Holding

Unconditional leave to defend the summary suit was not warranted as the fraud was detected after payment, leaving no plausible defence for the issuing bank.

Summary

USB AG issued an irrevocable Letter of Credit in favour of a beneficiary for the import of tin ingots. The beneficiary presented documents and USB AG paid the amount on 6 April 1998. Later, State Bank of Patiala (the issuing bank) learned that the beneficiary and its associated firms were involved in fraud and, on 3 February 1999, put USB AG "on caution" not to negotiate further documents. USB AG demanded reimbursement of the amount already paid, but the bank refused, claiming the fraud defence. The High Court granted unconditional leave to the bank to defend the summary suit, holding that triable issues existed. The Supreme Court held that because the fraud was discovered only after payment, no plausible defence existed and therefore unconditional leave could not be granted. The Court allowed the appeal, set aside the High Court order and revoked the leave to defend.

Issues considered

Whether unconditional leave to defend a summary suit under Order XXXVII, Rule 3 of the CPC could be granted when the alleged fraud was discovered only after the payment under the Letter of Credit had been made.
Whether the issuing bank could rely on a post‑payment fraud defence to refuse reimbursement under the UCP 500.

Legislation cited

Code of Civil Procedure, 1908s. Order XXXVII, Rule 3

Subjects

summary suitOrder XXXVIIunconditional leaveLetter of CreditUCP 500fraudreimbursementbank liabilitytriable issue

Judgment

UBS AG A
v.
STATE BANK OF PATIALA

MAY JO, 2006

[B.P. SINGH AND ALTAMAS KABIR, JJ.] B

Code of Civil Procedure, 1908: Order XXXVII, Rule 3.

Summary suit-Unconditional leave to defend--Triable issues - Letter
of credit issued by defendant-bank to plaintiff-bank with a request to inform c
the beneficiary that an irrevocable Letter of Credit had been established for
the sum indicated therein to be paid by the plaintiff-bank on negotiation of
documents to be presented by the beneficiary-On such documents having
been presented by the beneficiary to the plaintiff-bank, it made payment
under the Letter of Credit to the beneficiary-The defendant-bank informed
the plaintiff-bank, after the payment was made, that the beneficiary was
D
perpetrating fraud with banks in India-The plaintiff-bank was put "on
caution" not to make any payment to the beneficiary-The plaintiff-bank
demanded reimbursement for the same from the defendant-bank-However,
the defendant-bank refused to reimburse on the ground that it had put the
plaintiff-bank "on caution"-The plaintiff-bank filed a summary suit before E
the High Court-The High Court granted unconditional leave to the
defendant-bank to defend the suit as triable issues were raised-Correctness
of-Held: If the fraud had been detected earlier and the plaintiff-bank had
been informed ofsuch fraud and put on caution prior to_making-lhe payment,
the defendant-bank may have had a triable issue to go to trial-In this case·
F
the fraud was detected after the payment was made-Therefore, there is no
plausible defence in the suit filed by the plaintiff-bank-Hence, unconditional
leave to defend the suit revoked-Uniform· Custom and Practice for
Documentary Credit 500.

·On 27.3.1998, on the request of its client, the respondent-Bank G
issued an irrevocable Letter of Credit for a sum of U.S. Dollars 13,20,900
to the petitioner-Bank. The beneficiary of the said Letter of Credit was
one "F". The said Letter of Credit had been issued for the import of
255.00 MT of Tin Ingots by the said "F". On 30.3.1998, the petitioner-
Bank confirmed the said Letter of Credit, which was to be valid till H
239
240 SUPREME COURT REPORTS (2006] SUPP. 2 S.C.R.

A 23.9.1998. On 6.4.1998, upon production of relevant documents by the
beneficiary, the petitioner-bank made payment under the said Letter of
Credit to the said beneficiary, namely, "F".

