Holding

When a negotiating bank, having obtained the issuing bank’s certification that the presented documents conform on their face to the terms of the letter of credit and without any allegation of fraud against it, is a holder in due course, the issuing bank is bound to reimburse the negotiating bank and a temporary injunction restraining such reimbursement is invalid.

Summary

The buyer entered into a contract for steel bars and opened a Letter of Credit (LC) with the Issuing Bank. The seller presented documents, including forged delivery challans, to the Negotiating Bank (Federal Bank), which, after obtaining certification from the Issuing Bank that the documents appeared to comply with the LC, paid the seller. The Issuing Bank later refused reimbursement, claiming the documents were not in conformity, and the buyer obtained a temporary injunction restraining the Issuing Bank from paying. The Supreme Court held that once the Issuing Bank certifies the documents as conforming and the Negotiating Bank has no allegation of fraud against it, the Negotiating Bank becomes a holder in due course and the Issuing Bank is bound to reimburse; therefore the injunction was vacated. The appeal was allowed, allowing the Negotiating Bank to claim reimbursement.

Issues considered

Whether a temporary injunction can be granted to restrain an issuing bank from honoring a letter of credit when no fraud is alleged against the negotiating bank.
Whether the issuing bank is bound to reimburse the negotiating bank after having certified the documents as conforming on their face.
Whether the negotiating bank qualifies as a holder in due course under the UCP 1983.
Whether the issuing bank can later refuse payment on the ground of fresh scrutiny of the documents.

Legislation cited

Code of Civil Procedure, 1908s. Order 39 Rule 1, s. Order 39 Rule 2

Subjects

Letter of CreditNegotiating BankIssuing BankTemporary injunctionUCP 1983Holder in due courseFraudOrder 39 CPCDocumentary creditReasonable care

Judgment

A FEDERAL BANK LTD.
v.
V.M. JOG ENGINEERING LTD. AND ORS.

SEPTEMBER 29, 2000

B [M. JAGANNADHA RAO AND U.C. BANERJEE, JJ.]

Code of Civil Procedure, 1908: Order 39 Rules 1 and 2.

Temporary injunction-Grant of-Principles-Letter of Credit (UC)-
C Buyer entered into contract with sellers for supply of reinforced steel bars
and structural steel-Buyer opened UC with "Issuing Bank" which required
certain documents to be produced by seller for payment by "Negotiating
Bank"-After delivery of the goods seller asked "Negotiating Bank" to make
payment against UC and endorse required documents- "Negotiating Bank"
D sent UC and documents to "Issuing Bank"-"Issuing Bank" certified
genuineness ofUC and documents and assured reimbursement to "Negotiating
Bank" on due date-Accordingly, "Negotiating Bank" made payment to
seller after deduction of its commission-Subsequently, "Issuing Bank" found

£
on scrutiny non-submission of certain documents-Buyer also informed
"hsuing Bank" offorgery by some person-Buyer filed suit for injunction-
"Negotiating Bank" imp_leaded, but no specific relief against it claimed-
-
"Jssuing Bank" restrained from releasing payment-Validity-Held: Once
the "Issuing Bank" certifies the genuineness of the UC and documents it is
bound reimburse the "Negotiating Bank"-Jt cannot take the plea that on
fresh scrutiny the documents were not in.conformity with the UC-Temporary
F injunction vacated
I

Temporary injunction-Grant of-Principles-Letter of Credit (UC)-
Buyer opened UC with "Issuing Bank"-Buyer alleged fraud against seller-
No allegation offraud or knowledge offraud against "Negotiating Bank"-
"Negotiating Bank" made payment to seller against UC after confirming
G genuineness of documents from "Issuing Bank"-However, "Issuing Bank"
refused to reimburse "Negotiating Bank" on the ground that documents were
not in conformity with UC-Temporary injunction restraining "Issuing Bank" ~,,
from making payment granted-Validity-Held: Temporary injunction can
be issued only where there is (i) fraud or (ii) irretrievable damage-If there .
is no allegation offraud or knowledge offraud on the part of "Negotiating
fl 542
FEDERAL BANK LTD. v. V.M. JOG ENGINEERING LTD. 543

Bank", it is not permissible for "Issuing Bank" to refuse payment-However, A
"Negotiating Bank" should not be a mere Collecting Bank or agent but
should be holder in due course-Hence, "Issuing Bank" bound to reimburse
"Negotiating Bank"-Temporary injunction vacated

Uniform Customs and Practice of Documentary Credits, 1983 : Articles
JO, 11, 15, 16 and 17. B

Credit Operations-Nature and principles of-Held : All parties deal
in documents and not in goods-If the "Negotiating Bank" is satisfied that
documents which appear on their face are as per Letter of Credit and then
makes the payment, "Issuing Bank" is bound to reimburse "Negotiating C
Bank"-However, "Negotiating Bank" is required to take reasonable care
with which the documents have to be examined.

Words and Phrases:

"Appear on their face" and "reasonable care "-Meaning of-In the D
context ofArts. I I (d) and I 5 of Uniform Customs and Practice ofDocumentary
Credits, 1983.

The respondent-plaintiff (buyer) entered into a contract with the sellers
for purchase of reinforced steel bars and structured steel. The Letter of Credit E
(IJC) opened by the respondent-plaintiff with the "Issuing Bank" required
various documents to be produced by the seller for payment in accordance
with the Uniform Customs and Practice of Documentary Credits, 1983.

The appellant-defendant, the Negotiating Bank, received documents from
the sellers, which included five delivery challans signed by the buyer's officers F
acknowledging receipt of goods. The seller sent a Bill of Exchange for
encashment against the LJC taken out by the buyer. The appellant sent the
BiU of Exchange, with endorsement of the buyer and the LJC 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 G
Negotiating bank then released a certain sum in favour of the sellers after
• deducting its commission. The Issuing Bank found on scrutiny non-
submission of certain documents. The respondent-buyer also informed Issuing
Bank offorgery by some person. Thereafter, the respondent-buyer filed a suit
for permanent injunction against the sellers, the Issuing Bank and the
Negotiating bank. H
544 SUPREME COURT REPORTS [2000) SUPP. 3 S.C.R.

A 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 the plaint or in the interlocutory
application, the plaintiff had not alleged 'fraud' or forgery against the
Negotiating Bank nor even knowledge of the fraud/forgery, which was alleged
B against the sellers in respect of .the delivery challans.

The trial court granted a temporary injunction under Order 39 Rule 1
of the Code of Civil Procedure, 1908 restraining the Issuing Bank from paying
any amount to anybody under the UC, pending suit. The High Court refused
to vacate the temporary injunction. This had resulted in the appellant-
C Negotiating Bank not being able to obtain reimbursement from the Issuing
Bank. Hence this appeal.

Allowing the appeal, the Court

HELD : 1.1. In credit operations, all parties concerned deal in documents,
D and not in goods, services and/or other performances to which the documents
may relate. Article 10 of the Uniform Customs and Practice of Documentary
Credits, ~983, (UCP) refers to the duty of the Bank to honour the commitment
Under Article ll(d) ofUCP, it is sufficient ifthe 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
E Issuing Bank is bound to reimburse the Negotiating Bank. (560-E; 561-C)

1.2. Article 15 of the UCP is concerned with the 'reasonable care' with
which the documents have to be examined. This Articl~ has relevance on the
question of'fraud'. It refers to the safeguards to be taken by the Bank. Once
the Bank takes such reasonable care as above stated, Article 15 states the
F Bank will have to be reimbursed by the party giving such authority. Clause
(b) of Article 15 states that refusal by the Issuing Bank to pay must be "on
the documents alone" as appear on their face to be inconsistent with the terms
and conditions of the credit. All that is, therefore, necessary is to examine
with reasonable care if the documents on their face conformed to the terms
G and conditions of the Letter of Credit (L/C. ). If the Issuing Bank does not
return them within reasonable time, it may be deemed that it has ratified the
genuineness of the documents. Thus, where the Issuing Bank does not
respond within reasonable time it cannot, under the UCP, dispute the
-
documents later. [561-D-HJ

