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CASE NO.:

Appeal (civil) 5626 of 2000

PETITIONER:

FEDERAL BANK LTD.

RESPONDENT:

V.M JOG ENGINEERING LTD. AND ORS.

DATE OF JUDGMENT: 29/09/2000

BENCH:

M. JAGANNADHA RAO & U.C. BANERJEE

JUDGMENT:

JUDGMENT

2000 Supp(3) SCR 542

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 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. 818 of 1999. The appeal was preferred against the order of the trial

Court dated 29,4.99 whereby the trial Court had confirmed an ex-pane

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 defendant, Bank of Maharashtra, Pune (3rd

respondent) at the instance of the plaintiff-buyers ( 1st respondent), M/s.

V.M. Jog Engineering Co., Pune. The sellers are M/s. 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.

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

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 me seller - to the Issuing Bank and

got the genuineness of the documents confirmed. The Negotiating bank then

released Rs. 1 ,9439,252 in favour of the sellers on 25.3.98, after

deducting its 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 Court 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 precluded the Negotiating Bank from getting

reimbursement from the Issuing Bank, One other peculiar feature of the case

is mat 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 Bank need not be heard in the

interlocutory application and that the said Bank had no locas standi Both

the courts below thought it fit to accept this contention and grant

injunction under Order 39 Rule 1 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 me Negotiating Bank

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nor even knowledge of the fraud/forgery which is alleged against me sellers

in respect of the delivery challans.

Aggrieved by the order of temporary injunction passed under Order 39 Rule 1

CPC, the Negotiating Bank has come up in appeal.

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.

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 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 India, Wardha. The expiration date was

31.3.98 but was extended upto 30.4.98.

The Letter of Credit issued by the Issuing Bank on 19.2,98 listed out 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, Pune branch/in

land L/C No. 1/98 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 Nenl Navi Murtbai 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/ indent and

evidencing despatch of the undernoted goods,

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

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

(5)......-.............,.......

(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.

(9) Copy of Delivery Challans-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

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 :

Special instructions for the negotiating Bank.

1. Negotiations under this credit are restricted to State Bank of India

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Hinganghat, Distt. Wardha (M.S.),

2. Negotiations should be marked separately tin the back of the 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.

4...............................

5, ..............................

6. Total drawings under this credit should not exceed Rs. 2,00,00,000

(Rupees two crores only)

It was lastly stated in the L/C as follows :

"This credit carries oar confirmation and we hereby engage with the drawers

endorsers and/or bonafide holders of draft(s) drawn under and negotiated in

confirmity with the terms and conditions of this credit will be duty

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, 409.

Yours faithfully, for Bank of Maharashtra Copy to : (1) State Bank of

India," Hinganghat Branch Distt Wardha (M.S.) (2) V.M, Jog Engineering Ltd.

Pune

Thus, the L/C confirms the rights of bonafide holders of the drafts that

may be issued by the drawers-sellers and to honour -on presentation of

documents or at maturity. It is also clear that the L/C is subject to UCP

(1983 Revision).

For me 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

the delivery Challans-cum-invoices" issued by Jaswant Steel Rotting Mills

Pvt. Ltd. (Plaintiff-buyer) duly signed by Project Authorities, with an

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,

Further, it was stated that clause 10 of the Letter of Credit (referred to

above) stood deleted.

On the same day, 19.3,98 seller sent a Bill of Exchange (called technically

as a Draft) to its dealer at Visakhapatnam against the Letter of Credit No.

1/98 dated 19.2.98 stating as fellows :.

"At 90 (ninety) days from the date of invoice pay to M/s 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 :

DD/Inv. No, Date Amount

104 19,2.98 Rs, 1,00,00,000

105 19,29.8 Rs. 1,00,00,000

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Sd For Jas want Steel Roi I ing 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 :

"accepted for payment on maturity"

Sd

Vice-President (Accounts) for V.M. Jog Engineering Co: (Buyer)

and

"We confirm having received the despatch documents",

Sd

Vice-President (Accounts) for V.M. Jog Engineering Co. (Buyer)

It will be noticed that ninety days from 19.2.98 would be 26.5,1999. That

would be the date on which the Negotiating Bank could claim from the

Issuing Bank, the monies if any, it might have paid to the seller.

