Full Judgment Text
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PETITIONER:
UNITED COMMERCIAL BANK
Vs.
RESPONDENT:
BANK OF INDIA AND OTHERS
DATE OF JUDGMENT26/03/1981
BENCH:
SEN, A.P. (J)
BENCH:
SEN, A.P. (J)
GUPTA, A.C.
CITATION:
1981 AIR 1426 1981 SCR (3) 300
1981 SCC (2) 766 1981 SCALE (1)548
CITATOR INFO :
R 1986 SC1924 (1,4,5)
RF 1992 SC1066 (13)
ACT:
Banking law-Documents submitted by the seller of goods
not in conformity with instructions given in the letter of
credit-Duties of the paying bank-Whether bound to determine
by physical examination or an expert advice if the goods
conformed to the contract-Nature and effect of letter of
credit.
Practice-Payment made by the paying bank "under
reserve" as a result of discrepancies in the documents
submitted by the seller-High Court, if could grant
injunction restraining the paying bank from collecting the
amount paid under reserve.
Constitution of India-Article 136-Supreme Court, if
would interfere with interlocutory orders under Art. 136.
Words and Phrases-Payment "under reserve"-Meaning of.
HEADNOTE:
Respondent No. 2 entered into a contract to sell to
respondent No. 3 one thousand metric tonnes of "Sizola Brand
Pure Mustard Oil" valued at approximately Rs. 86 lakhs
pursuant to which the buyer opened a letter of credit with
the appellant bank. After despatching the goods to the
various destinations to which they were instructed to send,
the seller presented 20 sets of documents in the first lot
and 27 sets of documents in the second, the aggregate value
of which was equivalent to the amount of letter of credit.
The appellant bank refused to make payment "except under
reserve" pointing to a discrepancy in the railway receipts
which stated "Sizola Brand Pure Mustard Oil Unrefined" as
against the description in the instructions of the letter of
credit "Sizola Brand Pure Mustard Oil". On instructions from
the seller the respondent bank received the money in respect
of the first lot of 20 documents "under reserve" and
credited the amount to their account with a specific
notation that the amount was paid "under reserve" as a
result of discrepancies between the railway receipts and the
instructions in the letter of credit.
In respect of the second lot, the appellant bank
refused payment on the ground of the discrepancies in the
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railway receipts as before as also on the ground that some
of the railway receipts were "stale".
In the meantime the appellant bank asked the respondent
to refund the amount paid in respect of the first lot of
documents under reserve because the
301
bills were acceptable to the buyer due to discrepancies.
Some correspondence ensued between the parties and the
banks; eventually on the faith of an undertaking given by
the seller the appellant bank paid the remainder amount in
respect of the 27 bills as well "under reserve" so that the
value in respect of both the sets of bills paid to the
sellers in two instalments was made "under reserve".
The sellers filed a suit in the High Court.
A few days thereafter the appellant bank served a
letter of demand on the respondent bank for the refund of
the entire amount paid to it in respect of the two sets of
bills together with interest thereon because, according to
it, the bills of exchange had not been retired by the buyer
for the reasons that the railway receipts were stale that
the goods had not been supplied according to the terms of
the agreement and that chemical analysis of the oil showed
that it was not fit for human consumption.
The respondent bank in turn wrote to the seller to
refund the whole amount whereupon the seller moved the High
Court for the grant of an exparte ad interim injunction
restraining the appellant bank from recalling or receiving
the amount due from the respondent bank which was granted.
The High Court appointed a Court receiver with power to
sell the goods without any obligation or liability to
purchasers as to their quality, quantity or edibility. At
the sale the seller himself bought the goods for Rs. 18
lakhs odd. The sale was confirmed by the High Court.
The single Judge of the High Court thereupon made the
temporary injunction absolute till the disposal of the suit
filed by the sellers on the view that the appellant was not
entitled under the terms of the letter of credit to
unilaterally impose a condition of the payment "under
reserve" or refuse to pay against the documents tendered by
the sellers merely because of the alleged discrepancies.
A Division Bench of the High Court summarily dismissed
the appellant’s appeal with the result that the seller
received the whole of the amount of the letter of credit as
well as bought the whole lot of goods for Rs. 18.53 lakhs.
On the question whether the High Court should, in a
transaction between a banker and a banker, grant an
injunction at the instance of the beneficiary of an
irrevocable letter of credit restraining the issuing bank
from recalling the amount paid under reserve from the
negotiating bank acting on behalf of the beneficiary against
a document of guarantee/indemnity at the instance of the
beneficiary and (2) whether this Court could, in a matter
like this, depart from its normal practice and refuse to
interfere with an interlocutory order under Article 136 of
the Constitution.