H United Commercial Bank v. Bank of India, [1981) 2 SCC 766; UP Co-
FEDERAL BANK LTD. v. V.M. JOG ENGINEERING LTD. 545
operative Federation Ltd. v. Singh Consultant and Engineers (P) Ltd, (1988) A
1 SCC 174; Royal Bank of Scotland pie. v. Cassa df Ris parimio de/le
Provincia Lombard, (1993) Financial Times 21.1.1992; Gian Singh and Co.
Ltd. v. Banque de L 'Indochine, (1974) 1WLR1234; Basse and Selve v. Bank
... ofAustralia, (1904) 20 TLR 431; Hansson v. Hamel and Horley Ltd, (1922)
2 AC (HL) 36; Bankers Trust Co. v. State Bank ofIndia, (1991) Lloyds Rep.
443; Co-operative Centrale etc. v. Sumitomu Bank Ltd. The Royan, (1987) 1 B
Lloyds Rep. 345; K'Jraganda Ltd v. Midland Bank, (1999) 1 All ER 801 and
Glencore International AG v. Bank of China, (1996) 1 Lloyds Rep. 135, 1997

... Current Law Year Book 328, referred to.

2.1. Courts ought not to grant injunction to restrain encashment of Bank C
guarantees or Letters of Credit. Two exceptions are : (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 of the Code of Civil Procedure, 1908 can be issued. [566-A-B]

2.2. The contract of the Bank guarantee or the Letter of Credit is D
independent of the main contract between the seller and the buyer. 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, ifthe 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 E
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. F
Its obligation under the document has nothing to do with any dispute as to
breach of contract between the seller and the buyer. (566-E-F]

Uniform Customs and Practice of Documentary Credits, (1983) issued
by International Chamber of Commerce, referred to.
G
3.. Ifthe appellant-Federal Bank was merely a Collecting Bank or agent
which had approached the Issuing Bank and ifthe 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 H
546 SUPREME COURT REPORTS [2000] SUPP. 3 S.C.R.

A Collecting Bank were forged or fraudulent. But where, on the other hand,
the Negotiating Bank, i.e. the 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
B restrain the Issuing Bank from reimbursing the Negotiating Bank. (569-G-H]

ITC Ltd v. Debts Record Appellate Tribunal, (1998) 2 SCC 70, relied
on.

R.D. Harbottle (Mercantile) Ltd v. National Westminster Bank Ltd.,
C (1978] QB 146; Edward and Owen Engineering Ltd. v. Barclays Bank
International Ltd., (1978) QB 159; Bolvinter Oil SA v. Chase Manhattan
Bank, (1984) 1 All ER 351; United Trading Corp. SA v. Allied Ards Bank,
(1985) 2 Lloyds Rep. 554; Guarantee Trust Co. ofNew York v. Hannay, (1918)
2 KB 623 (KB), Saloman and Nandszus, (1899) 92 LT 325 and Szetejn v. J.
Heney Schrodar Banking Corp., (1941) 31 NYS 2d. 631, referred to
D
Raymond Jack: "Documentary Credits", (1991) pp. 191-192, referred
to.

4.1. The contract between the Issuing Banker and the paying or
E Negotiating (intermediary) Banker may partake of a dual nature. The
relationship is mainly that of principal and agent 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 them and thus enters into
contractual relations with the Issuing Bank. (569-G-H)
F
Virgo Steels v. Bank ofRajasthan, AIR (1998) Bo!". 82, approved.

Westminster Bank Ltd. v. Banca Nazionale di Credito, (1928) 32 LL Rep.
306; Pagels' Law ofBanking, 9th Edn., (1982) pp. 543-544, referred to.
G A.(]. Davis : 'The Law Relating to Commercial Letters of Credit' 2nd
Edn., (1954) p; 92 and Principles oflnernational Trade Law, 2nd Edn., (1999)
p. 298, referred to.

4.2. The Negotiating Bank took the precaution in getting clearance for
H the document from thP. Issuing bank and the latter gave such clearance. It is,
FEDERAL BANK LTD. v. V.M. JOG ENGINEERING LTD. [M. JAGANNADHA RAO, J.] 547

therefore, not open to the Issuing Bank to contend that on fresh scrutiny, it A
found that the documents were not in conformity with the Letter of Credit or
that the buyer had so informed it. (572-A-B)

.... CIVIL APPELLATE JURISDICTION : Civil Appeal No. 5626 of2000.

From the Judgment and Order dated 8.10.99 of the Bombay High Court B
in A.O. No. 818of1999.

A.B. Divan, V.A. Mohta, Rajeev Dhawan, Makarand D. Adkar, S. Ganesh,
Rajan Narain, Ms. Mohini Narain, Ms. Kavita Dahiya, Ms. Pooja Sriram,
Vishwajit Singh, Rajesh Kumar and Satish Aggarwal for the appearing parties.
c
The Judgment of the Court was delivered by

M. JAGANNADHA RAO, J. Leave granted.

The appellant Federal Bank at Bombay was the 3rd defendant in the suit
D
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. 818of1999. 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 E
defendant, Bank of Maharashtra, Pune (3rd respondent) at the instance of the
.... plaintiff-buyers (lst respondent), Mis. V.M. Jog Engineering Co., Pune. The
sellers are Mis. 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.
F
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
G
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 H
548 SUPREME COURT REPORTS [2000] SUPP. 3 S.C.R.

A 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 Gourt and the High Court, after noting that the
Negotiation Bank had released to the seller the above sum upon due
certification of the seller's documents by the Issuing Bank - have thus
B 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
C 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 th is
contention and grant injunction under Order 39 Rule I 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
D nor t:ven knowledge of the fraud/forgery which is alleged against the sellers
i~ respect of the delivery challans.

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

E 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.
F 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.T. of reinforcement steel-
bars and structural-steel, conforming to IS: 1786. These were needed for the
G buyer's 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 placed upon the sellers by the buyers on 7.2.98 for each
of these projects . ..-...~ time for supply of material was 31.3.98. The buyer
availed of a Letter of Credit dated 19.2.98 from the Issuing Bank to the tune
of Rs. 2 crores with negotiation initially to be restricted to the State Bank of
H India, Wardha. The expiration date was 31.3.98 but was extended upto 30.4.98.
-
FEDERAL BANK LTD. v. V.M. JOG ENGINEERING LTD. [M. JAGANNADHA RAO, J.] 549

The Letter of Credit issued by the Issuing Bank on 19.2.98 listed out A
the various "documents" which had to be produced by the sellers for payment
under the Letter of Credit opened by the buyer with the Issuing Bank: These
were described as follows :

(1) "The Beneficiary drafts drawn on the applicant without recourse
to the drawer and marked under bank of Maharashtra, Tilak Road, B
Pune branch/inland L/C No. 1198 dated 19.2.98 for 100% of the Invoice
value at 90 days Usance from the date of receipt of material at

.. Andheri and Palm Beach, Marg Bridge, Near Nerul, Navi Mumbai sites.

(2) Invoices signed by the beneficiary or his constituted agent in
copies of gross value of the goods certifying goods are as per order/ C
indent and evidencing despatch of the undemoted goods.

(3) Receipt dated not later than 31.3.98 marked freight prepaid.

(4) ........................... .

(5) ........................... . D
(6) Copies of Octroi receipts for the amount claimed in invoice.

(7) Copy of Weigh Slip for empty and Loaded transport Vehicle.

(8) Photocopy of Manufacturer's test certificate.
E
(9) Copy of Delivery Chal/ans-cum-invoices issued by Jaswant Steel
Rolling Mills Pvt. Ltd. duly signed by Project Authorities with an
endorsement as the material received in good condition and indicating
the date of receipt of material at sites."

