses that the Hon'ble Supreme Court has consistently, unvaryingly and relentlessly held that Courts should interfere in the encashment of Bank Guarantees and Letters of Credit with great circumspection. Although this approach may appear to be harsh on a defrauded party, it should not be forgotten that such a party has legal recourse to proceed against the defrauder in a civil action for the recovery of money. In most instances the fraud has been committed largely because of reckless trust reposed by one of the parties upon the other party to the transaction, in which folly foolhardiness or carelessness the Bank has no role to play. The Bank is a third party and is merely a facilitator of commercial transactions. The Bank ought not to be made to suffer for the recklessness of its constituents or be held liable for the legal inequities of a third party, else this significant and now irreplaceable method and medium of international trade be rendered unworkable and non-functional.
RELEVANT AND RELIED UPON PROVISIONS OF THE UCP
19. The dispute in hand must be decided by applying the law laid down by the Apex Court and on the application of the Uniform Customs And Practice For Documentary Credits (UCP 500 for brevity). It would be convenient for facility of reference to reproduce the relevant provisions thereof which have been relied upon by the learned counsel for the parties:
Article 2
Meaning of Credit
For the purposes of these Articles, the expressions 'Documentary Credit(s)' and 'Standby Letter(s) of Credit' (hereinafter referred to as 'Credit(s)'), mean any arrangement, however named or described, whereby a bank (the 'Issuing Bank') acting at the request and on the instructions of a customer (the 'Applicant') or on its own behalf,
i. is to make a payment to or to the order of a third party (the 'Beneficiary'), or is to accept and pay bills of exchange (Draft(s) drawn by the Beneficiary,
or
ii. authorises another bank to effect such payment, or to accept and pay such bills of exchange (Draft(s)),
or
iii. authorises another bank to negotiate against stipulated document(s) provided that the terms and conditions of the Credit are complied with.
For the purpose of these Articles, branches of a bank in different countries are considered another bank.
On a reading of Article 7 it will become evident that there is yet another term of art which has evolved, namely, that of the 'Advising Bank', which institution is expected to ensure that it takes reasonable care to check the apparent authenticity of the Credit which it advised. The use of the word 'Apparent' clarifies that the role of the Bank does not entail the carrying out of an investigatory enquiry; this should and will always remain the duty of the parties to the commercial transaction. The phrase 'collecting bank' has been defined in Black's Law Dictionary, Fifth Edition, as 'any Bank handling the item for collection except the payor bank'; and 'payor' means the 'person by whom a bill or note has been or should have been paid'.
Article 9
Liability of Issuing and Confirming Banks
a. An irrevocable Credit constitutes a definite undertaking of the Issuing Bank, provided that the stipulated documents are presented to the Nominated Bank or to the Issuing Bank and that the terms and conditions of the Credit are complied with:
i. if the Credit provides for sight payment - to pay at sight;
ii. if the Credit provides for deferred payment - to pay on the maturity date(s) determinable in accordance with the stipulations of the Credit;
iii. if the Credit provides for acceptance:
a. by the Issuing Bank - to accept Draft(s) drawn by the Beneficiary on the Issuing Bank and pay them at maturity, or
b. by another drawee bank - to accept and pay at maturity Draft(s) drawn by the Beneficiary on the Issuing Bank in the event the drawee bank stipulated in the Credit does not accept Draft(s) drawn on it, or to pay Draft(s) accepted but not paid by such drawee bank at maturity;
iv. if the Credit provides for negotiation - to pay without recourse to drawers and/or bona fide holders, Draft(s) drawn by the Beneficiary and/or document(s) presented under the Credit. A Credit should not be issued available by Draft(s) on the Applicant. If the Credit nevertheless calls for Draft(s) on the Applicant, banks will consider such Draft(s) as an additional document(s).