Allowing the appeal,
^
HELD : 1(a) The High Court was wrong in granting the
temporary injunction restraining the appellant bank from
recalling the amount paid to the respondent bank. Courts
usually refrain from granting injunction to restrain the
performance of the contractual obligations arising out of a
letter of credit or a
302
bank guarantee between one bank and another. If such
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temporary injunctions were to be granted in a transaction
between a banker and a banker, restraining a bank from
recalling the amount due when payment is made under reserve
to another bank or in terms of the letter of guarantee or
credit executed by it, the whole banking system in the
country would fail. [329 F, 324B-C]
(b) In the instant case the appellant bank was under a
duty to its constituent to scrutinise the documents and
could not be compelled to make payment particularly when the
description in the document did not tally with that in the
letter of credit. It was fully entitled to exercise its
judgment for its own protection. Instead of asking the
buyers to change the description of the goods in the letter
of credit the sellers sought to get over the irregularity by
instructing the bankers to execute a letter of guarantee or
indemnity. [325 G-H]
(c) The appellant bank knew little or nothing about the
mustard oil. Its duty was not to go out and determine by
physical examination of the consignments, or employment of
experts, whether the goods actually conformed to the
contract between the buyer and the seller, nor even
determine either from its own or expert advice whether the
documents called for the goods which the buyer would be
bound to accept. [326 C-D]
2(a) Bank issuing or confirming a letter of credit is
not concerned with the underlying contract between the buyer
and seller. The duties of a bank under a letter of credit
are created by the document itself; in any case it has the
power and is subject to the limitations which are given or
imposed by it, in the absence of the appropriate provisions
in the letter of credit. [319 B-C]
(b) The opening of a confirmed letter of credit
constitutes a bargain between the banker and the seller of
the goods which imposes on the banker an absolute obligation
to pay. The banker is not bound or entitled to honour the
bills of exchange drawn by the seller unless they and such
accompanying documents as may be required thereunder, are in
exact compliance with the terms of the credit. Such
documents must be scrutinised with meticulous care. If the
seller has complied with the terms of the letter of credit,
however, there is an absolute obligation upon the banker to
pay irrespective of any disputes between the buyer and the
seller whether the goods are upto the contract or not. [317
C-D]
Tarapore and Co., Madras v. Tractors Export, Moscow and
Anr. [1969] 2 S.C.R. 920 applied.
Hamzeh Malas and Sons v. British Imex Industries Ltd.
[1958] 2 Q.B. 127 and Urguhart Lindsay and Co. Ltd. v.
Eastern Bank Ltd. [1922] 1 K.B. 318, referred to.
(c) The refusal of the bank to honour a bill of
exchange drawn by the seller on presentation of the proper
documents constitutes a repudiation of the contract as a
whole and the sellers are entitled to damages arising from
such a breach. [317 E]
(d) A letter of credit constitutes the sole contract
with the banker, and the bank issuing the letter of credit
has no concern with any question that may arise between the
seller and the purchaser of the goods, for the purchase
price of which the letter of credit was issued. [319 G]
303
(e) It is settled law that in dealing with commercial
letters of credit the documents tendered by the seller must
comply with the terms of the letter of credit, and the
banker owes a duty to the buyer to ensure that his
instructions relative to the documents against which the
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letter of credit is to be honoured are complied with. [322
D]
(f) A payment under reserve is understood in banking
transactions to mean that the recipient of money may not
deem it as his own but must be prepared to return it on
demand. The balance of convenience clearly lies in allowing
the normal banking transactions to go forward. The sellers
have failed to establish that they would be put to an
irreparable loss unless are interim injunction was granted.
[329 B-C]
English, Scottish and Australian Bank Ltd. v. Bank of
South Africa [1922] 12 L1.L. Rep. 21 st. 24, Equitable Trust
Co. of New York v. Dawson Partners Ltd. [1927] 27 L1.L. Rep.
49, Rayner v. Hambros Bank Ltd. [1943] 1 K.B. 37, Bank Melli
Iran v. Barclays Bank [1951] 2 L1.L. Rep. 367, Lamborn v.
Lake Shore Banking Co. [1921] 196 App. Div. 504 at p. 507;
188 NYS 162 at p. 164 and Laudisi v. American Exchange
National Bank [1924] 239 NYS 234; 146 N.E. 347 at 348
referred to.
3(a) The powers of this Court under Article 136 of the
Constitution though untrammelled, are subject to self-
ordainerd restrictions. The Court does not, as a matter of
rule, interfere with interlocutory orders, save under very
exceptional circumstances. [327 H]
(b) In the instant case there was no justification for
the High Court to grant a temporary injunction under order
39 rules 1 and 2 of C.P.C. to the sellers, the effect of
which virtually was to restrain a transaction between a
banker and a banker. Courts view with disfavour the grant of
such temporary injunction. The High Court has prejudged the
whole issue by holding that the appellant could not
unilaterally impose the conditions of payment ‘under
reserve’ nor was it justified in holding that the documents
were ‘clean’. [328 B]
JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 132 of
1980.