Thereafter, it is stated in the L/C in clause 10 "Last date of Negotiation F
of documents 20.4.1998 but not later than 20 days from despatches".
(This clause was later deleted on 19.3.98 when the appellant was
nominated as Negotiating Bank in place of the State Bank of India).
The Special Instructions in the L/C for the Negotiating Bank were as
follows: G
Special instructions for the negotiating Bank.
1. Negotiations under this credit are restricted to State Bank of India
Hinganghat, Distt. Wardha (M.S.).
2. Negotiations should be marked separately on the back of the H
550 SUPREME COURT REPORTS [2000] SUPP. 3 S.C.R.

A documentary credit N.A.

3. To reimburse themselves, the negotiating bank will send us the full
set of original documents by Registered Post alongwith a certificate
of compliance of the terms and conditions of the credit and request
for demand drafts/pay order.
B
4. ······························

5. ······························
6. Total drawings under this credit should not exceed Rs. 2,00,00,000
(Rupees two crores only)
c
It was lastly stated in the L/C as follows :

"This credit carries our confirmation and we hereby engage with the
drawers endorsers and/or bonajide holders of draft(s) drawn under •
and negotiated in confirmity with the terms and conditions of this
D credit will be duly honoured on presentation of documents or at
maturity.

Except as otherwise expressly stated, this credit is subject to Uniform
Customs and Practice for documentary credits (1983 Revision),
international Chamber of Commerce, Publication No. 400.
E
Yours faithfully,

for Bank of Maharashtra

Copy to : (I) State Bank of India."

F Hinganghat Branch Distt. Wardha (M.S.)

(2) V.M. Jog Engineering Ltd. Pune

Thus, the. Lie confirms the rights of bonafide holders of the drafts that
may be issued by the drawers-sellers and to honour on presentation of
G documents or at maturity. It is also clear that the UC is subject to UCP (1983
Revision).

For the purposes of the main point arising in the case, it is important
to note clause 9 of the Letter of Credit. That clause requires that one of the
document to be produced by the seller for payment should be the "copies of
H the delivery Chai/ans-cum-invoices" issued by Jaswant Steel Rolling Mills
FEDERAL BANK LTD. v. V.M. JOG ENGINEERING LTD. [M. JAGANNADHA RAO, J.] 551

Pvt. Ltd. (Plaintiff-buyer) duly signed by Project Authorities, with an A
endorsement-that the material was recovered in good condition and indicating
the date of receipt of material at sites.

On 19.3.98, the appellant became the Negotiating Bank in the place of
State Bank of India. The Issuing bank informed the seller that the Negotiating
Bank would be the Federal Bank (appellant) and not the State Bank of India, B
Further, it was stated that clause l 0 of the Letter of Credit (referred to above)
stood deleted.

On the same day, 19.3.98 seller sent a Bill of Exchange (called technicalfy
as a Draft) to its dealer at Visakhapatnam against the Letter of Credit No.
1/98 dated 19.2.98 stating as follows : C
"At 90 (ninety) days from the date of invoice pay to Mis The Federal
Bank Ltd., Bombay Samachar Marg, Fort, Mumbai of order a sum of
Rs. 2,00,000.00 (Two crores only) towards value of material given as
below:
D
DD/Inv. No. Date Amount

104 19.2.98 Rs. l ,00,00,000

105 19.2.98 Rs. l,00,00,000

Sd E
For Jaswant Steel Rolling Ltd.

This was addressed to the seller's agent at Vijag Steel Plant. Copies were sent
to purchaser (Plantiff). This Bill of Exchange contains endorsements purported
signed by the Vice-President of the buyers as follows :
F
"accepted for payment on maturity"
Sd
Vice-President (Accounts)
for V.M. Jog Engineering Co. (Buyer)
and G

"We confirm having received the despatch documents".
Sd
Vice-President (Accounts)
for V.M. Jog Engineering Co. (Buyer) H
552 SUPREME COURT REPORTS [2000] SUPP. 3 S.C.R.

A It will be noticed that ninety days from 19.2.98 would be 20.5.1998. That
would be the date on which the Negotiating Bank could claim fro~ the
Issuing Bank, the monies if any, it might have paid to the seller.

- But, it is the contention of the buyer-plaintiff that the first despatch of
the goods was on 28.3.98 and that payment would be due to the Negotiating
B Bank only on 26.6.98. The appellant Bank on the other hand contended that
once the Vice President of the buyer company confirmed the despatch
document dated 19.2.98, ninety days would expire by 20.5.98 and the appellant
Bank, in case it paid to the sellers under the Bill of Exchange issued by the
sellers, the appellant should be repaid on 20.5.98 and not on 26.6.98.

C On 20.3.98, the sellers wrote to the appellant Bank (through their dealers
at Visakhapatnam, Shriram Investment Services Ltd.) to discount the Bill of
Exchange for Rs. 2 crores and pay the proceeds. The bill along with other
"documents" so sent by or on behalf of the sellers were received by the
appellant Bank. The above letter of the sellers to the appellant Bank reads as
D follows:
"Please find enclosed herewith the documents drawn under Bank of
Maharashtra, Pune L/C No. 1/98 dated 19.2.98.

Drawer Jaswant Steel Rolling Mills PVt. Ltd. Nagpur (sellers)

E Drawee V.M. Jog Engineering Ltd., Pune (buyers)

Amount Rs. 2,00,00,000 (Rupees two crores only) I

Usance 90 days

Due date .......
F
Kindly discount the same @ 15.25% p.a. and issue the cheque in
favour of the Federal Bank Ltd.- Ale. Jaswant Steel Rolling Mills Pvt.
Ltd. payable at Mumbai."

In other words, the sellers demanded payment on the Bill of Exchange
G against the L/C by producing these documents before the Negotiating Bank.
The Negotiating Bank was to pay the amount minus its commission. I could
draw the released amount from the Issuing Bank on the 90 day from 19.2.98
the date of despatch document i.e. 20.5.98.

The appellant-Negotiating Bank then took the extra precaution of sending
H to the Issuing Bank - the L/C and the "documents" sent by the sellers for
FEDERAL BANK LTD. v. V.M. JOG ENGINEERING LTD. [M. JAGANNADHA RAO, J.] 553

confirmation. This is stated to be part of the Banking practice. A
The letter dated 20.3.98 by the appellant (Negotiating Bank) to the
Issuing Bank stated that they were enclosing the original Letter of Credit for
2 crores, Usance 90 days, due date 20.5.98 (they were counting 90 days from
19.2.98) and that they were enclosing the "documents" sent to them by sellers
along with L/C: B
"Draft dt. 19.3.98 Invoice dated 19.2.98 (5 sheets)

L/R-Delivery Challan dt. 19.2.98 (5 sheets)

UC: Above L/C in original is enclosed. Please return the same with C
the signatures duly verified and certified."

It was also said in the said letter by the Negotiating Bank that they 'have
negotiated the documents today' and they 'confirm having noted the drawings
on the original LC. ' The letter of the Negotiating Bank further states :

Instructions: D

I. Acknowledge receipt quoting your and our reference number.

2. Confirm due date of payment.

3. VerifY and certifY the signatures on the LC and confirm that the E
signatories on the LC have the required authority to issue the same.

4. Confirm t~at the documents are in order and payment will be made
on due date.

Reimbursement :
F
(i) Remit Bill amount on due date itself by your Pay Order drawn in
our favour.

(ii) Remit Bill amount by Telephonic/Telegraphic transfer (TI) through
your branch at Bombay with instructions to reimburse to us on due
date itself." G
We have already stated that the Bill of Exchange (or draft) was also sent
by the sellers to the Negotiating Bank, through their dealer. This Bill was one
of the documents thus received by the Negotiating Bank. It contained the two
endorsements purported to have been made by or behalf of the buyers (to
which we have already made reference) and purporting to be signed by the H
554 SUPREME COURT REPORTS (2000] SUPP. 3 S.C.R.

A Vice-President (Accounts) of the buyers. These endorsements read as follows

"Accepted for the payment on maturity.
Sd\-
Vice-President (Accounts)
for V.M. Jog Engineering Ltd. (buyers)
B
We confirm having received the despatch documents.