Despite having made payment of the entire amount covered by the
Letter of Credit to the beneficiary, the petitioner-Bank agreed to the
B extension of the maturity date of the Letter of Credit from 23. 9.1998 till
21.3.1999. On 3.2.1999, the Advocate for the respondent-Bank wrote to
the petitioner-Bank that the respondent-Bank had received information
that the beneficiary along with other constituents of the respondent-Bank
had been perpetrating huge frauds on several banks in India. It was also
C mentioned that from the enquiry undertaken, it was clear that "F" did
not ship any goods on the vessel in question and the bill of Lading
negotiated by "F" was fraudulent.

By the said letter, the petitioner-Bank was informed further that
the respondent-Bank had been advised not to make any payment under
D the above-mentioned Letter of Credit dated 27.3.1998 and the petitioner-
Bank was put 'on caution' and was advised not to negotiate the export
bills presented by "F" and further not to make any payment to "F" in
respect of the said Letter of Credit.

E The petitioner-Bank demanded remittance of the entire amount
covered by the Letter of Credit, which was due for payment on 21-3-
1999. On receipt of two such demands, the respondent-Bank replied
drawing the attention of the petitioner-Bank to the letter written by its
Advocate on 3.2.1999, informing the petitioner-Bank that it had been
F advised not to make any payment under the aforesaid Letter of Credit
dated 27.3.1998, favouring "F".

On receipt of the said communication, the petitioner-Bank wrote
to the respondent-Bank indicating that the documents presented by the '
beneficiary had been negotiated and payments had already been made
G on 6.4.1998 long prior to the allegations of fraud indicated by the Advocate
of the respondent-Bank. It was pointed out that irrespective of the said
fact, under the Uniform Custom and Practice for Documentary Credit
500 (UCP 500), the respondent-Bank was under an obligation to reimburse
on the due date of the Letter of Credit, the amount already paid by the
H petitioner-Bank to the beneficiary. There was no evidence that the
USB AG v. STATE BANK OF PA TIALA 241
~
beneficiary had acted fraudulently. The respondent-Bank was once again A
requested to remit the actual outstanding amount, together with interest
at the rate of 5. 7% from the date of maturity up to the date of payment
to the account of the petitioner-Bank.

As the respondent-Bank failed to honour its commitments under
'UCP 500', the. petitioner-Bank instituted a summary suit in the High B
Court. The High Court was of the view that the suit raised serious triable
issues and, therefore, granted unconditional leave to the defendants to
defend the suit. Hence the appeal.

The following question arose before the Court:-
c
Whether unconditional leave could have been granted to the
respondent-Bank to defend the suit filed against it by the appellant-Bank
for its refusal to reimburse the appellant-Bank in respect of the amount
disbursed to the beneficiary of the Letter of Credit before being informed
of the fraud allegedly perpetrated by the beneficiary and the constituents D
of the respondent-Bank?

Allowing the appeal, the Court

HELD: I. No triable issue can be raised which would warrant grant
of unconditional leave to the respondent-Bank under Order XXXVII of E
the Code of Civil Procedure, 1908 to defend the suit filed by that appellant-
Bank. International commerce operates on trust and relies to a large
extent on arrangements between banks on behalf of their respective
clients, giving rise to Uniform Custom and Practice for Documentary
Credit 500 (UCP 500) which governs the Letter of Credit involved in the F
instant case. Prior to 3.2.1999, when the Advocate for the respondent-
Bank wrote to the petitioner-Bank, there is nothing on record to suggest
that any fraud had been perpetrated by the applicant and the beneficiary
or that the appellant-Bank had been requested not to negotiate the
documents to be presented by the beneficiary. In fact, four and a half
months after 6.4.1998, when the Letter of Credit had already been G
negotiated, the respondent-Bank requested the appellant-Bank to extend
the maturity date of the Letter of Credit from 23.9.1998 to 21.3.1999.
(251-A-C)

Oil & Natural Gas Corporation Ltd v. ss1, 120001 6 sec 385; H
-·
242 SUPREME COURT REPORTS [2006] SUPP. 2 S.C.R.