Appeal by Special Leave from the Judgment and Order
dated 17.10.79 of the High Court of Bombay in Appeal No. 382
of 1979 in Suit No. 1028/78.
F.S. Nariman, P.H. Parekh, K.R. Modi, R.A. Kapadia,
Raian Karnjawala and M.H. Shah for the Appellant.
K.K. Venugopal, Vinay Bhasin, Rakesh Sahani, Vineet
Kumar, G.E. Vahanvati and S.J. Thacker for Respondent No. 1.
304
Soli J. Sorabjee, E.J. Balsara, S. Ganesh, Narain and
P.H. Amin for Respondent No.2.
Lal Narain Sinha, Attorney General of India, Ram Balak
Mahto and B.P. Singh for Respondent No. 3.
The Judgment of the Court was delivered by
SEN, J. This appeal by special leave is from an order
of the Bombay High Court dated August 24, 1979, granting a
temporary injunction restraining the appellant, the United
Commercial Bank. By this order the appellant has been
restrained from making a recall of a sum of Rs. 85,84,456
paid by it under reserve against the relative bills of
exchange drawn against the letter of credit issued by it,
from respondent No. 1, the Bank of India, and in terms of
the letter of guarantee or indemnity executed by that Bank,
in a suit based on a bankers’ letter of credit.
The facts are somewhat complicated, but it is necessary
to disentangle the facts to bring out the point of law
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involved.
The respondent No. 2, Messrs Godrej Soaps Limited,
herein-after referred to as ‘the plaintiffs’, by a contract
dated February 2, 1978 agreed to supply to the respondent
No. 3, the Bihar State Food and Civil Supplies Corporation
Limited, hereinafter referred to as ‘the Bihar Corporation’,
one thousand metric tonnes of ‘Sizola Brand pure Mustard
oil’ the total value of which was approximately Rs. 86 lacs,
packed in brand new leakproof 62,040 tins of net 16 kg. each
at the rate of Rs. 137 per tin. The contract provided inter
alia that the Bihar Corporation were to open a letter of
credit with the appellant, the United Commercial Bank, for
the said amount, which the Bihar Corporation duly did.
The letter of credit issued by the appellant was in the
following terms :
United Commercial Bank
Nariman Point Branch
United Commercial Bank
Frazer Road, Patna Branch, 13th June, 1978.
Office :
Malbourne Road,
Calcutta-1.
305
To
M/s Godrej Soaps Ltd.,
Eastern Express Highway,
Vikhroli, Bombay 400 079.
Dear Sirs,
LETTER OF CREDIT No. 1/78
At the request of Bihar State Food & Civil
Supplies Corpn. Ltd., Patna, we hereby establish our
confirmed irrevocable Letter of Credit in favour of
your goodself for account of Messrs Bihar State Food &
Civil Supplies Corpn. Ltd., East Boring Road, Patna,
for any sum or sums not exceeding in all Rs. 86,00,000
(say Rupees eighty six lakhs only) outstanding at
anyone time available by your drafts at sight drawn on
Messrs Bihar State Food & Civil Supplies Corpn. Ltd.
without recourse to drawers for full invoice value of
merchandise to be described in the invoice as : 62040
tins of Sizola Brand Pure Mustard Oil packed in brand
new leak proof tins of net 16 kgs. each @ Rs. 137
(Rupees one hundred thirty seven only) per tin.
Despatched from Bombay accompanied by the following
documents :
(i) Signed detailed invoices in duplicate.
(ii) Railway Receipts consigned to or endorsed in
favour of UNITED COMMERCIAL BANK marked ‘FREIGHT/
TO PAY’ evidencing despatch by Railway of the
merchandise as stated above.
Signed Delivery order on your godown at.....
fvg. United Commercial Bank covering the delivery
of the above-mentioned merchandise.
(iii)Insurance Policies or Certificate covering usual
transit risks and rail issued in duplicate and
endorsed in blank by Transit Insurance at the cost
of openers not exceeding one per cent of value of
goods to be effected by beneficiary and to be
included in the invoice.
Railway Receipt/Delivery order must be dated not later
than
306
Bills of Exchange must be dated and negotiated not
later than 20.7.1978.
sd. Accountant sd. Manager.
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The schedule annexed specified the various destinations
to which the goods were to be despatched.
Between June 22, 1978 and June 26, 1978, the plaintiffs
from time to time despatched an aggregate of 24,400 tins of
their mustard oil by invoices bearing Nos. 4501 to 4520 of
the aggregate value of Rs. 36,52,960 to various destinations
mentioned in the schedule annexed to the letter of credit.