Sd\-
Vice-President (Accounts)
for V.M. Jog Engineering Ltd." (buyers)
c As far as proof of delivery of the despatched goods is concerned, the
position was as follows. Among the documents accompanying the L/C were
the five invoices dated 19.2.98 (5 sheets) and the five delivery challans dated
19.2.98 (5 sheets). The five delivery challans contained the signature of one
Mr. P. Waghmode who purported tci sign on behalf of the buyers and two of
D the five delivery challans purportedly contained the counter-signature of the
Vice-President (Accounts) of the buyer dated 21.2.98 and 28.2.98 respectively.
The office stamp of the buyer's company was found on all the five delivery
challan.>. The endorsement of Mr. Waghmode on the delivery challans also
stated that goods were received in good condition.

E The Issuing Bank, after receiving the documents, wrote back to the Negotiating
Bank in its crucial letter on 23.3.98 as follows :

"Re: • No. 1/98 dated
Our inland L/C
192.98
F For Rs. 2,00,00,000 fvg. Jaswant
Steel Rolling Pvt. Ltd.

We have received the abovesaid L/C in original along with your
covering letter. We have confirmed the due date on 20.5.98 and the
documents are in order and paym<:nt of the above mentioned L/C
G 1/98 will be made on 20.5.98.

We have verified and certified the signatures on the L/C and
confirm that the signatories to the L/C have the required authority to
issue the same.
H We returned herewith the abovementioned L/C 1/98."
FEDERAL BANK LTD. v. V.M. JOG ENGINEERING LTD. [M. JAGANNADHA RAO, J.] 555

In other words, the Issuing Bank certified the signatures and assured the A
Negotiating Bank, that it would reimburse the Negotiating Bank on the due
date, 20.5.98. Obviously, the Issuing Bank proceeded on the basis that the
delivery was on 19.2.98 as stated in the document (and not on 28.3.98, as
contended by the buyers in the plaint).

On the basis of the above letter dated 23.3.98 sent by the Issuing Bank B
to the Negotiating Bank, the latter discounted the Bill of Exchange drawn from
the seller and paid Rs. 1,94,39,252 under the L/C on 25.3.98 to the sellers.

On 24.3.98 the Negotiating Bank wrote to the Issuing Bank that the
latter had returned the L/C, along with confirmation and also the documents.
It said that the Negotiating Bank shall be deliverir.g the documents again to C
the Issuing Bank on due date and that "the same is returned herewith which
you may kindly acknowledge". 'Encl : as above'. (A contention was raised
by the Issuing Bank in its affidavits in the trial Court that by this letter, the
Negotiating Bank was agreeing to send some other documents and they were
not sent later at the time of seeking reimbursement on 20.5.98). D
The Negotiating Bank, having parted with Rs. 1,94,39,252 upon
confirmation of the genuineness of the documents by the Issuing Bank, was
waiting to claim reimbursement by the Issuing Bank on the 'due date', 20.5.98.

But then, there was a sudden surprise. It received a letter from the E
Issuing Bank on 19.5.1998 that the Issuing Bank had found on "scrutiny in
May 1998", that the Negotiating Bank had not submitted (1) "Delivery
challan-cum-invoices issued by sellers duly signed by project authorities
with an endorsement that the material is received in good condition and
indicating that the date of receipt of material at sites as per clause No. I 0 of F
our L/C (2) All relevant motor transport receipts as per clause No. 3 of our
LC. They stated that after receipt of the above documents as per terms of
L/C, they would be able to consider further." This has obvious referred to
clause 9 of the L/C extracted above.

On 20.5.98, there was a further letter by the Issuing Bank to the G
Negotiating Bank that (I) As per special instructions for the Negotiating
Bank, "clause No. 3 of our L/C, full set of original documents along with a
certificate of compliance of the terms and conditions of credit is not received
by us". "Original L/C, duly discharged has not been received by us. You are
requested to send the above documents". According to the appellant, by the
letter the Issuing Bank was going back on its earlier certification and assurance H
556 SUPREME COURT REPORTS [2000) SUPP. 3 S.C.R.

A to reimburse the appellant as per its letter dated 23.3.98 addressed to the
Negotiating Bank.

Meanwhile, the Issuing Bank had alerted the buyers on 15.5.98 that the
Negotiating Bank had produced certain documents purportedly dated 19.2.98
containing an endorsement that the material was received in good condition
B as per order. The buyers stated in their plaint that it was only then that they
learnt that the "sellers" had committed 'forgery' by showing that one 'Mr. P.
Waghmode' had made the said fraudulent endorsements on the demand
vouchers on behalf of the buyers. They contended that there was nobody by
the name Mr. P. Waghmode in their service much less with necessary
C authorisation, to act or receive the goods on behalf of the buyers. They
stated that on 17.5.98, Mr. Bhapkar, Project Manager of the buyers visited the
factory of the sellers and found that only 654 MT of steel was shown in the
sellers' accounts as having been supplied and not the full quantity. A further
contention was that, in fact, only 523 MT was supplied and not 654 MT. On
18.5.98, the buyers informed the Issuing Bank that forgeries had been committed
D by "some persons" in the documents presented to the Issuing Bank.

The buyer was conscious that on 20.5.98, the Negotiating Bank would
press for payment from the Issuing Bank. The buyer then filed the suit against
the sellers (1st defe~dant), the Issuing Bank (2nd defendant) and the
E Negotiating Bank (3rd defendant) for permanent injunction. No specific relief
was claimed against the Negotiating Bank but it was prayed that the Issuing
Bank should not release any amount under the L/C. In the entire body of the
plaint there is no a/legation imputing any fraud to the Negotiating Bank,
much less even knowledge of fraud Allegation of fraud and forgery were
made only against the sellers. In the interlocutory application, though injunction
F was prayed against the Issuing Bank, the Negotiating Bank was not brought
into the array. Injunction was obtained on 20.5.98 by the buyers against the
Issuing Bank not to honour the L/C. The said Bank then wrote on 20.5.98 to
the Negotiating Bank that in view of the Court's order, they would not be able
to release any amount in favour of the Negotiating Bank, after the due date
G i.e. 20.5.98.

It was only then that the Negotiating Bank came to know that though
it had been impleaded in the suit as the 3rd defendant, it had not been
impleaded in the application for injunction. It moved the Court for vacation
of the order stating that they had sent the L/C and documents including the
H delivery challans dated 19.2.78 to the Issuing Bank for due checking and that
· FEDERAL BANK LTD. v. V.M. JOG ENGINEERING LTD. [M. JAGANNADHA RAO, J.] 557

the Issuing Bank in their crucial letter dated 23.3.98 had certified the A
genuineness of the endorsements on the L/C and the signatures on the
documents. Further, the Bill of Exchange drawn by the sellers against the
L/C contained the signature of the Vice-President of the buyers (we have
already extracted the endorsement) and the delivery challans were signed by
Mr. P. Waghmode, with the endorsement "received material in good condition"
and two of these endorsements were counter signed by Vice President of the B.
buyer with his stamp and that once the Issuing Bank had certified the above
documents presented by the sellers to the Negotiating Bank, the Negotiating
Bank could not but pay the sellers and they had paid Rs. 1,94,39,252 to the
sellers on 25.3.98. The Negotiating Bank pointed out that no allegations of
fraud or forgery were made against it nor even knowledge thereof attributed C
to it.

On these facts, the trial Court refused to vacate the injunction in its
order dated 29.4.99. This order was confirmed by the High Court. The
Negotiating Bank has come up in appeal by Special leave.
D
In this appeal, we have heard the submissions of learned counsel for
the appellant Sri S. Ganesh and of the learned Senior counsel for the buyers
Sri V.A. Mohta and of Sri Rajesh Kumar, for the Bank of Maharashtra.