A Dwarikesh Sugar Industries Ltd v. Prem Heavy Engineering Works (P) Ltd,
(199716 SCC 450; Federal Bank Ltd. v. VJ1. Jog Engineering Ltd, [20011
1 SCC 663, Raj Duggal v. Ramesh Kumar Bansal, (19911 Supp. (1) SCC
191 and Shah Babula! Khimji v. Jayaben D. Kania, [19811 4 SCC 8,
referred to.

B 1.2. If the fraud had been detected earlier and the appellant-Bank
had been informed of such. fraud and put on caution prior to making the
payment, the respondent-Bank may have had a triable issue to go to trial.
That is not so in this case. In this case, the fraud was detected after the
Letter of Credit had been negotiated and hence such fraud alleged to
C have been committed by the constituents of the respondent-Bank cannot
be set up as a plausible defence in the suit filed by the appellant-Bank.
(251-E-FI

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 2578 of
2006.
D
From the final Order dated 28.10.2005 of the Bombay High Court in
Summons for Judgment No. 783/2003 in Summary Suit No. 897.'2000.

Asliok Desai, Sr. Adv., Ravinder Nath, Ms. Kumkum Sen, Rajesh
Roshan, Diwakar Maheshwari (for M/s. Rajinder Narain & Co.), Advs. with
E him for the Appellant.

R.F. Nariman. Sr. Adv. Virag Tulzapurkar, Mahesh Agarwal, Rishi
Agarwal. Manu Krishnan. Ms. Bindi Dave, Kuna! and E.C. Agrawala, Advs.
with him for the Respondent.
F
The following Judgment of the Court was delivered :

AL TAMAS KABIR, J. : The Petitioner-Bank. namely, United Bank
of Switzerland, Lausanne, Switzerland (hereinafter referred to as 'USB AG')
filed three separate Summary Suits, being Nos. 8907 of 2000, 1515 of 2000
G and 6089 of 1999. against the State Bank of Patiala, Federal Bank Limited
and United Western Bank, respectively. The Petitioner-Bank took out
Summons for Judgment No.783 of 2003 in Summary Suit No.897 of 2000
against the State Bank of Patiala. Two similar Summons for Judgment Nos.
784 of 2003 and 786 of 2003 were also taken out by the Petitioner-Bank
H in connection with Summary Suit Nos. 1515 of 2000 and 6089 of 1999.
USB AG v. STATE BANK OF PATIALA [KABIR, J.] 243

Inasmuch as, the said three suits were filed in respect of various Letters A
of Credit, where the terms and conditions were identical and the defence
taken were also identical, the said three Summons for Judgment were taken
up for hearing and disposal analogously and were dismissed by a common
order dated 28th October, 2005. The Learned Single Judge of the High Court
of Judicature at Bombay also granted unconditional leave to the Respondent-
Banks to defeng their respective suits.
B

Three separate Special Leave Petitions, being Special Leave Petition ©
Nos. 5639 of2006, 6141 of2006 and 6134 of2006, have been filed against
the common judgment disposing of the said three suits and since they involve
common questions of law and fact, they have been taken up for admission C
together.

Since the facts in the three matters are more or less similar, we will
first deal with the facts relating to the Special Leave Petition in respect of
the State Bank of Patiala (SLP © No. 5639 of 2006).
D
On 27th March, 1998, on the request of its client, Mis Ham co Mining
& Smelting Ltd, the State Bank of Patiala issued an Irrevocable Letter of
Credit for a sum of U.S. Dollars 1,320,900 to the Petitioner-Bank. The
beneficiary of the Letter of Credit was Mis. Frobevia S.A. The said Letter
of Credit appears to have been issued for the import of 255.00 MT of Tin E
Ingots by Mis. Hamco Mining & Smelting Ltd. On 30th March 1998, the
Petitioner-Bank confirmed the said Letter of Credit, which was to be valid
till 23rd September, 1998. On 6th April, 1998, upon production ofrelevant
documents by the beneficiary, the Petitioner-Bank made payment under the
said Letter of Credit to the said beneficiary, namely, Frobevia S.A.
F
Despite having made payment of the entire amount covered by the
Letter of Credit to the beneficiary, the Petitioner-Bank agreed to the
extension of the maturity date of the Letter of Credit from 23rd September,
1998 till 21st March, 1999. On 3rd February, 1999, the advocate for the
Respondent-Bank wrote to the Petitioner-Bank that the Respondent Bank had G
received information that Mis. Hamco Mining & Smelting Ltd, Mis.
Frobevia and one Solo Industries Ltd., having its offices at London and
Sharjah, in connivance with other group companies of Hamco had been
perpetrating huge frauds on several banks in India. It was also mentioned
that from the enquiry undertaken, it was clear that Mis. Frobevia did not ship H
244 SUPREME COURT REPORTS [2006] SUPP. 2 S.C.R.