But if 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

Sank only on 26.6.98, The appellant Bank on the other hand contended mat

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, me appellant should be repaid on 20.5.98 and not on

26.6,98,

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 till along with other

"documents" so sent by or on behalf of th6 sellers were received by the

appellant Bank. The above letter of the sellers to the appellant Bank reads

as 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)

Dmawee V.M. Jog Engineering Ltd., Pune (buyers)

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

Usance 90 days

Due date .......

Kindly discount the same @ 15.25% p.a. and issue the cheque in favour of

the Federal Bank Ltd.- A/c. Jaswant Steel Rolling Mill Pvt. Ltd. payable at

Mumbai."

In other words, the sellers demanded payment on the Bill of Exchange

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 men took the extra precaution of sending to

the Issuing Bank - the L/C and the "documents" sent by the sellers for

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confirmation. This is stated to be part of the Banking practice.

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:

"Draft dt, 19.3,98 Invoice dated 19.2,98 (5

sheets)

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

L/C: Above L/C in original is enclosed. Please return the same with 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'.

1. 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

signatories on the LC have the required authority to issue the same.

4, Confirm that the documents are in order and payment will be made on due

date.

Reimbursement:

(i) Remit Bill amount on due date itself by your Pay Order drawn in our

favour.

(ii) Remit Bill amount by Telephonic/Telegraphictransfer (TT) through your

branch at Bombay with instructions to reimburse to US on due date itself."

We have already stated that the Bi11 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 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)

We confirm having received the despatch documents.

.Sd\-

Vice-President (Accounts) for V,M. Jog Engineering Ltd." (buyers)

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 challaos contained the signature of

one Mr, P. Waghmode who purported to sign on behalf of the buyers and two

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of 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.

the Issuing Bank, after receiving the documents, wrote back to me

Negotiating Bank in its crucial letter on 23.3.98 as follows :

"Re: Our inland L/C No. 1/98 dated 192,98

For Rs. 2,00,00,000 fvg. Jaswant Steel Rolling Pvt. Ltd.

We have received the above said 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 payment of the above mentioned L/C 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.

We returned herewith the above mentioned L/C 1/98."

In other words, the Issuing Bank certified the signatures and assured the

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 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 delivering the documents again to

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 hot sent later at the time of seeking reimbursement on 20.5.98).

The Negotiating Bank, haying 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 me 'due dateV2G.5,98.

But then, there was a sudden surprise. It received a letter from the

Issuing Bank on I9;5.1:998 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.

10 of 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

Negotiating Bank that (1) 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 to reimburse the appellant as per its letter

dated 233:98 addressed to the Negotiating Bank.

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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

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 Jess with necessary

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 me sellers and found that only 654 MT of steel was shown in

the sellers' accounts as having been supplied and not die 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 tot forgeries had been

committed 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 defendant), the Issuing Bank (2nd defendant) and the

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 allegation 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 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 ie. 20.5.98.

It was only then that the Negotiating Bank came to know that though it had

been impleaded is 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

delivery challans dated 19.2.78 to the Issuing Bank for due checking and

that the Issuing Bank in their crucial letter dated 23.3.98 had certified

the 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 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 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.

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

plaintiff-buyers had deliberately not impteaded 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

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Negotiating Bank need hot 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 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 chailans) 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 arid Practice for Documentary Credits (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, me Article

states that the Issuing Bank "shall, be precluded from claiming that the

documents are not in accordance with the terms and conditions 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

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 (hat the

primary duty to verify the documents was that of the Negotiating Bank and

that the 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 counsel was told 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 said Bank would reimburse to the Negotiating

Bank. Counsel was informed mat that question does not arise in this appeal.

The following points arise for consideration in this appeial :

(1) In the context of the need for Banks to take reasonable care to

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 Negotiating Bank was guilty of fraud or had knowledge of fraud by

the seller, could the Negotiating Bank not seek reimbursement from the

Issuing Bank, 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 turn

round and refuse reimbursement on the ground that on further scrutiny made

by its - long after the Negotiating Bank parted with monies - was not

correct or was mistaken ?