b A confirmation of an irrevocable Credit by another bank (the 'Confirming Bank') upon the authorisation or request of the Issuing Bank, constitutes a definite undertaking of the Confirming Bank, in addition to that of the Issuing Bank, provided that the stipulated documents are presented to the Confirming Bank or to any other Nominated Bank and that the terms and conditions of the Credit are complied with:
i. if the Credit provides for sight payment - to pay at sight;
ii. if the Credit provides for deferred payment - to pay on the maturity date(s) determinable in accordance with the stipulations of the Credit.
iii if the Credit provides for acceptance:
a. by the Confirming Bank - to accept Draft(s) drawn by the Beneficiary on the Confirming Bank and pay them at maturity, or
b. by another drawee bank - to accept and pay at maturity Draft(s) drawn by the Beneficiary on the Confirming Bank, in the event the drawee bank stipulated in the Credit does not accept Draft(s) drawn on it, or to pay Draft(s) accepted but not paid by such drawee bank at maturity;
iv. if the Credit provides for negotiation - to negotiate without recourse to drawers and/or bonafide holders, Draft(s) drawn by the Beneficiary and/or document(s) presented under the Credit. A Credit should not be issued available by Draft(s) on the Applicant. If the Credit nevertheless calls for Draft(s) on the Applicant, banks will consider such Draft(s) as an additional document(s).
c. i. If another bank is authorised or requested by the Issuing Bank to add its confirmation to a Credit but is not prepared to do so, it must so inform the Issuing Bank without delay.
ii. Unless the Issuing Bank specifies otherwise in its authorisation or request to add confirmation, the Advising Bank may advise the Credit to the Beneficiary without adding its confirmation.
d. i. Except as otherwise provided by Article 48, an irrevocable Credit can neither be amended nor canceled without the agreement of the Issuing Bank, the Confirming Bank, if any, and the Beneficiary.
ii. The Issuing Bank shall be irrevocably bound by an amendment(s) issued by it from the time of the issuance of such amendment(s). A Confirming Bank may extend its confirmation to an amendment and shall be irrevocably bound as of the time of its advice of the amendment. A Confirming Bank may, however, choose to advise an amendment to the Beneficiary without extending its confirmation and if so, must inform the Issuing Bank and the Beneficiary without delay.
iii. The terms of the original Credit (or a Credit incorporating previously accepted amendment(s) will remain in force for the Beneficiary until the Beneficiary communicates his acceptance of the amendment to the bank that advised such amendment. The Beneficiary should give notification of acceptance or rejection of amendment(s). If the Beneficiary fails to give such notification, the tender of documents to the Nominated Bank or Issuing Bank, that conform to the Credit and to not yet accepted amendment(s), will be deemed to be notification of acceptance by the Beneficiary of such amendment(s) and as of that moment the Credit will be amended.
iv. Partial acceptance of amendments contained in one and the same advice of amendment is not allowed and consequently will not be given any effect.
Article 10
Types of Credit
a. All Credits must clearly indicate whether they are available by sight payment, by deferred payment, by acceptance or by negotiation.
b. i. Unless the Credit stipulates that it is available only with the Issuing Bank, all Credits must nominate the bank (the 'Nominated Bank') which is authorised to pay, to incur a deferred payment undertaking, to accept Draft(s) or to negotiate. In a freely negotiable Credit, any bank is a Nominated Bank.
Presentation of documents must be made to the Issuing Bank or the Confirming Bank, if any, or any other Nominated Bank.
ii. Negotiation means the giving of value for Draft(s) and/or document(s) by the bank authorised to negotiate. Mere examination of the documents without giving of value does not constitute a negotiation.
c. Unless the Nominated Bank is the Confirming Bank, nomination by the Issuing Bank does not constitute any undertaking by the Nominated Bank to pay, to incur a deferred payment undertaking, to accept Draft(s), or to negotiate. Except where expressly agreed to by the Nominated Bank and so communicated to the Beneficiary, the Nominated Bank's receipt of and/or examination and/or forwarding of the documents does not make that bank liable to pay, to incur a deferred payment undertaking, to accept Draft(s), or to negotiate.
d. By nominating another bank, or by allowing for negotiation by any bank, or by authorising or requesting another bank to add its confirmation, the Issuing Bank authorises such bank to pay, accept Draft(s) or negotiate as the case may be, against documents which appear on their face to be in compliance with the terms and conditions of the Credit and undertakes to reimburse such bank in accordance with the provisions of these Articles.