Learned counsel for the appellant Sri S. Ganesh contended that the E
plaintiff-buyers had deliberately not impleaded the appellant in the injunction
application and they obtained injunction in collusion with the Issuing Bank.
They could not have# stated in the trial Court that the Negotiating Bank need
not be heard. Learned counsel pointed out that no allegation of fraud was
made in the plaint nor in the injunction application against the Negotiating
Bank and the allegations were made only on the sellers for allegedly committing F
forgery of documents. Learned counsel pointed out that not even knowledge
of fraud or forgery was attributed to the appellant.· The appellant had obtained,
by way of caution, the confirmation from the Issuing Bank as per Banking
Practice in regard to the genuineness of the endorsements on the Bill of
Exchange and L/C and on the documents (including the delivery challans) G
produced by the sellers and that the Issuing Bank had confirmed the
genuineness of the same and had, in fact, promised to reimburse the
Negotiating Bank on the due date i.e. 20.5.98 (i.e. 90th day after the date of
delivery 19.2.98). The Bill of Exchange was also signed by the Vice President
of the buyer and necessary endorsement was made. Counsel also referred us
to Articles of the Uniform Customs and Practice for Documentary Credits H'.
558 SUPREME COURT REPORTS [2000) SUPP. 3 S.C.R.

A (1983 Revision) which stood incorporated in the Letter of Credit dated 19.2.98 ---
(and in particular Article 16{b) and (e)) and pointed out that even in cases
where Issuing Bank did not refuse to certify the documents in reasonable
time, the Article states that the Issuing Bank "shall, be precluded from
claiming that the documents are not in accordance with the terms and ccinditions
B of the credit". Here, on facts, there is an express acceptance of the genuineness
of the documents and this is an afortiori case. The Banks are governed by
a separate contract and were not concerned with disputes as to non-
performance - or non-delivery of goods - by the seller to the buyer.

On the other hand, the learned counsel for the Issuing Bank, Sri Rajesh
C Kumar contended before us (and in their written submissions) that it was true
that on 23.3.98 the Issuing Bank had certified to the Negotiating Bank that
the documents were in order. "But when in May, 1988, the Negotiating Bank
claimed to be reimbursed, the Issuing Bank scrutinised and it was revealed
that the documents were not in order". It also contended that the primary
duty to verify the documents was that of the Negotiating Bank and that the
D confirmation obtained from the Issuing Bank of no value.

Sri V.A. Mohta, learned senior counsel for the buyers-plaintiff wanted
to contend that the injunction obtained by the plaintiff had to be maintained.
Learned counsel was confronted with his client's stand in the trial Court that
the Negotiating Bank had no concern with the injunction. Learned senior
E counsel was told that in view of the peculiar stand taken by his client in the
trial Court, in case this Court declared that the injunction would not come in
the way of the Negotiating Bank getting reimbursed by the Issuing Bank, his
clients could not have any objection to it. Counsel, however, submitted that,
in that event, the Issuing Bank should not debit the buyer for the amount the
F said Bank would reimburse to the Negotiating Bank. Counsel was informed
that that question does not arise in this appeal.

The following points arise for consideration in this appeal :

(1) In the context of the need for Banks to take reasonable care to
G scrutinise the documents produced before it for honouring the L/C, what is
the relevance of the UCP Code issued by the International Chamber of
Commerce, which was here expressly incorporated in the L/C?

(2) If it is the case of the plaintiff-buyer that there is 'fraud' on the part
of the sellers in relation to the documents and if it is not its case that the
H Negotiating Bank was guilty of fraud or had knowledge of fraud by the seller,
FEDERAL BANK LTD. v. V.M. JOG ENGINEERING LTD. [M. JAGANNADHA RAO, J.] 559

could the Negotiating Bank not seek reimbursement from the Issuing Bank, A
as a holder in due course of the Bill of Exchange, against the L/C?

(3) Whether, once the Issuing Bank had certified the documents whiCh
were presented to the Negotiating Bank by the sellers, the said Bank could
tum round and refuse reimbursement on the ground that on further scrutiny
made by its - long after the Negotiating Bank parted with monies - was not B
correct or was mistaken ?

Point I

This point mainly deals with the UCP Code (1983 Revision) which was
incorporated by reference into the L/C. As the interpretation of the UCP is C
commercially 0f considerable importance, we would like to deal with the
relevance of the UCP Code in some detail.
·-
This Court had occasion in United Commercial Bank v. Bank of India,
[1981] 2 sec 766 (at 780) to refer to the Uniform Customs and Practices for D
Documentary Credits (UCP for short) by which the 'General provisions and
Definitions and the Articles following are to apply to all documentary credit
and binding upon all parties thereto unless otherwise expressly agreed'. The

- UCP states that it shall be deemed incorporated into each documentary credit
if there are words in the Credit indicating that such credit was issued subject
to Uniform Customs and Practices of Documentary Credits. E
The UCP has been formulated by the International Chamber of Commerce,
Prof. R.M. Goode described it as the 'most successful harmonising measure
in the history of international commerce'. Prof. E.P. Ellinger stated that the
UCP was the result of necessity and the need for use of banks as agents in
international trade. The first UCP was drafted in 1929, the next one in 1933, F
then in 1951, 1962 and 1974 and 1983. The 1983 version (relevant in the case
before us) was used in 170 countries. (It was revised in 1990 and 1993). (The
New York version of it revised in 1993). (See Principles oflntemational Trade
Law by Indira Carr, 2nd Ed., 1999).
G

- In the absence of incorporation, the UCP will not apply but it can be
taken into account as part of mercantile customs and practices and most of
it is also treated as part of common law, barring a few differences. If an express
term in the contract contradicts the UCP terms, the contract prevails, Mustill,
l. in Royal Bank of Scotland pie. v. Cassa di Ris parimio de/le Provincie
Lombard, (I 993) (Financial Times 21 Jan, 1992) said : H
/
560 SUPREME COURT REPORTS [2000) SUPP. 3 S.C.R.

A " ..... .it must be recognised that (the UCP) terms do not constitute a
statutory code. As the title marks clear, they constitute a formulation
of customs and practices, which the parties to a letter of Credit can

B
incorporated Into their contracts by reference. If it is found that the
parties have explicitly agreed such a tefll1, then the search need go no
further, since any contrary provision in UCP must yield to the parties'
expressed intention."
..
We are here concerned with the Uniform Commercial Practice of
Documentary Credits (1983) (which is referred to in the L/C).

It states in Article 3: "credits, by their nature are separate transactions
C from the sales or other contracts (s) on which they may be based and banks
are in no way concerned with or bound by such contract(s), even if any
refuse whatsoever to such contracts(s) is included in the credit. Article 4
states that: 'in credit operations, all parties concerned deal in documents, and
not in goods, services and/or other performances to which the documents
-·
.D may relate". This is also declared by this Court in several cases.

Article I 0 refers to the duty of the Bank to honour the commitment. It
states: "An irretrievable credit constitutes a definite undertaking of the Issuing
Bank, provided that the stipulated documents are presented and that the
terms and conditions of the credit are complied with: (i) ifthe credit provides
E for sight payment - to pay, or that payment will be made (ii) if the credit
provides for deferred payment - to pay or that payment will be made on the
date(s) determinable in accordance with the stipulations of the creditor (iii) if
the credit provides for acceptance - to accept drafts drawn by the beneficiaries
if the credit stipulates that they are to be drawn on the Issuing Bank, or to
be responsible for that acceptance and payment at maturity if the credit
F stipulates that they are to be drawn on the applicant for the credit or any
other drawee stipulated in the credit; (iv) if the credit provides for negotiation
- to pay without recourse to drawer and/or bona fide holders, drafts drawn
by the beneficiary, at sight or at a tenor, on the applicant for the credit or on
any other drawee stipulated in the credit other than the Issuing Bank itself,
G or to provide for negotiation by another bank and to pay as above, if such
negotiation is not affected (b) ......... (c) ....... (d) ........ ". Article 1 l(a) stipulates
that 'All credits must clearly indicate whether they a~e available by sight
payinent, by deferred payment, by acceptance or by negotiation ...... Clause (b)
states that: 'All credits must nominate the bank (nominated bank) which is
authorised to pay (paying bank), or to accept drafts (accepting bank), or to
H negotiate (negotiating bank) unless the credit allows negotiation by any bank
FEDERAL BANK LTD. v. V.M. JOG ENGINEERING LTD. [M. JAGANNADHA RAO, J.] 561

(negotiating bank). (c) .... Clause (d) of Article 11 is relevant and it reads : A
"Article 11 (d) : By nominating a bank other than itself or by
allowing for negotiation by any bank or by authorising or requesting
a bank to add its confirmation, the issuing bank authorises such bank
to pay, accept or negotiate, as the case may be, against documents
which appear on their face to be in accordance with the terms and B
conditions of the credit and undertakes to reimburse such bank in
accordance with the provisions of these Articles".