Between June 17 to July 1, 1978 the plaintiffs further
despatched an aggregate of 23,080 tins of the said goods
covered by invoices Nos. 4521 to 4539 of the aggregate value
of Rs. 34,70,312 on July 7 and 8, 1978 the plaintiffs also
despatched an aggregate of 10,560 tins covered by invoices
Nos. 4540 to 4547 of the aggregate value of Rs. 14,61,184.
The plaintiffs presented the documents for payment of
Rs. 85,84,456 in two lots. There were twenty sets of
documents in the first lot, the total value of which was Rs.
36,52,960, the second lot in 27 sets of the total value of
Rs. 49,31,496. The first lot consisted of four sets of the
value of Rs. 7.30 lacs, seven sets of Rs. 12.78 lacs, five
sets of Rs. 9.13 lacs and four sets worth Rs. 7.30 lacs, the
second of 27 sets, consisting of 19 sets of Rs. 34.17 lacs
and 8 sets of Rs. 14.16 lacs. It is these two lots of
documents which are the subject matter of the suit.
When the documents were presented by the plaintiffs for
payment of Rs. 36,52,960 against the first lot of 20 sets,
and Rs. 49,31,496 against the second lot in 27 sets, the
appellant, United Commercial Bank refused to make payment
‘except under reserve’ on the ground of ‘discrepancies’. The
main discrepancy was that the goods were described in the
railway receipts as "Sizola Brand Pure Mustard Oil
‘Unrefined"’. The plaintiffs accordingly instructed their
bankers, the Bank of India, to accept payment of Rs.
36,52,960 against the first lot of documents ‘under
reserve’. The appellant accordingly made an aggregate
payment of Rs. 36,52,960 to the Bank of India, that is, the
negotiating bank, by three cheques of Rs. 7,30,502, Rs.
12,78,636 and Rs. 16,43,832. It is significant to note that
Bank of India in their turn credited the account of the
plaintiffs, who were their constituents, also ‘under
reserve’, with a
307
specific notation that ‘it was paid under reserve on account
of discrepancies’.
As regards the second lot comprising of 27 sets of
documents, 19 sets were presented by the plaintiffs on July
3, 1978, with sight drafts of Rs. 1,82,648 each along with
bills of exchange together with the relevant documents. On
July 5, 1978 the appellant addressed a letter to the
plaintiffs refusing to make any payment under the letter of
credit due to ‘discrepancies’ as well as some of the railway
receipts being ‘stale’. It was clearly stated by the
appellant "We are unable to negotiate the documents and are
returning the same to you. However, if you so desire, we
shall send the documents on collection basis and shall remit
the amount to you on receipt of proceeds". Admittedly, the
discrepancies remained till July 12, 1978 as the description
of goods in the railway receipts still remained "Sizola
Brand Pure Mustard Oil ‘Unrefined"’ till the plaintiffs made
a request to the Central Railways for the deletion of the
word ‘Unrefined’.
On July 12, 1978 the appellant addressed a letter to
the Bank of India making a demand for the refund of the
amount of Rs.36,52,960 paid under reserve in respect of the
first lot of documents stating "In this connection we wish
to state that we are now advised by our Patna Office that
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the bills are not acceptable to the Corporation due to
discrepancies. We shall therefore, thank you if you kindly
remit the amount with interest at 5 per cent from the date
of payment to you by us to the date of payment by you to
us." On the same day, the appellant addressed a letter to
the plaintiffs in regard to the second lot of 27 documents
that the documents were not acceptable due to discrepancies
and, therefore, no payment could be made against them under
the letter of credit. On the next day, i.e., July 13, 1978
the plaintiffs addressed a letter to the appellant in
respect of the first lot of 20 documents ‘negotiated and
paid by you under reserve’, stating that the word
‘Unrefined’ in the railway receipts should not have been
treated as a discrepancy, forwarding copies of telegrams
sent by the Central Railway to the various destinations
deleting the word‘unrefined’, with a request that the
appellant may, as regards the 27 documents of the second
lot, ‘negotiate the documents and pay for the same
forthwith’. On the same day, the plaintiffs also addressed a
letter to the Bihar Corporation stating that the word
‘Unrefined’ had no relation to the quality but was inserted
for the purpose of paying a lower freight, and further that
the railway authorities had agreed to amend the railway
receipts by deleting the word ‘Unrefined’.
308
On July 13, 1978 the plaintiffs addressed the following
letter to their bankers, the Bank of India :
July 13, 1978.
Bank of India,
Foreign Exchange Dept.,
Mahatma Gandhi Road,
Bombay 400 023.
Attn : MR. SIRUR
Dear Sirs.
19 documents for Rs. 1,92,648 each drawn
under L/C No. 1/78 dated 13.6.1978 of United
Commercial Bank Patna Office.
