Full Judgment Text
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CASE NO.:
Appeal (civil) 2578 of 2006
PETITIONER:
UBS AG
RESPONDENT:
State Bank of Patiala
DATE OF JUDGMENT: 10/05/2006
BENCH:
B.P. Singh & Altamas Kabir
JUDGMENT:
J U D G M E N T
(Arising out of SLP) No.5639 of 2006)
With
Civil Appeal No. .....2579....../2006
(Arising out of SLP ) No.6134 of 2006)
and
Civil Appeal No. ....2580......./2006
(Arising out of SLP ) No.6141 of 2006)
ALTAMAS 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 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 in connection with
Summary Suit Nos. 1515 of 2000 and 6089 of 1999.
Inasmuch as, the said three suits were filed in respect of
various Letters 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 defend their
respective suits.
Three separate Special Leave Petitions, being Special
Leave Petition ) Nos. 5639 of 2006, 6141 of 2006 and 6134 of
2006, 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 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).
On 27th March, 1998, on the request of its client, M/s
Hamco 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 M/s. Frobevia S.A. The said Letter of Credit
appears to have been issued for the import of 255.00 MT of Tin
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Ingots by M/s. 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 of relevant documents by the
beneficiary, the Petitioner-Bank made payment under the said
Letter of Credit to the said beneficiary, namely, Frobevia S.A.
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 received information that M/s. Hamco
Mining & Smelting Ltd, M/s. 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 M/s.
Frobevia did not ship any goods on the vessel in question and
the Bill of Lading negotiated by M/s. 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-Bank was put ’on
caution’ and was advised not to negotiate the export bills
presented by M/s. Frobevia and further not to make any
payment to M/s. Frobevia in respect of the said Letter of
Credit.
Notwithstanding the aforesaid letter dated 3rd February,
1999, the 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 payment under the aforesaid
Letter of Credit dated 27th March, 1998, favouring M/s.
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 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 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
upto the date of payment to the account of the Petitioner-
Bank, that is, UBS AG, 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 February, 1999,
written by the advocate of the Respondent-Bank, the
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
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of their dues.
Pursuant thereto, the Petitioner-Bank instituted
Summary Suit No. 897 of 2000 in the Ordinary Original Civil
Jurisdiction of the High Court of Judicature at Bombay under
Order XXXVII of the Code of Civil Procedure, 1908.
As indicated, hereinbefore, two similar suits on similar
causes of action, were filed by the Petitioner-Bank against the
Federal Bank Limited and United Western Bank, being
Summary Suit Nos. 1515 of 2000 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.
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.
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 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 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-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 of Credit had been accepted to mature
on 23rd September, 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 September, 1998 to 21st March,
1999. The Appellant-Bank was requested to confirm such
extension. In response to the said communication, the
Appellant-Bank by its communication dated 31st August, 1998
confirmed the extension of the reimbursement date till 21st
March, 1999.
As indicated hereinbefore, notwithstanding the fact that
the Appellant-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 one M/s. Solo Industries
Ltd., had been brought to its notice by several other banks
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which had established Letters of Credit at the instance of
M/s. 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 the said letter the
Appellant-Bank was put ’on caution’ not to negotiate the
export bills, if any, presented by M/s. Frobevia and further not
to make any payment whatsoever to M/s. 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 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 import of
any goods, on the basis of bogus documents and that even
the Bill of Lading and shipping documents used for obtaining
the Letter of 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
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 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.
The reasoning of the learned Single Judge of the High
Court in granting such leave has been questioned in these
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.
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 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.
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. vs. SBI,
Overseas Branch, Bombay, (2000) 6 SCC 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, this Court held that an unconditional bank
guarantee must be given effect to even where there is a
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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 payment
under the Letter of Credit had been made to the beneficiary.
Similar sentiments were expressed by this Court in
Dwarikesh Sugar Industries Ltd. vs. Prem Heavy Engineering
Works (P) Ltd. And Anr., (1997) 6 SCC 450, wherein while
dealing with a bank guarantee this Court held that 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 Bank Ltd. vs. 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 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
results in irretrievable damage. 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 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
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 bank and the confirming
bank. It was urged that since the fraud committed by M/s.