A any goods on the vessel in question and the Bill of Lading negotiated by
Mis. Frobevia was fraudulent.

By the said letter, the Petitioner-Bank was informed further that the
Respondent-Bank had been advised not to make any payment under the
above mentioned Letter of Credit dated 27th March, 1998 and the Petitioner-
B Bank was put 'on caution' and was advised not to negotiate the export bills
presented by Mis. Frobevia and further not to make any payment to Mis.
Frobevia in respect of the said Letter of Credit.

Notwithstanding the aforesaid letter dated 3rd February, 1999, the
c Petitioner-Bank demanded remittance of the entire amount covered by the
Letter of Credit, which was due for payment on 21st March, 1999. On
receipt of two such demands made on 17th March 1999 and 23rd March,
1999, the Respondent-Bank replied drawing the attention of the Petitioner-
Bank to the letter written by its learned advocate on 3rd February, 1999,
informing the Petitioner-Bank that it had been advised not to make any
D
payment under the aforesaid Letter of Credit dated 27th March, 1998,
favouring Mis. Frobevia S.A.

On receipt of the said communication, the Petitioner- Bank wrote to
the Respondent-Bank on 7th April, 1999 indicating that documents presented
E by the beneficiary had been negotiated and payments had already been made
on 6th April, 1998 long prior to the allegations of fraud indicated by the
learned advocate of the Respondent-Bank. It was pointed out that irrespective
of the said fact, under the Uniform Custom and Practice for Documentary
Credit 500 (hereinafter referred to as' UCP 500') the Respondent-Bank was
under an obligation to reimburse on the due date of the Letter of Credit, the
F
amount already paid by the Petitioner-Bank to the beneficiary. There was
no evidence that the beneficiary had acted fraudulently. The Respondent-
Bank was once again requested to remit the actual outstanding amount,
together with interest at the rate of 5. 7%, from the date of maturity up to the
date of payment to the account of the Petitioner-Bank, that is, UBS AG,
G Stamford Branch, C.T., U.S.A.

Inasmuch as. despite the repeated demands, the Respondent-Bank did
not reimburse the Petitioner-Bank in respect of the amount paid to the
beneficiary under the Letter of Credit before receipt of the letter dated 3rd
H February, 1999, written by the advocate of the Respondent-Bank, the
USBAGv. STATEBANKOFPATIALA[KABIR,J.] 245

- Petitioner-Bank sent a legal notice dated 30th June, 1999 informing the
Respondent-Bank that on account of their failure to honour their commitments
under 'UCP 500', the Petitioner-Bank would be constrained to file a suit for
recovery of their dues.
A

Pursuant thereto, the Petitioner-Bank instituted Summary Suit No. 897
of 2000 in the Ordinary Original Civil Jurisdiction of the High Court of
B
Judicature at Bombay under Order XXXVII of the Code of Civil Procedure,
1908.

,
-1 As indicated, hereinbefore, two similar suits on similar causes of action,
were filed by the Petitioner-Bank against the Federal Bank Limited and c
United Western Bank, being Summary Suit Nos. 1515 of2000 and 6089 of
2000, respectively. Inasmuch as, the three Special Leave Petitions against
the said three suits have been taken up for consideration together, leave is
granted in all the three Special Leave Petitions.