Article 14
Discrepant Documents and Notice
a. When the Issuing Bank authorises another bank to pay, incur a deferred payment undertaking, accept Draft(s), or negotiate against documents which appear on their face to be in compliance with the terms and conditions of the Credit, the Issuing Bank and the Confirming Bank, if any, are bound:
i. to reimburse the Nominated Bank which has paid, incurred a deferred payment undertaking, a accepted Draft(s), or negotiated,
ii. to take up the documents.
b. Upon receipt of the documents the Issuing Bank and/or Confirming Bank, if any, or a Nominated Bank acting on their behalf, must determine on the basis of the documents alone whether or not they appear on their face to be in compliance with the terms and conditions of the Credit. If the documents appear on their face not to be in compliance with the terms and conditions of the Credit, such banks may refuse to take up the documents.
c. If the Issuing Bank determines that the documents appear on their face not to be in compliance with the terms and conditions of the Credit, it may in its sole judgment approach the Applicant for a waiver of the discrepancy(ies). This does not, however, extend the period mentioned in sub-Article 13(b).
d. i. If the Issue Bank and/or Confirming Bank, if any, or a Nominated Bank acting on their behalf, decides to refuse the documents, it must give notice to that effect by telecommunication or, if that is not possible, by other expeditious means, without delay but no later than the close of the seventh banking day following the day of receipt of the documents. Such notice shall be given to the bank from which it received the documents, or to the Beneficiary, if it received the documents directly from him.
ii. Such notice must state all discrepancies in respect of which the bank refuses the documents and must also state whether it is holding the documents at the disposal of, or is returning them to, the presenter.
iii. The issuing Bank and/or Confirming Bank, if any, shall then be entitled to claim from the remitting bank refund, with interest, of any reimbursement which has been made to that bank.
e. If the Issuing Bank and/or Confirming Bank, if any, fails to act in accordance with the provisions of this Article and/or fails to hold the documents at the disposal of, or return them to, the presenter, the Issuing bank and/or Confirming Bank, if any, shall be precluded from claiming that the documents are not in compliance with the terms and conditions of the Credit.
f. If the remitting bank draws the attention of the Issuing Bank and/or Confirming Bank, if any, to any discrepancy(ies) in the document(s) or advises such banks that it has paid, incurred a deferred payment undertaking, accepted Draft(s) or negotiated under reserve or against an indemnity in respect of such discrepancy(ies), the Issuing Bank and/or Confirming Bank, if any, shall not be thereby relieved from any of their obligations under any provision of this Article. Such reserve or indemnity concerns only the relations between the remitting bank and the party towards whom the reserve was made, or from whom, or on whose behalf, the indemnity was obtained.
Article 15
Disclaimer on Effectiveness of Documents
Banks assume no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any document(s), or for the general and/or particular conditions stipulated in the document(s) or superimposed thereon; nor do they assume any liability or responsibility for the description, quantity, weight, quality, condition, packing, delivery, value or existence of the goods represented by any document(s), or for the good faith or acts and/or omissions, solvency, performance or standing of the consignors, the carriers, the forwarders, the consignees or the insurers of the goods, or any other person whomsoever.
Article 23
Marine/Ocean Bill of Lading
a. If a Credit calls for a bill of lading covering a port-to-port shipment, banks will, unless otherwise stipulated in the Credit, accept a document, however, named, which:
i. appears on its face to indicate the name of the carrier and to have been signed or otherwise authenticated by:
* the carrier or a named agent for or on behalf of the carrier, or
* the master or a named agent for or on behalf of the master.