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Point 1

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

commercially of 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, 13981]

2 SCC 766 (at 780} to refer to the Uniform Customs and Practices for

Documentary Credits (UCP for short) by which the 'General provisions and

Definitions arid 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.

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, 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 if revised in 1993). (See Principles of

International Trade Law by Indira Carr, 2nd Ed, 1999).

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 if 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, J. in Royal Bank of Scotland plc. v. Cassa di Ris

parimio delie Provincie Lombard, (1993) (Financial Times 21 Jan, 1992) said

: i "......it must be recognised that (the UCP) terms do not constitute a

statutory code. As the title marks blear, they constitute a formulation of

customs and practices, which the parties to a letter of Credit can

incorporated into their contracts by reference. If it is found that the

parties have explicitly agreed such a term, 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 I 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

from the sales or other contracts (&) on which they may be based and banks

are in no way concerned with or bound by such contracts), even if any

refuse whatsoever to such contracts(s) is included in the credit. Article 4

states mat: 'in credit operations, all parties concerned deal in documents,

and not in goods, services and/or other performances to which the documents

may relate". This is also declared by this Court in several cases.

Article 1.0 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 mat

the terms and conditions of the credit are complied with: (i) if the credit

provides for sight payment - to pay, or mat 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 he

drawn on the Issuing Bank, or to be responsible for mat acceptance and

payment at maturity if the credit stipulates that they are to be drawn on

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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, or to provide

for negotiation by another bank and to pay as above, if such negotiation is

not affected (b)......(c).........(d)....,...''. Article 11 (a) stipulates

that 'All credits must clearly indicate whether they are available by sight

payment, 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 negotiate (negotiating bank) unless the predit allows negotiation by any

bank (negotiating bank). (e)....Clause (d) of Article 11 is relevant and it

reads ;

"Article ll(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 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 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 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 as riot 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 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 Dipiock in Gian Singh & Co, Ltd. v. Banqae

deL' lndochine, (1974) 1 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 arid letters Of Credit. In that case, the reference was made to

Article 7 of the UCP (1962). 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 that is called for, (p, 1252). In Basse and Selve v.Bank

of Australia, (1904) 20 TLR431 = 90 L.T. 618, the defendant bank was

instructed to negotiate the drafts of a shipper in Sydney against a

Certificate of Dr. Hehns 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 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

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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 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, the defendants' only remaining

duty was to see that the documents which be brought purported on their face

to be documents described In the mandate. It was no part of their duty to

verify the genuineness of the documents".

All that is therefore necessary is to examine with reasonable if the

documents on their face conformed to the terms and conditions of the L/C.

One other important Article that is important OH the question of

'reasonable care' of the Bank in examining the documents is Article 17. It

reads :

"Article 17 : Banks assume no liability or responsibility for the form,

sufficiency, accuracy, genuineness, falsification or legal effect of any

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 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 with, question of fraud

separately).

Learned counsel for the appellant Sri Ganesh has contended that if the

Issuing Bank does not certify the documents within reasonable time, if will

be deemed that it had accepted the documents. Counsel relied on clauses (c)

and (e) of Article 16, Clause (c) states :

"Article I6(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",

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 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".

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 it was held that the time taken to consult the customer could

not be excluded. A different view was expressed earlier in Co-operative

Central etc- v, Sumitomu Bank Ltd. The Roy an, (1987) 1 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 Sank "approaches the applicant for waiver of

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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)

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 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 I6(e): If the Issuing Blank fails to act in accordance with the

provisions of paragraphs (c) and (d) of this Article and/or fails to hold

the documents at me disposal of, or to return them to, the presentator, the

Issuing Bank shall be prechuded 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

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.

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 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 ah

original document, a document produced or appearing to have been produced

- (i) by reprographic, automated or computerised systems; (ii) as carbon

copies, provided that it is marked as original and, where necessary,

appears to be signed.

Recently in Karaganda Ltd. y. 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 oh headed 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 an upon Glencore International AG v. Bank of

China, (1996) I Lloyds' Rep. 135 to say that me absence of the word

'original' in any document produced on rd processor was a document

produced by a computerised system within Article 20(b) and was required to

be marked as original. But this case was distinguished by the High Court

(see 1998 Lloyds Rep. Bank 173) (1997 Current Law Year Book 328). It was

held by the 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 arid

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 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

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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 "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 not so stipulate, banks will accept such

documents as presented, provided that their debtor content makes it

possible to relate 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

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 comprehensive as it does not address itself to the

effect of 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] 1 SCC 174 (at p. 48).