D
The short point for decision in these appeals is whether unconditional
leave could have been granted to the Respondent-Banks to defend the suits
filed against them by the Appellant- Bank for their refusal to reimburse the
Appellant-Bank in respect of the amounts disbursed to the beneficiary of the
Letters of Credit before being informed of the fraud allegedly perpetrated
by the beneficiary and the constituent of the Respondent-Banks. E

The Letter of Credit issued by the Respondent-Bank requests the
Appellant-Bank to advise the beneficiary that the Respondent-Bank was
establishing an Irrevocable Letter of Credit for 1,320,900 U.S. Dollars only.
The Letter of Credit further indicates the 20th of June, 1998 as the expiry
F
date for shipment and 10th of July, 1998, for negotiation in Switzerland.
It was further stipulated that the documents for negotiation were to be
presented within 21 days from the date of the shipping documents and were
to be accompanied by the documents evidencing shipment of 255 metric
tonnes of tin ingots. In paragraph 12 of the Letter of Credit it was particularly
indicated that the credit was subject to Uniform Customs and Practice for G
Documentary Credit (1993 Revision) as published in International Chambers
of Commerce Publication No.500.

According to the Appellant-Bank, the beneficiary presented the
documents indicated by the Letter of Credit for negotiation to the Appellant- H
246 SUPREME COURT REPORTS [2006] SUPP. 2 S.C.R.

A Bank on 6th April, 1998 and on the basis thereof the Appellant-Bank made
payment under the Letter of Credit to the beneficiary M/s.Frobevia S.A. and
informed the Respondent-Banks accordingly. -
On 22nd· July, 1998, the Respondent-Bank informed the Appellant-
Bank that its documents for U.S. Dollars 1,320,900 referred to in the Letter
B of Credit had been accepted to mature on 23rd Sept~mber, 1998 on which
date the funds would be remitted as per the instructions of the Appellant-
Bank. By a subsequent communication dated 21st August, 1998, the
Respondent-Bank informed the Appellant-Bank that the beneficiary had
agreed to extend the maturity date of the Letter of Credit from 23rd
c September, 1998 to 2 lst March, 1999. The Appellant-Bank was requested
to confirn1 such extension. In response to the said communication, the
Appellant-Bank by its communication dated 3 I st August, 1998 confirmed
the extension of the reimbursement date till 2 I st March, 1999.
-
As indicated hereinbefore, notwithstanding the fact that the Appellant-
D
Bank had made payment to the beneficiary under the Letter of Credit as
far back as on 6th April, 1998, and had informed the Respondent-Bank
accordingly, the Respondent-Bank caused a letter dated 3rd February, 1999
to be written by its learned advocate stating that certain frauds perpetrated
by its constituent, M/s. Hamco Mining & Smelting Ltd., M/s. Frobevia and
E one Mis. Solo Industries Ltd., had been brought to its notice by several
other banks which had established Letters of Credit at the instance of
Mis. Hamco Mining & Smelting Ltd. It was also mentioned that the clear
implication was that the Letters of Credit were fraudulently encashed
by production of bogus Bills of Lading and other shipping documents. By
F the said letter the Appellant-Bank was put 'on caution' not to negotiate
the export bills, if any, presented by Mis. Frobevia and further not to make
any payment whatsoever to Mis. Frobevia in respect of the Letter of Credit.

While considering the application filed by the Appellant-Bank for
summary judgment, the High Court took note of the fraud said to have been
G perpetrated by M/s.Hamco Group of Industries and that it was the case of
the Defendant-Bank that they had been defrauded by their constituent in
obtaining the Letter of Credit. The learned Single Judge also took note of
the submission made on behalf of the Defendant-Bank that it had come to
its notice that the Letter of Credit had been sought to be encashed without
H import of any goods, on the basis of bogus documents and that even the
USB AG v. STATE BANK OF PATIALA [KABIR, J.] 247

Bill of Lading and shipping documents used for obtaining the Letter of A
Credit and subsequent encashment thereof were fraudulent.