We are enclosing 19 documents as referred to above
and request you to forward the same to the United
Commercial Bank, Nariman Point, Bombay for negotiations
of payment.
We request you to collect these funds forthwith
and credit our Cash-Credit Account No. 1 with you.
We have complied with all the terms and conditions
of the Letter of Credit and feel that United Commercial
Bank would make the payment to you without reserve. You
may accept the payment under reserve if insisted upon
by them.
Asst. Financial Controller
The Bank of India accordingly wrote letter to the
appellant stating "we would accept payment under reserve".
On July 14, 1978 the appellant addressed a letter to the
Bank of India returning the 27 documents relating to the
second lot signifying their inability to negotiate the
documents due to discrepancies in the description of goods
in the railway receipts, stating that mere deletion of the
word ‘Unrefined’ could not make the railway receipts clean,
and furthermore, because some of the railway receipts were
‘stale’. It also intimated the plaintiffs by their letter of
even date that they could lift the ‘reserve’ without
obtaining prior permission of their constituents i.e. the
Bihar Corporation.
309
The plaintiffs, being apprehensive that their bankers,
the Bank of India, would be bound to refund Rs.36.52 lacs
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pursuant to the notice of demand served by the appellant
inasmuch as the payment was made under reserve, kept a
plaint ready on July 17, 1978 for grant of a perpetual
injunction against the appellant, and on the same day
addressed a letter to the appellant asking for payment of
Rs.49,31,496 against the second lot of documents, enclosing
a letter of guarantee or indemnity executed by their
bankers, which reads :
Date July 17,1978
United Commercial Bank,
Nariman Point,
Bombay 400021.
Attn : Mr.P.K. Sharma
Dear Sirs,
Letter of Credit No. 1/78 of your Patna Office
dated 13.6.78-Two sets, each containing 19 & 8
negotiable documents.
We are in receipt of your letters bearing No.
Fex/Exp/78 dated 12.7.78 and 14.7.78 on the above
subject.
We refer to our submission of 19 documents through
our bankers, Bank of India and 8 documents submitted
directly by us to you for negotiation and payment. We
learnt from you that you have returned the set of 19
documents to Bank of India pointing out certain
discrepancies in the documents to them. The set of 8
documents has been returned to us by you stating
certain discrepancies under cover of your letter
Fex/Exp/GSR/78 dated 12.7.78.
One of the discrepancies pointed out by you in
both the sets of documents (19 & 8) is regarding the
appearance of the word ‘unrefined’ in the railway
receipts, as the same word does not appear in the
Letter of Credit along with the words "Sizola Brand
Pure Mustard Oil". Out of abundant precaution, we then
obtained and gave you copies of telegrams issued by the
Central Railway to the Station Masters of the various
destination stations, to which the goods were booked,
to the effect that the word "unrefined" is superfluous
and, therefore, deleted. You have taken
310
the stand that by this action of the Central Railway
also the documents still does not continue to be in
accordance with the letter of credit.
Out of abundant precaution, we are now submitting
herewith the railway receipt returned by you wherein
the word "unrefined" has been physically deleted by the
railway authorities.
We are also enclosing a letter of undertaking
which is letter of undertaking issued by our bankers,
the Bank of India, in your name indemnifying you
against demurrage, wharfage and such other charges
which you may have to pay at various destinations,
where the goods have been consigned. This action of
ours is without prejudice to any of our rights and
contentions.
We now request you to Pay for these documents
forthwith.
Director.
The Bank of India executed a letter of indemnity
or guarantee to the effect :
Bank of India
70/80, M.G.Road
Bombay-400023.
United Commercial Bank, 18th July, 1978.
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Mafatlal Centre,
Nariman Point Branch,
Bombay.
Dear Sirs,
In consideration of your having negotiated
Documentary Bills of Exchange drawn by Godrej Soaps
Ltd., drawn on Bihar State Food & Civil Supplies Corpn.
dated (various dates) under the commercial letter of
credit. No. L/C 1/78 dt. 13.6.78 issued by United
Commercial Bank, Frazer Road Branch for account of
Bihar State Food and Civil Supplies Corpn., We hereby
‘unconditionally’ agree to hold you harmless and
indemnified for all consequences of nonacceptance
and/or non/payment of this/these bill (s) exchange by
reason of the following discrepancies claims by you:
..... ..... .....
311
We have made arrangements for due payment of
this/these bill (s).
We further unconditionally agree that in the event
of the bills being dishonoured on due presentation on
account of the above discrepancies claimed by you to
reimburse and on demand the equivalent of the above
mentioned bill(s) together with all other expenses,
demurrage and all such other charges incurred by you in
connection with dishonoured bill (s).
Notwithstanding anything contained hereinbefore
our liability under this bond is restricted to Rs.