It is, therefore, clear that under Article 11 (d), 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 c
Bank then pays, the Issuing Bank is bound to reimburse the Negotiating
Bank.
~

We have to refer to another important Article, i.e. Article 15, which
concerns the 'reasonable care' with which documents have to be examined.
This Article has relevance on the question of 'fraud'. It refers to the safeguards D
to be taken by the Bank. It states :

"Article 15 : Bank must examine all documents with reasonable
care to ascertain that they appear on their face to be in accordance
with the terms and conditions of the credit. Documents which appear
on their face to be inconsistent with one another will be considered
E
as not appearing on their face to be in accordance with the terms and
conditions of the credit".

Once the Bank takes such reasonable care as above stated, Article 16
states that the Bank will have to be reimbursed by the party giving such
authority, Clause (b) of Article 16 states that refusal by the Issuing Bank to
F
pay must be "on the documents alone" as appear on their face to be
inconsistent with the terms and conditions of the credit.

At common law, the position is no different. The principle of reasonable
care has been applied by Lord Diplock in Gian Singh & Co. Ltd. v. Banque G
de L 'Jndochine, (1974) l WLR 1234. The Bank has to examine with reasonable
,,,. care to ascertain if they appear on their face to be in accordance with the
terms and letters of Credit. In that case, the reference was made to Article 7
of the UCP (I 962). It was observed that the said Article did no more than
restate the duty of the bank at common law. It was further held that in the
ordinary course, visual inspection of the actual documents presented is all H
562 SUPREME COURT REPORTS [2000] SUPP. 3 S.C.R.

A that is called for. (p. 1252). 'In Basse and Se!iJe v. Bank of Australia, (1904)
20 TLR 431 = 90 L.T. 618, the defendant bank was instructed to negotiate the
drafts of a shipper in Sydney against a Certificate of Dr. Helms for 100 tons
of Cobalt ore analysis not less than 5% pretoxide. The shipper shipped
worthless ore which was described in the bill of loading as 'P.M. 2680 bags
B containing 100 tons of Cobalt ore". The sample initially submitted did not
refer to the bill of lading goods. But later, the shipper marked the sample in
the same way as the goods were described in the Bill of lading quantity and
obtained a second certificate showing satisfactory tests of "a sample of
Cobalt ore marked P.M. 2680 bags representing 100 tons''. The Bank this time
accepted the shipper's drafts and was held to be entitled to recover from the
C plaintiffs. The Certificate on its face was regular and came within the meaning
of the mandate. Bigham, J. said:

"Once they were in touch with the right man, ~he defendants' only
remaining duty was to see that the documents which be brought
·"'
purported on their face to be documents described in the mandate.
D It was no part of their duty to verify the genuineness of the
documents".

All that is therefore necessary is to examine with reasonable ifthe documents
on their face conformed to the terms and conditions of the L/C.
One other important Article that is important on the question of
E
'reasonable care' of the Bank in examining the documents is Article 17. It
reads :

"Article I 7 : Banks assume no liability or responsibility for the form,
sufficiency, accuracy, genuineness, falsification or legal effect of any
F document, 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,
condition packing, delivery, value or existence of the goods represented
by any document, or for the good faith or acts and/or omissions,
solvency, performance or standing of the consignor, the carriers, or
G the insurers of the goods or any other person whomsoever".

This shows that the Bank does not - if it is not clear from the face of the
documents - owe any liability or responsibility for the falsity of the documents.
(However, we shall presently deal witt :'·: question of fraud separately).

H Learned counsel for the appellant Sri Ganesh has contended that if the
FEDERAL BANK LTD. v. V.M. JOG ENGINEERING LTD. [M. JAGANNADHA RAO, J.] 563

Issuing Bank does not certify the documents within reasonable time, it will A
be deemed that it had accepted the documents. Counsel relied on clauses (c)
and (e) of Article 16. Clause (c) states :

"Article l 6(c) : The Issuing Bank shall have reasonable time in
which to examine the documents and to determine as above whether
to take up or to refuse the documents". B
If the Issuing Bank does not return them within reasonable time, it may be
deemed that it has ratified the genuineness of the documents. These clauses

- are based on principles of common law.

In Hansson v. Hamel and Horley Ltd, (1922) 2 AC 36 (HL), Lord Sumner c
stated (at p. 46):

"these documents have to be handled by the banks, they have to be
'
taken up or rejected promptly and without any opportunity for
prolonged inquiry".
D
Two judgments as to whether the Issuing Bank can consult its customer
appear to be conflicting. In Bankers Trust Co. v. State Bank of India, (1991)
Lloyds Rep. 443, it was held that the Banker's Trust was barred from refusing
the documents because it had taken unreasonable time to examine and reject
them, some nine days. By that time the State Bank of India had paid to the
Steel Authority of India. There were no doubt, 967 sheets to be verified. But E
~ it was held that the time taken to consult the customer could not be excluded.
A different view was expressed earlier in Co-operative Centrale etc. v.
Sumitomu Bank Ltd The Royan, (1987) l Lloyds Rep. 345 (on appeal, see
(1988) 2 Lloyds Rep. 250). However, Article 14(c) of the UCP (1993 Revision)
appears to accept the view in the Bankers' Trust case for it says that if the
F
Bank "approaches the applicant for waiver of discrepancy" that shall not
extend the seven days time set in Article 13(b) of the UCP ( 1993 Revision).

In deciding whether the time taken is reasonable or not, English Courts
used to take into account banking practice. The Bank in England, normally
used to take three days. (Banker's Trust Ltd v. State Bank of India, (1991) G
I
2 Lloyd. 443).
~ ...
Clause (d) of Article 16 of the 1983 Revision states that, if the issuing
bank decides to refuse, it must give notice to the bank from which it received
the documents or to the beneficiary, if it directly received from him. Such
notice must state the discrepancies in respect of which the Issuing Bank H
564 SUPREME COURT REPORTS [2000) SUPP. 3 S.C.R.

A refuses the documents and must also state whether it is holding the documents
at the disposal of or is returning them to, the presentator (remitting bank or
the beneficiary, as the case may be). Sub-clause (e) reads :

"Article 16(e) : If the Issuing Bank fails to act in accordance with the
provisions of paragraphs (c) and (d) of this Article and/or fails to hold
B the documents at the disposal of, or to return them to, the presentator,
the Issuing Bank shall be precluded from claiming that the documents
are not in accordance with the terms and conditions of the credit".

Thus, where the Issuing Bank does not respond within reasonable time it
C cannot, under the UCP, cannot dispute the documents later.
This sub-clause (e) of Article 16 has been relied upon heavily by the
learned counsel for the appellant to show that where the Issuing Bank
expressly accepts the documents sent by the Negotiating Bank, no other
question can arise.
D As to what type of documents are to be accepted as 'originals' Article
22(c) states that unless otherwise stipulated in the credit, banks will accept
as original documents produced or appearing to have been produced: (i) by
reprographic system (ii) by or as the result of, automated or computerised
system (iii) as carbon copies - provided if these type of documents are marked
E as 'originals', provided they have been, where necessary, authenticated.
Under Article 20(b) of the UCP 1993 Revision, "unless otherwise stipulated
in the Credit, banks will also accept as an original document, a document
produced or appearing to have been produced - (i) by reprog;aphic, automated
or computerised systems; (ii) as carbon copies, provided that it is marked as
F original and, where necessary, appears to be signed.