Any signature or authentication of the carrier or master must be identified as carrier or master, as the case may be. An agent signing or authenticating for the carrier or master must also indicate the name and the capacity of the party, i.e. carrier or master, on whose behalf that agent is acting.
And
ii indicates that the goods have been loaded on board, or shipped on a named vessel.
Loading on board or shipment on a named vessel may be indicated by pre-printed wording on the bill of lading that the goods have been loaded on board a named vessel or shipped on a named vessel, in which case the date of issuance of the bill of lading will be deemed to be the date of loading on board and the date of shipment.
In all other cases loading on board a named vessel must be evidenced by a notation on the bill of lading which gives the date on which the goods have been loaded on board, in which case the date of the on board notation will be deemed to be the date of shipment.
If the bill of lading contains the indication 'intended vessel', or similar qualification in relation to the vessel, loading on board a named vessel must be evidenced by an on board notation on the bill of lading which, in addition to the date on which the goods have been loaded on board, also includes the name of the vessel on which the goods have been loaded, even if they have been loaded on the vessel named as the 'intended vessel'.
If the bill of lading indicates a place of receipt or taking in charge different from the port of loading, the on board notation must also include the port of loading stipulated in the credit and the name of the vessel on which the goods have been loaded, even if they have been loaded on the vessel named in the bill of lading. This provision also applies whenever loading on board the vessel is indicated by preprinted wording on the bill of lading
iii. Indicates the port of loading and the port of discharge stipulated in the Credit, notwithstanding that it:
a. indicates a place of taking in charge different from the port of loading, and/or a place of final destination different from the port of discharge,
and/or
b. contains the indication 'intended' or similar qualification in relation to the port of loading and/or port of discharge, as long as the document also states the ports of loading and/or discharge stipulated in the Credit.
And
iv. consists of a sole original bill of lading or, if issued in more than one original, the full set as so issued,
and
v. appears to contain all of the terms and conditions of carriage, or some of such terms and conditions by reference to a source or document other than the bill of lading (short form/blank back bill of lading); banks will not examine the contents of such terms and conditions,
and
vi. contains no indication that it is subject to a charter party and/or no indication that the carrying vessel is propelled by sail only,
and
vii. in all other respects meets the stipulation of the Credit.
b. For the purpose of this Article, transhipment means unloading and reloading from one vessel to another vessel during the course of ocean carriage from the port of loading to the port of discharge stipulated in the Credit.
c. Unless transhipment is prohibited by the terms of the Credit, banks will accept a bill of lading which indicates that the goods will be transhipped, provided that the entire ocean carriage is covered by one and the same bill of lading.
d. Even if the credit prohibits transhipment, banks will accept a bill of lading which:
i. indicates that transhipment will take place as long as the relevant cargo is shipped in Container(s), Trailer(s) and/or 'LASH' barge(s) as evidenced by the bill of lading, provided that the entire ocean carriage is covered by one and the same bill of lading.
and/or
ii. incorporates clauses stating that the carrier reserves the right to tranship.
Article 48
Transferable Credit
a. A transferable Credit is a Credit under which the Beneficiary (First Beneficiary) may request the bank authorised to pay, incur a deferred payment undertaking, accept or negotiate (the 'Transferring Bank') , or in the case of a freely negotiable Credit, the bank specifically authorised in the Credit as a Transferring Bank, to make the Credit available in whole or in part to one or more other Beneficiary (ies) (Second Beneficiary (ies)).
b. A Credit can be transferred only if it is expressly designated as 'transferable' by the Issuing Bank. Terms such as 'divisible', 'fractionable', 'assignable', and 'transmissible' do not render the Credit transferable. If such terms are used they shall be disregarded.
c. The Transferring Bank shall be under no obligation to effect such transfer except to the extent and in the manner expressly consented to by such bank.