86,00,000 (Rupees Eighty Six lacs only) apart from
charges enumerated above and it will remain in force
till 17.8.1978. Unless a claim under the guarantee is
made against us in writing and received by us before
that date all your rights under the said guarantee
shall be forfeited and we shall be relieved and
discharged from all liability thereunder.
for BANK OF INDIA
sd. P. Accountant sd. P. Manager
It is significant to note that it was represented by
the Bank of India acting on behalf of the plaintiffs, "We
have made arrangements for the payment of these bills",
meaning thereby that the Bihar Corporation had agreed to
retire the bills of exchange.
On July 19, 1978 the representative of the plaintiffs,
Messrs Godrej Soaps Ltd. met the representatives of the
appellant, the United Commercial Bank at Bombay. It was
pointed out to him that first set of 20 documents had not
been accepted by the Bihar Corporation due to discrepancies
and that the appellant had, therefore, by their letter dated
July 12, 1978 made a demand for refund of Rs. 36,52,960. As
regards the second lot of 27 documents towards which the
balance amount of Rs. 49,31,496 was payable to the Bank of
India, in terms of the letter of indemnity or guarantee
executed by it he was informed that the instructions were
awaited from the head office and was asked to come in the
evening on the same day. The plaintiffs on the same day, i.
e., on July 19, 1978, brought the suit in the Original Side
of the Bombay High Court alongwith an application for the
grant of a temporary injunction to restrain the appellant
from recalling the amount of
312
Rs. 36,52,960 but the learned Single Judge, Bharucha J.,
declined to grant an ex parte ad interim injunction, while
allowing liberty to the plaintiffs to take out notice of
motion returnable on August 4, 1978 but it appears that no
such notice was ever taken out.
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When the appellant came to know of the suit, the
plaintiff’s representative made an endorsement at the foot
of the letter dated July 17, 1978:
As per Mr. Sharma’s talk with Mr.K.R. Gokulam we
hereby undertake not to proceed with this suit.
sd.R.V. Shekar
19.7 1978
On the faith of the undertaking the appellant made
payment of Rs.49,31,496 to the Bank of India in terms of the
letter of indemnity.
There is controversy between the parties as to what
transpired before the payment of Rs.49,31,496 and as to the
meaning of the aforesaid endorsement. We refrain from making
any observations as they would tend to prejudice the rights
of the parties. But one thing is clear that R.V. Shekar,
Assistant Financial Controller, Godrej Soaps was acting on
behalf of the plaintiffs, and the word ‘we’ meant Messrs.
Godrej Soaps Limited’. Further, that payment was secured by
making the endorsement.
The Bank of India addressed two letters dated July
20,1978 to the plaintiffs, that their account had been
credited with Rs. 34,70,312 and Rs. 14,61,184 i.e., Rs.
49,31,496 representing the value of the second lot of 27
documents, ‘under reserve’.
From the narration of these facts, prima facie it
appears that the payment of Rs. 36,52,960 against the first
lot of 20 documents made by the appellant to the Bank of
India, was a payment made ‘under reserve’ and that of Rs.
49,31,496 was also made ‘under reserve’ as well as against
the letter of guarantee or indemnity executed by it.
On August 2, 1978 the appellant served a letter of
demand on the Bank of India, for refund of Rs. 85,84,456
together with interest thereon at 15% per annum from the
date of payment by it to the date of refund, stating that
the bills of exchange had not
313
been retired by the Bihar Corporation, that is the buyers,
due to discrepancies. The letter reads :
Fex/exp/1110/78 2nd August, 1978
Bank of India
70/80 M.G. Road, Bombay 400 023.
Attn: Mr. PUDVAL, Manager (Advance)
Dear Sirs,
Re: Your Guarantee Re. C/72/943 dated 18th July
1978 in our favour for Rs.86,00,000 Document drawn
by M/s Godrej Soaps Ltd., under our Frazer Road,
Patna Branch L/C 1/78 dated 13.6.1978-negotiated
by us under reserve.
Please refer to our letter No. 646/78 dated 1st
August, 1978.
In this connection we are now advised by our Patna
Office that the bills have not been accepted by the
drawees, Bihar State Food & Civil Supplies Corporation
Limited due to the discrepancies. Our Patna Office is,
therefore, arranging to return the documents to us
which we hereby undertake to forward to you when
received.
In terms of your Guarantee No. 8/72/943 dated 18th
July 1978 for Rs. 86,00,000 and in terms of our letters
date 24.6.1978, 27.6.1978 and 28.6.1978 and two letters
of 19.7.1978, under cover of which we had made payment
of the bills to you, we hereby call upon you to refund
to us the amount of bills viz. Rs. 85,84,456 (Rupees
Eighty five lacs eighty four thousand four hundred and
fifty six) together with interest from the date of
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payment by us to you to the date of refund by you to us
@ 15% per annum.