Recently in Karaganda Ltd v. Midland Bank, (1999) 1 All ER 801
(Commercial Court) (CA) the Court of Appeal affirmed the judgment of the
High Court in a case involving the meaning of the word 'original'. There the
documents were produced by word-processor and laser printed on headed
G paper without bearing the word 'original'. The Midland Bank refused to treat
the copy of the insurance policy as the L/C required 'original insurance policy
or certification'. The Bank relied upon Glencore International AG v. Bank of
China, (1996) 1 Lloyds' Rep. 135 to say that the absence of the word 'original'
in any document produced on t 'FJrd processor was a document produced
by a computerised system within Article 20(b) and was required to be marked·
H as original. But this case was distinguished by the High Court (see 1998
FEDERAL BANK LTD. v. V.M. JOG.ENGINEERING LTD. [M. JAGANNADHA RAO, J.] 565

Lloyds Rep. Bank 173) (1997 Current Law Year Book 328). It was held by the A
learned Judge that a document could be regarded as "marked as original" if,
either it was expressly marked with the word 'original', or if it was a necessary
implication of the terms and markings of the document that it was original.
Here, the document complied with the latter test and therefore conformed to
the credit. On appeal, the Court of Appeal, as recently as 1999, accepted this
view holding that 'a document containing all the details of the contract and B
which was patently not a reprographic or carbon copy of another document
could constitute an original for purposes of the UCP 1993 Revision'. We are
only referring to the view of the English Court as a mark of interest. That ·
question does not, however, arise in this case.

As to the source from which the documents emanate, Article 23 states
c
that - where documents (other than transport documents, insurance documents
and commercial invoices called for) are called for, the credit should stipulate
by whom such documents are to be issued and their wording or debtor
content. If the credit does n~t "so stipulate, banks will accept such documents
as presented, provided that their debtor content makes it possible to relate D
the goods and/or servicing referred to therein to those referred to in the
commercial invoice(s) presented, or to those referred to in the credit if the
credit does not stipulate presentation of a commercial invoice."

With regard to expiry date and presentation, Articles 46 to 48 deal with E
the principles applicable.

Before parting with Point 1, we may add that the UCP (1983 revision)
or even the 1993 Revision did not refer to fraud as an exception. That is why
Indira Carr says in 'international Trade Law, 2nd Ed. 1999 at p. 266-267 that
the UCP is not comp~ehensive as it does not address itself to the effect of F
fraud or illegality in the documentary credit arrangement. We may here add
that the Uniform Civil Code (USA) in clause (2 of Articles 5-114 specifically
refers to forgery and fraud. This US Code was noticed by Jagannath Shetty,
J. in UP Co-operative Federation Ltd. v. Singh Consultant & Engineers Pvt.
Ltd., [1988] 1sec174 (at p. 48).
G
Points 2 and 3 :

We have set out the facts in sufficient detail to highlight that the
plaintiff-buyers have no plea that the Negotiating Bank which paid the monies
to the sellers committed any 'fraud'. The allegations in the plaint are that the
sellers in connivance with some persons presented forged or false documents H
566 SUPREME COURT REPORTS [2000] SUPP. 3 S.C.R.

A to the Negotiating Bank which included delivery·vouchers purported issued
& signed on behalf of the buyers (signed by one Mr. Waghmode and counter
signed by its Vice President (Accounts), the case of the buyers was, however,
that Mr. Waghmode was not in their service nor authorised to issue any such
vouchers.

B .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 l, CPC
C 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 4 of the UCP (1983 Revision).
In case of an irrevocable Bank guarantee or Letter of Credit the buyer cannot
obtain injunction against the Banker on the ground that there was a breach
of the contract by the seller. The Bank is to honour the demand for encashment
D 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
E 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
F and the buyer. As to its knowledge of fraud or forgery, we shall presently deal
with it.

Knowledge offraud :

G Decided cases hold that in order to obtain an injunction against the
Issuing Bank, it is necessary to prove that the Bank had knowledge of the
fraud.

Kerr, J. said in R.D. Harbottle (Mercantile) Ltd v. National Westminister
Bank Ltd., (1978) Q.B. 146 at 155 that irrevocable Letters of Credit are 'the
H life blood of international commerce'. He said :
FEDERAL BANK LTD. v. V.M. JOG ENGINEERING LTD. [M. JAGANNADHA RAO, J.] 567

"Except possibly in clear cases of fraud of which the banks have A
notice, the Courts will leave the merchants to settle their disputes
under the contracts by litigation or arbitration ........ Otherwise, trust in
international commerce could be irreparably damaged."

Denning M.R. stated in Edward and Owen Engineering Ltd. v. Barclays
Bank International Ltd, (1978) Q.B. 159 that 'the only exception is where B
there is a clear fraud of which the bank had notice'. Browne, LJ. said in the
same case : "but it is certainly not enough to alleged fraud, it must be
established' and in such circumstances, I should say, very clearly established".
In Bolvinter Oil S.A. v. Chase Manhattan Bank, (1984) 1 All E.R. 351 at P.
352, it was said 'where it is proved that the Bank knows that any demand C
for payment already made or which may thereafter be made, will clearly be
fraudulent. But the evidence must be clear, both as to the fact offraud and
as to the bank's knowledge. It would certainly not be sufficient that this rests
upon the uncorroborated statement of the customer, for irreparable damage
can be .done to a bank's credit in the relatively brief time "before the injunction
is vacated". Thus, not only must 'fraud' be clearly proved but so far as the D
Bank is concerned, it must prove that it had knowledge of the fraud. In United
Trading Corp. S.A. v. Allied Ards Bank, (1985) 2 Lloyds Rep. 554, it was
stated that there must be proof of knowledge of fraud on the part of the Bank
at any time before payment. It was also observed that it "would be sufficient
ifthe corroborated evidence of the plaintiff usually in the form of contemporary E
documents and the unexplained failure of a beneficiary to respond to the
attack, lead to the conclusion that the only realistic inference to draw was
'fraud"'. In Guarantee Trust Co. of New York v. Hannay, (1918) 2 K.B. 623
(KB), the Banker accepted the documents without any knowledge of fraud or
falsify and it was held that the defendants could not counter-claim from the
Bank. However, it would be the Banker's duty to refuse the documents which F
on their face bear signs of having been altered (See Re Saloman and Nandszus,
[1899] 92 L.T. 325. That was a c.i.f. contract. This Court in ITC Ltd. v. Debts
Record Appellate Tribunal, [1998] 2 SCC 70 (at 79) also held that knowledge
of the Bank as to the fraud or forgery had to be prima facie established.

The foundation of English law in this area is the American case of Sztejn G
v. J. Heney Schroder Banking Corpn., (1941) 31 NYS 2d. 631. (Extensive
details of this case are available in 'Documentary Credits' by Raymond Jack,
1991 pp. 191-192). This case has been cited in more than one judgment of this
Court and the English Courts but we shall give more facts of that case and
the principle of 'holder in due course' laid down therein which arises in the H
568 SUPREME COURT REPORTS (2000] SUPP. 3 S.C.R.

A case before us, as per the appellant's pleadings. In that case, the applicant
for a credit (i.e. the buyer) claimed injunction against the Issuing Bank
Schroder Banking Corporation to prevent it paying on the documents which
had been presented. The credit had been advised to the seller in India by the
Issuing Bank's correspondent in India, the Chartered Bank of India, Australia
B and China. The correspondent had not confirmed the credit: The applicant
alleged that what had been shipped was rubbish rather than the bristles
contracted to be supplied. The Chartered Bank (the Collecting Bank) which
received the documents from the seller for 'collection', applied for dismissing
the buyer's claim. (This was a proceeding similar to Order 7 Rule 11 CPC) for
an injunction on the ground that there was no cause of action. The buyer's,
C in their application for injunction, informed the Issuing Bank abou~ the fraud
of the sellers. For the purpose of hearing that application of the Collecting
Bank, the Court assumed the facts stated in the application of the buyer as
to fraud to be true. (Otherwise, this was a difficult burden of proofnormally).
Shientag, J. held that :

D "Where the seller's fraud has been called to the bank's attention
before the drafts and documents have been presented for payment the
principle of the independence of the bank's obligation under the
Letter of Credit should not be extended to protect the unscrupulous
seller. It is true that even though the documents are forged or
E fraudulent, if the issuing bank has already paid the draft before
receiving notice of the seller's fraud, it will be protected if it exercised
reasonable diligence before making such payment."