d. At the time of making a request for transfer and prior to transfer of the Credit, the First Beneficiary must irrevocably instruct the Transferring Bank whether or not he retains the right to refuse to allow the Transferring Bank to advice amendments to the Second Beneficiary (ies). If the Transferring Bank consent to the transfer under these conditions, it must, at the time of transfer, advise the Second Beneficiary (ies) of the First Beneficiary's instructions regarding amendments.
e. If a Credit is transferred to more than one Second Beneficiary (ies), refusal of an amendment by one or more Second Beneficiary (ies) does not invalidate the acceptance(s) by the other Second Beneficiary (ies) with respect to whom the Credit will be amended accordingly. With respect to the Second Beneficiary (ies) who rejected the amendment, the Credit will remain unamended.
f. Transferring Bank charges in respect of transfers including commissions, fees, costs or expenses are payable by the First Beneficiary, unless otherwise agreed. If the Transferring Bank agrees to transfer the Credit it shall be under no obligation to effect the transfer until such charges are paid.
g. Unless otherwise stated in the Credit, a transferable Credit can be transferred once only. Consequently, the Credit cannot be transferred at the request of the Second Beneficiary to any subsequent Third Beneficiary. For the purpose of this Article, a retransfer to the First Beneficiary does not constitute a prohibited transfer.
Fractions of a transferable Credit (not exceeding in the aggregate the amount of the Credit) can be transferred separately, provided partial shipments/drawings are not prohibited, and the aggregate of such transfers will be considered as constituting only one transfer of the Credit.
h. The Credit can be transferred only on the terms and conditions specified in the original Credit, with the exception of:
* the amount of the Credit,
* any unit price stated therein,
* the expiry date,
* the last date for presentation of documents in accordance with Article 43
* the period for shipment,
any or all of which may be reduced or curtailed.
The percentage for which insurance cover must be effected may be increased in such a way as to provide the amount of cover stipulated in the original Credit, or these Articles.
In addition, the name of the First Beneficiary can be substituted for that of the Applicant, but if the name of the Applicant is specifically required by the original Credit to appear in any document (s) other than the invoice, such requirement must be fulfillled.
i. The First Beneficiary has the right to substitute his own invoice(s) (and Draft(s) for those of the Second Beneficiary(ies), for amounts not in excess of the original amount stipulated in the Credit and for the original unit prices if stipulated in the Credit, and upon such substitution of invoice(s) (and Draft(s) the First Beneficiary can draw under the Credit for the difference, if any, between his invoice(s) and the Second Beneficiary's(ies') invoice(s).
When a Credit has been transferred and the First Beneficiary is to supply his own invoice(s) (and Draft(s) in exchange for the Second Beneficiary's(ies) invoice(s) (and Draft(s) but fails to do so on first demand, the Transferring Bank has the right to deliver to the Issuing Bank the documents received under the transferred Credit, including the Second Beneficiary's(ies) invoice(s) (and Draft(s) without further responsibility to the First Beneficiary.
j. The First Beneficiary may request that payment or negotiation be effected to the Second Beneficiary(ies) at the place to which the Credit has been transferred up to and including the expiry date of the Credit, unless the original Credit expressly states that it may not be made available for payment or negotiation at a place other than that stipulated in the Credit. This is without prejudice to the First Beneficiary's right to substitute subsequently his own invoice(s) (and Draft(s)) for those of the Second Beneficiary(ies) and to claim any difference due to him.