In the meantime, please note that the documents
are held by us at your sole risk and responsibility.
You may, if you so desire protect the merchandise
including keeping insurance covernote valid.
.................................................
Please treat this as MOST URGENT.
sd.......Manager
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The 47 Notary’s protest Certificates show that when the
bills of exchange were re-presented for payment to the Bihar
Corporation on August 2, 1978 the drawees dishonoured the
bills of exchange on August 3, 1978 for the reason that (1)
the railway receipts accompanying the bills were ‘stale’,
(2) the goods had not been supplied as per the terms of
agreement, and (3) the chemical analysis showed that the oil
required refinement before being fit for human use,
The Bank of India accordingly addressed a letter to the
plaintiffs on the next day i.e. August 4, 1978 giving
intimation that the appellant by its letter dated August 2,
1978 had made a demand for refund of the amount of Rs.
85,84,456 paid under reserve and in terms of its letter of
guarantee or indemnity, seeking their ‘instructions’ in the
matter. On August 6, 1978 which was a Sunday, the plaintiffs
moved learned Single Judge at his residence, alongwith an
affidavit of their Sales Manager stating that unless an
injunction was granted the Bank of India, according to the
banking practice, would make payment of Rs. 85,84,456/- to
the appellant, on the commencement of the banking hours on
August 7, 1978. The learned Single Judge granted an ex-parte
ad interim injunction restraining the appellant from
recalling or receiving the amount due from the Bank of
India.
On December 17, 1978, the learned Single Judge
appointed the Court receiver to be the ad interim receiver
with power to sell the goods in question either in one lot
or separate lots, on ‘as is where is basis’, without any
obligation or liability to purchasers thereof as to quality,
quantity or edibility of the said goods. On March 27, 1979
the Court receiver accepted the offer of the plaintiffs to
buy the goods for Rs. 18,53,000 and the sale was confirmed
by the High Court on April 4, 1979.
The learned Single Judge by his order dated August 24,
1979 made the temporary injunction absolute till the
disposal of the suit on the view that the appellant was not
entitled under the terms of the letter of credit, to
unilaterally impose the condition of payment ‘under reserve’
or refuse to pay against the documents tendered by the
plaintiffs merely because of the alleged discrepancies, nor
was it open to it to reject the documents as stale, for in
his view, there were in-deed no stale documents. Upon these
grounds, he held that the plaintiffs had a prima facie case
He, however, added a rider that (1) the Bank of India was
left free to decide whether or not the conditions for
payment under the letter of indemnity had been satisfied so
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as to justify the making of payment thereunder to the
appellant, and (2) the appellant was not restrained from
making a claim upon the Bank of India or from receiving from
it the amount payable in terms of the letter of indemnity
nor was the Bank of India restrained from making payment
thereunder.
The appellant being aggrieved by the order of the
learned Single Judge dated August 24, 1979 preferred an
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appeal but a Division Bench of the High Court summarily
dismissed the appeal on October 17, 1979.
The result of all this has been that the plaintiffs
have not only received Rs. 85,84,456 towards the price of
1000 metric tonnes of ‘Sizola Brand Pure Mustard Oil’, but
also have the mustard oil in question on payment of Rs.
18,53,000.
The repercussions arising from the learned Single
Judge’s order dated August 24, 1979 are reflected in the
correspondence that ensued between the parties. There is no
need to refer to all the letters except a few. The
plaintiffs by their solicitor’s letter dated August 29,
1979, drew the attention of the Bank of India to the learned
Single Judge’s order granting injunction, and ‘instructed’
it not to pay. It reads :
The said interim order makes it absolutely clear
that our clients will in no way be liable and
responsible to return the amounts received under
reserve and therefore our clients are in no way liable
to pay any sum to UCO Bank and therefore you are also
not liable at present to pay any sum to UCO Bank under
the said letter of indemnity. In the circumstances, it
will not only be improper but illegal for you to make
any payment to UCO Bank.
In the circumstances, we have been instructed by
our clients to request you which we hereby do not to
make any payment to UCO Bank. In spite of what is
stated herein, if any payment is made by you to UCO
Bank, the same will not be binding on our clients and
you will not be entitled to debit such amount to our
clients current account with you and our clients will
refuse to reimburse you any sum so wrongfully paid by
you. Please note that if any payment is made by you, it
will be entirely at your risk and peril.
The appellant by its letter dated August 31, 1979 addressed
to the Bank of India made a demand for payment of Rs.