The learned Single Judge also took note of the submission made on
behalf of the Plaintiff-bank that since the Letter of Credit was a written
contract, on the date of maturity the Defendant-Bank was bound to honour
the commitment made therein. The learned Judge also noted that it was the
B
case of the Plaintiff-Bank that even before communication by the
Respondent-Bank of the fraud said to have been perpetrated by the
constituent of the Respondent-Bank, the Appellant-Bank had already paid
over the amount to the beneficiary which amount was to be reimbursed
c
- by the Respondent-Bank.

On consideration of the submissions made, the learned Single Judge
was of the view that the suit raises serious triable issues and in that view
of the matter unconditional leave was granted to the Defendant-Banks to
defend their respective suits.
D
The reasoning of the learned Sin~le Judge of the High Court in granting
such leave has been questioned in thes~ appeals on the ground that the High
Court had completely misconstrued the law relating to Letters of Credit
which is sometimes referred to as the life-blood of international commerce.
E
The main contention raised on behalf of the Appellant-Bank is that
since it had no knowledge of any fraud perpetrated by the constituent of the
•Respondent-Bank before making payment under the Letter of Credit in
question, the Respondent-Bank could not refuse to reimburse the Appellant-
Bank of payments already made to the beneficiary under the Letter of Credit
F
before such intimation was received. It was also the case of the Appellant-
Bank that since it had no knowledge of the fraud said to have been committed
with regard to the Bills of Lading and the Letter of Credit itself, it negotiated
documents presented before it by the beneficiary and made payment
accordingly as per the instructions of the Respondent-Bank.
G
Appearing for the Appellant-Bank, Mr. Ashok Desai, learned senior
advocate, referred to and relied on the decision of this Court in Oil & Natural
Gas Corporation Ltd. V. SB!, Overseas Branch, Bombay, [2000] 6 sec 385,
wherein while dealing with a summary suit under Order XXXVII and
a similar question involving leave to defend in respect of a bank guarantee, H
248 SUPREME COURT REPORTS [2006] SUPP. 2 S.C.R.

A this Court held that an unconditional bank guarantee must be given effect
to even where there is a dispute between the parties and that unless there
is a plea relating to fraud the Court does not have jurisdiction to grant
unconditional leave to defend. Mr. Desai submitted that in the instant case
the plea relating to fraud was taken by the Respondent-Bank against its own
constituent and such fact was intimated to the Appellant-Bank long after the
B payment under the Letter of Credit had been made to the beneficiary.

Similar sentiments were expressed by this Court in Dwarikesh Sugar
Industries Ltd. v. Prem Heavy Engineering Works (P) Ltd. And Anr.. [ 1997]
6 SCC 450, wherein while dealing with a bank guarantee this Court held that
c the principle of undue enrichment was not applicable to encashment of
bank guarantees.

Mr. Desai also referred to another decision of this Court in Federal
Bunk Ltd. v. V.M. Jog Engineering Ltd And Ors., [2001 [ 1 SCC 663,
wherein it was observed that in the case of a bank guarantee or letter of
D
credit the Court should not issue an order of injunction restraining
encashment thereof on ground of breach of the main contract between the
buyer and the seller. A contract of bank guarantee or letter of credit is
independent of the main contract and the only exceptions are when fraud is
committed by the seller or where encashment re~ults in irretrievable damage.
E This Court went on further to hold that where the negotiating bank makes
payment to the seller after obtaining confirmation from the issuing bank
about the genuineness of the letter of credit, bill of exchange and other
related documents and seeks reimbursement from the issuing bank, the
encashing bank cannot be restrained by injunction from obtaining
F reimbursement.

Mr. Desai also referred to the relevant provisions of the UCP 500, and
in particular Article 14 thereof, which deals with reimbursement on negotiation
of documents presented to the Confirming-Bank on the instructions of the
Issuing-Bank. It was urged that the Respondent-Bank had no defence since
G no triable issues arise in the suits as filed.