20. It is in the factual matrix narrated above, in the context of the sundry Articles of the UCP 500 and in the conspectus of the law enunciated by the Hon'ble Supreme Court that the Suit has to be decided. It has been contended by Mr. Jayant Bhushan that irretrievable injury will be caused to the Plaintiff if the injunction is not confirmed since the effect would be that the money would stand transferred by ISSUING BANK to NEGOTIATING BANK which is located in the America, after debiting the account of the Plaintiff. The consequence of that event would be that JINDAL would not be in a position to make recovery of the money debited to its account. It has already been seen that this did not find favor with the Hon'ble Supreme Court in the Tarapore's case (supra) where it had been observed as follows:-
15. The main grievance of the Indian Firm is that if the Russian Firm is allowed to take away the money secured to it by the letter of credit, it cannot effectively enforce its claim arising from the breach of the contract it complains of. It was urged on its behalf that the Russian Firm has no assets in this country and thereforee any decree that it may be able to obtain cannot be executed. thereforee, it was contended that the trial court was justified in issuing the impugned orders. The allegation that Russian Firm has no assets in this country was not made in the pleadings. That apart in the circumstances of this case that allegation has no relevance. An irrevocable letter of credit has a definite implication. It is a mechanism of great importance in international trade. Any interference with that mechanism is bound to have serious repercussion on the international trade of this country. Except under very exceptional circumstances, the Courts should not interfere with that mechanism.
Mr. Bhushan has made an effort to dilute the observations by distinguishing the facts of the two cases by submitting that the Court was not convinced that the Russian firm did not possess any assets in India, but this argument does not convince me to depart from the general view that the Court should not interfere in the encashment of Letter of Credit or Bank Guarantee especially where, as in the case at hand, moneys have been paid out and fraud has not been laid at the doorstep of the Bank concerned.
21. So far as the question of fraud of an egregious nature is concerned it is not the case that NEGOTIATING BANK has committed or been privy to any fraudulent act. Admittedly, NEGOTIATING BANK has already disbursed the amounts covered by the Letter of Credit and has only been able to recover the aforesaid sum of US$ 82,709.79. The pleadings of JINDAL have already been adverted to and reproduced above which clearly charge SURYA IMPEX with fraud. One of the treatise on the subject, namely The Law of Bankers' Commercial Credits, H.C. Gutteridge and Maurice Megrah, Seventh Edition makes relevant reading. The nomenclature is somewhat different, 'intermediary bank' being broadly equivalent to 'Negotiating Bank' as used in this judgment. The learned Authors state that - 'Where a credit is issued in respect of a foreign trade transaction, a bank in the seller's country is usually introduced into the credit contract, an intermediary bank, which usually accepts the instructions of the issuing bank, looking to the latter for indemnity in respect of its so acting. It may be called upon merely to advise the credit to the beneficiary or to pay, accept or negotiate the beneficiary's draft and documents; or, again, to confirm the credit thereby making itself liable to the beneficiary on the same terms as does the issuing bank. The intermediary may be chosen by the buyer or, more often by the issuing bank. If the former, the buyer will be liable for all that the intermediary does, or fails to do, which is not in accord with the buyer's requirements as laid down in the credit. In the latter case, the buyer-applicant normally relieves the bank from responsibility. .... The relationship between issuing and intermediary bank depends upon what the latter is called upon by the issuing bank to do. As between the issuing bank and the intermediary bank the relationship is, unless otherwise agreed, that of principal and agent, so that when the intermediary bank has fully complied with its mandate it is entitled to reimbursement of any moneys it has properly paid. It is further indemnified against any loss it may suffer by reason of its acting on the mandate; where the credit calls for a 'time' bill on it and it accepts, it is entitled to be reimbursed when it pays (and it cannot after acceptance decline to pay) whether or not there is any dispute between the buyer and the seller, providing that the documents tendered to it against acceptance are in conformity with the relative conditions of the credit. In the case of a revocable credit this right seems to extend to all payments made by the intermediary bank before it receives notice of the modification or cancellation of the credit'. This treatise also envisages the situation where the documents tendered appear on their face to be in order, as is the case before me. The discrepant nature of the Bill of Lading was discovered later on, and very curiously on the initiative of the Seller before the assignment of the contract, viz. JINDAL. It is even more curious and inexplicable that JINDAL had whilst confirming acceptance of discrepancy in document (see its letter dated 10-11-99) caused investigations to be made after the NEGOTIATING BANK had released payments to the assignee/third party. Even a subsequent holder of a usance/time bill does not caste any obligation on it to inquire as to whether the terms of the engagement/credit have been fulfillled. In this genre of credits, it is not their negotiation which is deferred but only the payment mentioned therein (180 days in the present case). I find no unusual haste in making payment within one day, as has been vehemently contended by Mr. Bhushan (Although contrary to the tenor of the Plaint). Indeed, the Letter of Credit could have required immediate payment/settlement and merely because it enabled credit to JINDAL would not place it in a more advantageous position. I am also of the view that Mr. Bhushan has unduly relied only on the first sentence of this paragraph which should be read in its entirety:
If the credit is available by 'time' draft, the negotiating bank may have recourse on the draft if this is ultimately unpaid. The fact of advising places no responsibility on the bank. And it makes no difference that negotiation may be restricted to that bank. The beneficiary has no right to assume in this case that the advising bank will do more and negotiate, or that it will negotiate without recourse. But the issuing bank undertakes by Article 3 (a) (iii) to purchase or negotiate without recourse to drawer and an advising bank which chooses to negotiate with recourse may prejudice the rights it would normally have against the issuing bank and may be unable to claim indemnity if its recourse fails.