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 me plaint

are that the sellers in connivance with some persons presented forged or

false documents to the Negotiating Bank which include delivery-vouchers

parported issued & signed on behalf of the buyers (signed by one Mr.

Waghmode and counter signed toy 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.

In several judgment 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

conies within these two exceptions, temporary injunction under Order 39,

Rule 1, CPC can be issued. It has also been held that the contract of the

Bank guarantee or the Letter of Credit is independent of the main contract

between the seller arid 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 0n

the ground that there was a breach of the contract by the seller. The Bank

is to honour the demand for encashment if the sellet pima 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 bound to honour the

demand of the seller for encashment. While doing so it must take reasonable

care. It is not permissible for the Bank to refuse payment on the ground

that the buyer is claiming that there is a breach of contract. Nor can the

Bank try to decide this question of breach at that stage and refuse payment

to the seller. Its obligation under the document having nothing to do with

any dispute as to breach of contract between the seller and the buyer. As

to its knowledge of fraud or forgery, we shall presently deal with it,

Knowledge of fraud :

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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) Lid v. National Westminister

Bank Ltd., (1978) Q.B, 146 at 155 at irrevocable Letters of Credit are 'the

life blood of international commerce''. He said :

"Except possibly in clear cases of fraud of which the banks have 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 Sank

International Lid. (1978) Q.B. 159 that 'the only exception is where 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 mast 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 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 of fraud 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 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 if the

corroborated evidence of the plaintiff usually in the form of contemporary

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, Hanney, (1918) 2 K.B.

623 (KB), the Banker accepted the documents without any knowledge of fraud

or falsify and it was held that me defendants could not counter-claim from

the Bank. However, it would be the 'Banker's duty to refuse the documents

which oh their face bear signs of having been altered (See Re Salomon and

Nandszus, [l899].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

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 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 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

Batik (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, in their application for

injunction, informed the Issuing Bank about the fraud of the sellers. For

the purpose of hearing tot application of the Collecting Bank, the Court

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assumed the facts stated in the application of the buyer as to fraud to be

true. (Otherwise, this was a difficult burden of proof normally). Shientag,

J. held that:

"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 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 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 the 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 a document as

complying with the terms of a letter of credit" No hardship will be caused

by permitting the bank to refuse 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

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

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 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 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 principle, 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

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 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

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must fail if it sought to restrain the Issuing Bank.from reimbursing the

Negotiating Bank- These principles prima facie flow from Shientag, J's

judgment which has been followed both in England and by this Court, in

several cases.

Legal relation of a Negotiating Bank vis-#-vis the Issuing Bank:

The contract between the issuing banker and the paying or negotiating

(intermediary) banker may partake of a dual nature. The relationship is

mainly 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

indemnify 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

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 intermediary banker and the buyer. But the

intermediary 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.

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 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 :

"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 to recover

from the issuing banker if the latter delays in deciding whether he will

repudiate or accept."

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 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.

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

(1998) Bom, 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

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that documents under the credit could be negotiated through any Bank. The

drawer drew the Bill of Exchange which was negotiated by the Bank of

Rajasthan, On receipt of the said drafts, the Bank of Rajasthan wrote to

the UGO 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 much in excess of the limit authorised by

UCO Bade 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

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

"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. UCO Bank was held bound by its own confirmation 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

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 me 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 conformity with the letters of Credit

or that the buyer had so informed them. Prima facie, the appellant was in

the position of a holder in due course. Points 2 and 3 are decided in

favour of me appellant

For me aforesaid reasons, we allow me appeal and vacate me temporary

injunction granted in favour of the plaintiff against the Bank of

Maharashtra in so far as the said injunction precluded the Bank of

Maharashtra from reimbursing the appellant-Federal Bank: It Is clarified

that me 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 era

of advanced technology of e-mail and internet. It is possible that in the

near future we must take greater pare and 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 fraud (Principles of International Trade Law, 2nd Ed,, 199 p.

298).