The stand taken on behalf of the Respondent-Bank was that the
Appellant-Bank could claim reimbursement only on the due date of
payment as stipulated in the Letter of Credit agreed upon between the issuing
H bank and the confirming bank. It was urged that since the fraud committed
USB AG v. STATE BANK OF PATIALA [KABIR, J.] 249

by Mis. Hamco Mining & Smelting Ltd. had been discovered and intimated A
to the Appellant-Bank before the due date ofreimbursement, the Respondent-
Bank was entitled to withhold payment under the Letter of Credit. It was
also urged that several triable issues arise in the suit, which had been taken
note of by the High Court while granting unconditional leave to defend the
suit.
B
Mr.R.F. Nariman, learned senior advocate, appearing for the
Respondent-Bank contended that one such triable issue was whether
payment had at all been made by the Appellant-Bank to the beneficiary
under the Letter of Credit before being infonned of the fraud perpetrated
by Mis. Hamco Mining & Smelting Ltd. It was contended that in the c
correspondence exchanged between the two banks, except for intimation
that the documents presented by the beneficiary had been negotiated by the
Appellant-Bank, there was nothing else on record to indicate that payment
had, in fact, been made on 6th April, 1998, the same date on which the
documents were presented for negotiation.
D
Apart from the above, it was submitted that the Court would have to
consider whether the Appellant-Bank had satisfied itself about the
genuineness of the documents presented and had obtained continuation
from the Respondent-Bank before making payment to the beneficiary of
the Letter of Credit. In fact, one of the points urged on behalf of the E
Respondent-Bank was that payment, if any, made by the Appellant-Bank
to Mis. Frobevia S.A. may have been under some private agreement and
not under the Letter of Credit.

It was contended that it was sufficient to indicate to the Court before F
which a suit was pending, that there was a triable issue for which leave to
defend the suit was required to be given.

Reference was made to the decision of this Court in Raj Duggal v.
Ramesh Kumar Bansal, [ 1991] Supp. 1 SCC 191, where a question had been
raised regarding leave to defend in a suit under Order XXXVII of the G
Code of Civil Procedure. While considering the said question, this Court
set out the principles to decide whether leave should be granted or denied
in the following manner :-

• "3. Leave is declined where the court is of the opinion that the grant H
250 SUPREME COURT REPORTS [2006] SUPP. 2 S.C.R.

A ofleave would merely enable the defendant to prolong the liLigation
by raising untenable and frivolous defences. The test is to see
whether Lhe defence raises a real issue and not a sham one, in the
sense that if the facls alleged by the defendant are established there
would be a good or even a plausible defence on those facts. If the
court is satisfied about that leave must be given. If there is a triable
B issue in the sense that there is a fair dispute to be tried as to the
meaning of a document on which the claim is based or uncertainty
as to the amount actually due or where the alleged facts are of such
a nature as to entitle the defendant to interrogate the plaintiff or
to cross-examine his witnesses leave should not be denied. Where
c also, the defendant shows that even on a fuir probability he has a
bona tide defence, he ought to have leave. Swnmwy judgments
under Order 37 should not be granted where serious conflict as to
matter offact or where any dijjiculty on issues as to law arises. The
court should not reject the defenc:e of Lhe defi:ndunt merely because
of its inherent implausibility or its inc:vnsislency."
D
It was urged that the defence was not required to show that it would
inevitably succeed in the suit, but that a plausible defence, capable of being
tried, was sufficient to grant leave to a defendant to defend a suit of this
nature. The principle in such matters was to grant leave to a defendant to
E defend a suit if there was the slightest possibility of a triable defence.