Furthermore, I cannot hold as Mr. Bhushan would have me do, that by reclaiming US$ 82,709.79 the NEGOTIATING BANK has taken recourse on the Drawer of the Bill. It has taken prudent steps to effect the maximum recoveries which it could manage, the benefit of which will be enjoyed and availed of by JINDAL.
22. If the injunction were to be issued the effect would be that the NEGOTIATING BANK would be out of pocket for the value of the Letter of Credit. A study of the UCP shows that this Bank has only to look at the documents mentioned in the Letter of Credit in the context of their apparent tenor, and on their face value, to justify if not mandate the release of payments. It has not been controverter before me by learned counsel for the Plaintiff that the NEGOTIATING BANK committed any contractual or other error in releasing the payment prior to 180 days. Mr. Bhushan had, no doubt, argued with vehemence that the request for payment had been made by SURYA IMPEX on 3.11.2004 and the request had been acceded to immediately. I find no error in the conduct of NEGOTIATING BANK as the fraud, or the failure to effect shipment had been discovered much later. It is indeed convenient and coincidental that in this usance Letter of Credit the fraud in the shipment was discovered after the payment had been released but before the expiry of 180 days. The immediate question that arises is whether any case whatsoever could have been made if the document in question was a sight Letter of Credit. It is certainly arguable that the arrangement could have been entered into between the Plaintiff/JINDAL and SURYA IMPEX whereby the latter would ostensibly transfer the Letter of Credit to a third party which would be untraceable after the receipt of money. I shall, however, presume for the present moment that no such conspiracy was, in fact, hatched. Even in those circumstances, where two innocent parties have been defrauded, I would prefer to make the Plaintiff bear the brunt of it since it was privy to the transaction and it should have taken all necessary steps to ensure that it would not be defrauded. The wisdom of allowing the Letter of Credit to be assigned by SURYA IMPEX is impossible to fathom out. By the time the fraud was discovered the liability of ISSUING BANK to make payment had already been incurred and this liability had only been deferred for a period of 180 days because the Letter of Credit was a usance Letter of Credit.
23. In these circumstances the Plaintiff has failed to disclose the existence of a prima facie case. The Interim Orders are, thereforee, recalled. Since I have proceeded on the assumption that the Plaintiff has not entered into any conspiracy with SURYA IMPEX, nothing remains to be proved in the trial. No purpose would, thereforee, be served in retaining the Suit on the Board of this Court. In any event with the recalling of the temporary injunction the Suit itself would be rendered infructuous. However, while releasing payment in terms of the Letter of Credit to the NEGOTIATING BANK the ISSUING BANK shall first deduct/adjust the sum of US $ 82,709.79.
24. The application is dismissed accordingly.
Suit No.1647/2003
25. No case for the issuance of a permanent injunction exists. The Suit is dismissed, but with no order as to costs.