Hamco Mining & Smelting Ltd. had been discovered and
intimated to the Appellant-Bank before the due date of
reimbursement, 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.
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
informed of the fraud perpetrated by M/s. Hamco Mining &
Smelting Ltd. It was contended that in the 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.
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 confirmation from the
Respondent-Bank before making payment to the beneficiary
of the Letter of Credit. In fact, one of the points urged on
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behalf of the Respondent-Bank was that payment, if any,
made by the Appellant-Bank to M/s. 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 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 vs. 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 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 of leave would merely
enable the defendant to prolong the litigation by
raising untenable and frivolous defences. The
test is to see whether the defence raises a real
issue and not a sham one, in the sense that if
the facts 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 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 also, the
defendant shows that even on a fair probability
he has a bona fide defence, he ought to have
leave. Summary judgments under Order 37
should not be granted where serious conflict as
to matter of fact or where any difficulty on
issues as to law arises. The court should not
reject the defence of the defendant merely
because of its inherent implausibility or its
inconsistency."
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
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 which
an appeal would lie. Placing reliance on the decision of this
Court in Shah Babulal Khimji vs. 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.
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
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in matters relating to grant of leave to a defendant to defend
a suit under Order XXXVII of the Code of Civil Procedure are
undoubtedly sound, in the facts of this case, however, no
triable issue can be raised which would warrant grant of
unconditional leave to the Respondent-Bank to defend the
suit filed by the Appellant-Bank. International commerce
operates on trust and relies to a large extent on
arrangements between banks on behalf of their respective
clients, giving rise to ’UCP 500’ which governs the Letter of
Credit involved in the instant case. Prior to 3rd February,
1999, when the advocate for the Respondent-Bank wrote to
the petitioner-bank, there is nothing on record to suggest
that any fraud had been perpetrated by the applicant and the
beneficiary or that the Appellant-Bank had been requested
not to negotiate the documents to be presented by the
beneficiary. In fact, four and a half months after 6th April,
1998, when the Letter of Credit had already been negotiated,
the Respondent-Bank requested the Appellant-Bank to extend
the maturity date of the Letter of Credit from 23rd September,
1998 to 21st March, 1999.
The facts of these three appeals are clear and simple.
The Letters of Credit were issued by the issuing \026bank to the
confirming-bank with a request to inform the beneficiary
that an irrevocable Letter of Credit had been established for
the sum indicated therein to be paid by the Appellant-Bank
on negotiation of documents to be presented by the
beneficiary. Such documents having been presented by the
beneficiary to the Appellant-Bank, it made payment under the
Letter of Credit to the beneficiary and was entitled to receive
reimbursement for the same from the Respondent-Bank. If
the fraud had been detected earlier and the Appellant-Bank
had been informed of such fraud and put on caution prior to
making payment, the Respondent-Bank may have had a
triable issue to go to trial. That is not so in these three
cases. In these cases, the fraud was detected after the
Letters of Credit had been negotiated and hence such fraud
alleged to have been committed by the constituent of the
Respondent-Bank cannot be set up even as a plausible
defence in the suit filed by the Appellant-Bank.
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 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
interpreted Clause 8 of the Letter of Credit in holding that the
plaintiff’s claim for encashment of the Letter of Credit could
not be accepted because prima facie Clause 8 of the said
Letter of Credit did not provide for discounting of the said
Letter of Credit and in view of such discounting the plaintiff
would not be entitled to claim reimbursement on the ground
that the said amount had been paid to the beneficiary. The
Letter of Credit itself shows that the same was to be negotiated
as had been done by the Appellant-Bank.
As far as the submission regarding the maintainability of
the appeals are concerned, we are satisfied that the principles
enunciated in Babulal 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 judgment and order of the High Court in these
three appeals are set aside and the unconditional leave
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granted to the Respondent-Bank to defend the suit is revoked.