The facts, as stated above, were that the sellers had drawn the draft under
the letter of Credit to the order of the Chartered Bank of India, Australia and
F China and delivered the draft and the fraudulent documents to the said
Chartered Bank's branch at Kanpur for 'collection' on account of the sellers.
The Chartered Bank could not compel the issuing Bank, Schroder Banking
Corporation, to pay by seeking a dismissal of the buyer's application by way
of a demurrer. The plaintiff was entitled to injunction for it had brought ~he
G allegation to the knowledge of the Issuing Bank, before the payment was
made. Shientag, J. further observed:

"As one Court has stated: obviously, when the issuer of a letter of
Credit knows that a document, although correct in form, is, in point
of fact, false or illegal, he cannot be called upon to recognise such
H a document as complying with the tenns of a letter of credit"
FEDERAL BANK LTD. v. V.M. JOG ENGINEERING LTD. [M. JAGANNADHA RAO, J.] 569

No hardship will be caused by permitting the bank to refuse A
payment where frauds is claimed, where the merchandise is not merely
inferior in quality but consists of worthless rubbish, where the draft
and the accompany document are in the hands of one who stands in
the same position as the fraudulent seller, where the bank has been
given notice of fraud before being presented with the drafts and B
documents for payment, and where the bank itself does not wish to
pay pending an adjudication of the rights and obligations of the other
parties."

The Court also noticed that, on facts, the Collecting Bank, Chartered Bank
was not a holder in due course but was a mere agent for collection for the C
account of the seller who was charged by the buyer with fraud. Therefore the
Chartered Bank's motion to dismiss the complaint (similar to Order 7 Rule 11
CPC) must be denied. Shientage, J. referred to the principle of 'holder in due
course' and said as follows:

"If it had appeared from the face of the complaint that the Bank D
presenting the draft for payment (i.e. Chartered Bank) was a holder
in due course, its claim against the Bank issuing the letter of credit
would not be defeated even though the primary transaction was
tainted by fraud."

This passage lays down the law as to when a person becomes a holder in E
due course in the case of a fraud by the sellers. This last paragraph from the
judgment of Shientag, J. is directly applicable to the facts of the case.

Applying the said princ~ple, we may state that 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 F
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 G
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. These principles
primafacie flow from Shientag, J's judgment which has been followed both H
570 SUPREME COURT REPORTS [2000] SUPP. 3 S.C.R.

A in England and by this Court, in several cases.
Legal relation of a Negotiating Bank vis-a-vis the Issuing Bank:

The contract between the issuing banker and the paying or negotiating
(intermediary) banker may partake of a dual nature. The reiationship is mainly
B 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
C 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 intenhediary banker and the buyer. But the intermediary
D banker, though initially the agent of the Issuing Bank, may also act as
principal in relation to him. (Pagets' Law of Banking, 9th Ed., (1982) p. 543,
544).

A.G. Davis in his 'The Law Relating to Commercial Letters of Credit'
(2nd Ed.) (1954) (p. 92 et see) deals with the rights of a negotiating Bank.
E These rights are partly based on the law relating to negotiable instruments
and partly on the law applicable strictly to letters of credit. So far as the rights
of the negotiating Banker against the seller are concerned, his position will
be that as in the case of a 'bill of exchange' as against the drawer. The author
deals with its rights against the seller as a holder in due course unless the
seller drew the bill 'sans recourse'. He also deals with the risks of the
F Negotiation Bank in cases of revocable credits. But so far as irrevocable
credits are concerned, he says that the terms of the credit have to be looked
into. Some terms indeed contain an undertaking by the Issuing Bank with the
seller and purchasers for value of drafts on credits, to honour those drafts
if, of course, the terms of the credit are complied with. He says :
...
G "But even in the absence of express words, a promise in favour of
such third persons may be implied from the terms of the letter of credit
and surrounding circumstances ............ where an intermediary banker
pays against documents other than those for which the credit calls
and tenders them to the issuing banker, he may nevertheless be able
H to recover from the issuing banker if the latter delays in deciding
FEDERAL BANK LTD. v. V.M. JOG ENGINEERING LTD. [M. JAGANNADHA RAO, J.] 571

whether he will repudiate or accept." A
Roche, J. in Westminister Bank Ltd v. Banca Nazionale di Credito,
(1928) 32 LL Rep. 306 at 312 said:

"if parties keep documents which are sent them ..... in consequence of
some mandate which they themselves have issued, and keep them for B
an unreasonable time, that may amount to a ratification of what has
been done as being done within their mandate."

The Issuing Bank, as principal may ratify the acts of its agent, the
correspondent bank which is its agent and by doing so, relieve the
correspondent bank of a liability it would otherwise have.
c
One ruling referred to by the learned counsel Sri S. Ganesh for the
appellant is directly in point. In Virgo Steels v. Bank of Rajasthan, AIR (l 998)
Born. 82. In that case, the UCO Bank issued a letter of Credit at request of
Virgo Steel in favour of Western Mini-steel Ltd. It provided that documents
under the credit could be negotiated through any Bank. The drawer drew the D
Bill of Exchange which was negotiated by the Bank of Rajasthan. On receipt
of the said drafts, the Bank of Rajasthan wrote to the UCO Bank, sending the
documents for its confirmation. The UCO Bank confirmed the signature of the
partner as per their records and said that they could release payment directly
to the Bank of Rajasthan. Subsequently, the UCO Bank found that Virgo
Steels, in connivance with some officials of the Branch, got the L/Cs opened E
much in excess of the limit authorised by UCO Bank. The UCO Bank disowned
liability to pay the Bank of Rajasthan on due date. M.B. Shah, J. (as he then
was) speaking for the Bench, rejected the plea of UCO Bank and found it
liable to the Bank of Rajasthan. It was held :

"whether the drawer or the acceptor or some officers of the UCO Bank F
committed fraud would hardly be a defence for non-payment of the
amount due to the Bills of Exchange negotiated by the Bank of
Rajasthan, a third party."

and that
G
"UCO bank has never raised any contention that some officers of
Bank of Rajasthan, which is altogether a third party, was involved in
any alleged fraud or conspiracy."

The Court relied upon a circular of the Reserve Bank of India dated 1.4.1992. H
572 SUPREME COURT REPORTS [2000) SUPP. 3 S.C.R.

A UCO Bank was heid bound by its own confinnation of the documents. We
are in respectful agreement with the judgment.

In view of the above reasons, this appeal is to be allowed.

Summarising, we hold that when the plaintiff buyer has no case that the
B appellant-Negotiating Bank had any knowledge of fraud, and when it took
precaution in getting clearance for the document from the issuing Bank on
203.98 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 confonnity with the letters of Credit or that
the buyer had so infonned them. Prima facie, the appellant was in the
C position of a holder in due course. Points 2 and 3 are decided in favour of
the appellant.

For the aforesaid reasons, we allow the appeal and vacate the terpporary
injunction granted in favour of the plaintiff against the Bank of Maharashtra
D in so far as the said injunction precluded the Bank of Maharashtra from
reimbursing the appellant-Federal Bank(lt 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. The Appeal is allowed. No costs.

Before parting with the case, we may state that we are now living in ap
E era of advanced technology of e-mail and internet. It is possible that in the
near future we must take greater care 'ind impose less rigorous standards of
proof of fraud for otherwise plaintiffs might find it impossible to make out a
serious liable issue or prima facie case. Indira Carr says that documentary
fraud is on the increase and more so, due to electronic data transfers. She
says there is a case for a fresh reassessment of the narrow exception of fra:ud
F (Principles oflntemational Trade Law, 2nd Ed., 199 p. 298).

v.s.s. Appeal allowed.