In addition, it was contended that the appeals were not maintainable
as the impugned order of the High Court granting leave to the Defendant-
Banks to defend their respective suits did not amount to a judgment against
F which an appeal would lie. Placing reliance on the decision of this Court
in Shah Babula! Khimji v. Jayaben D. Kania And Anr., [1981] 4 SCC 8,
Mr. Nariman submitted that no civil right of the Appellant-Bank had been
adversely affected by grant of such leave and that as far as the Appellant-
Bank was concerned, the suits filed by it remained and the defendants therein
would only get an opportunity to defend the same.
G
On consideration of the submissions made on behalf of the respective
parties, we are unable to agree with the submissions advanced on behalf of
the Respondent-Bank in these appeals. While the principles indicated by
Mr. Nariman in matters relating to grant of leave to a defendant to defend
H a suit under Order XXXVII of the Code of Civil Procedure are undoubtedly
USB AG v. STATE BANK OF PATIALA (KABIR, J.] 251

sound, in the facts of this case, however, no triable issue can be raised which A
would warrant grant of unconditional leave to the Respondent-Bank to
defend the suit filed by the Appellant-Bank. International commerce operates
on trust and relies to a large extent on arrangements between banks on
behalf of their respective clients, giving rise to 'UCP 500' which governs
the Letter of Credit involved in the instant case. Prior to 3rd February,
1999, when the· advocate for the Respondent-Bank wrote to the petitioner-
B
bank, there is nothing on record to suggest that any fraud had been
perpetrated by the applicant and the beneficiary or that the Appellant-Bank
had been requested not to negotiate the documents to be presented by the
beneficiary. In fact, four· and a half months after 6th April, 1998,
when the Letter of Credit had already been negotiated, the Respondent-Bank c
requested the Appellant-Bank to extend the maturity date of the Letter of
Credit from 23rd September, 1998 to 21st March, 1999.

The facts of these three appeals are clear and simple. The Letters of
Credit were issued by the issuing bank to the confirming-bank with a
D
request to inform the beneficiary that an irrevocable Letter of Credit had
been established for the sum indicated therein to be paid by the Appellant-
Bank on negotiation of documents to be presented by the beneficiary. Such
documents having been presented by the beneficiary to the Appellant-Bank,
it made payment under the Letter of Credit to the beneficiary and was
entitled to receive reimbursement for the same from the Respondent-Bank. E
If the fraud had been detected earlier and the Appellant-Bank had been
informed of such fraud and put on caution prior to making payment, the
Respondent-Bank may have had a triable issue to go to trial. That is not
so in these three cases. In these cases, the fraud was detected after the
Letters of Credit had been negotiated and hence such fraud alleged to F
have been committed by the constituent of the Respondent-Bank cannot
be set up even as a plausible defence in the suit filed by the Appellant-
Bank.

The High Court, appears to have been persuaded to hold that serious
triable issues arise in the present suits since the record reveals that a fraud G
had been committed in obtaining the Letter of Credit. Even . if the
constituent of the Respondent-Bank had committed fraud in obtaining the
Letter of Credit, the same would not be a triable issue to decide whether
the Appellant-Bank was entitled to reimbursement under the Letter of Credit
before such fraud was brought to its notice. The High Court has wrongly H
252 SUPREME COURT REPORTS (2006] SUPP. 2 S.C.R.

A interpreted Clause 8 of the Letter of Credit in holding that the plaintiffs
claim for encashment of the Letter of Credit could not be accepted
because prima facie Clause 8 of the said Letter of Credit did not provide
for discounting of the said Letter of Credit and in view of such discounting
the plaintiff would not be entitled to claim reimbursement on the ground that
the said amount had been paid to the beneficiary. The Letter of Credit itself
B shows that the same was to be negotiated as had been done by the Appellant-
Bank.

As far as the submission regarding the maintainability of the appeals
are concerned, we are satisfied that the principles enunciated in Babula!
c Khimji 's case (supra) which apply to Letters Patent Appeals, will not apply
to appeals for which special leave is granted under Article 136 of the
Constitution.

In such circumstances, these appeals succeed and are allowed. The
D judgment and order of the High Court in these three appeals are set aside
and the unconditional leave granted to the Respondent-Bank to defend the
suit is revoked.

V.S.S. Appeals allowed.

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