85,84,456 in
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terms of the letter of guarantee or indemnity. But this was
of not avail since the Bank of India as instructed by the
plaintiffs, sent a letter dated October 16, 1979 to the
appellant, by which it referred to the order passed by the
learned Single Judge, and refused to make any payment,
stating :
In its order dated 24th August, 1979 the Court has
stated that there is no provision regarding staleness
of the Railway Receipts in the letter of Credit and it
is not open to Bihar Food Corporation to recall the
payments made on that ground. Further, it is stated in
the said order that ‘the protests made upon dishonour
of the bills by these second defendants show that no
discrepancy was made a ground of dishonour.
Having regard to the observations in the order of
the Court, it cannot be said that the Bills were
dishonoured on the presentation on account of the
discrepancies. Further, the bills do not appear to have
been duly presented.
We understand that you have not appealed against
this order. In view of the aforesaid observations in
the said order dated 24th August, 1979 the terms of the
indemnity cannot be said to have been complied with so
as to enable us to make payment to you.
The Bank of India went on to say that in the circumstances
set out above, it had been advised that it was not proper
for it to make any payment under the letter of guarantee to
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the appellant unless it was established in proper
proceedings that the terms of the mandate had been complied
with so as to entitle it to receive payment and to enable
the Bank of India to make payment to it. This was contrary
to its earlier stand taken in the affidavit filed in June,
1979, in opposition to the notice of motion, by which it
denied that ‘it was trying to wriggle out of its
obligations’ under the letter of guarantee or indemnity and
by which it said that it ‘submits to the order of the
Court’.
The main point in controversy is: Whether the Court
should in a transaction between a banker and a banker grant
an injunction, at the instance of the beneficiary of an
irrevocable letter of credit, restraining the issuing bank
from recalling the amount paid under reserve from the
negotiating bank, acting on behalf of the beneficiary
against a document of guarantee/indemnity at the instance of
the
317
beneficiary ? Another question also arises as to whether the
Court should not in a matter like this, depart from its
normal practice, and refuse to interfere with an
interlocutory order under Art, 136 of the Constitution.
The nature of the contractual obligations flowing from
a banker’s letter of irrevocable credit and more
particularly, the rights of the seller as the accredited
party or beneficiary of the credit, against the issuing and
drawee bank was dealt with by this Court in Tarapore and Co.
Madras v. Tractors Export, Moscow and Anr. It was held that
the opening of a confirmed letter of credit constitutes a
bargain between the banker and the seller of the goods which
imposes on the banker an absolute obligation to pay. It was,
however, pointed out relying on a passage in "Chalmers’
Bills of Exchange" that it can hardly be over-emphasised
that the banker is not bound or entitled to honour the bills
of exchange drawn by the seller unless they, and such
accompanying documents as may be required thereunder, are in
exact compliance with the terms of the credit’. Such
documents must be scrutinised with meticulous care. If the
seller has complied with the terms of the letter of credit,
however, there is an absolute obligation upon the banker to
pay irrespective of any disputes there may be between the
buyer and the seller as to whether the goods are up to
contract or not. The Court relied upon the two decisions in
Hamzeh Malas and Sons v. British Imex Industries Ltd. and
Urguhart Lindsay and Co. Ltd. v. Eastern Bank Ltd. and
observed at p. 930 of the Report, that the refusal of the
bank to honour the bills of exchange drawn by the seller on
presentation of the proper documents constituted a
repudiation of the contract as a whole, and the sellers were
entitled to damages arising from such a breach.
In Stein v. Hambro’s Bank of Northern Commerce a
contract for the sale of hides by an English seller to a
buyer from Venice, to be shipped from India, was financed by
an irrevocable letter of credit. The buyer, contending that
a condition had not been met, instructed the bank to cancel
the credit and to refuse acceptance, which was accordingly
done. In an action by the seller against the issuing bank it
was held that there had been a breach of the letter of
credit contract and that the seller could recover the amount
of the bill of
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exchange for which acceptance was refused. The case was
concerned chiefly with the question of the measure of
damages. The right of the seller to maintain the action, if
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the conditions had been met, seems to have been assumed
without discussion. The theory underlying this result is
that the issuing bank is not concerned with the sales
contract at all. Rowlatt J. said :
The obligation of the bank is absolute, and is
meant to be absolute, that when the documents are
presented they have to accept the bill. That is the
commercial meaning of it.
The fulfilment of the terms of the sales contract is a
matter for the seller and the buyer alone.
In Urguhart, Lindsay and Co. Ltd. v. Eastern Bank Ltd.
(supra) Rowlatt J. held that the position of the banker
under an irrevocable credit is in law the same as that of a
person who has contracted to buy a shipping document
representing the goods shipped, or to be shipped, under the
contract between the beneficiary and the person at whose
instance the credit has been issued. The credit in this case
was opened in pursuance of a contract between Urguhart,
Linsday and Co. and Benjamin Jute Mills, by which the former
were to manufacture certain machinery and deliver it f.o.b.
Glasgow, for shipment to Calcutta. Two instalments of the
machinery were manufactured and shipped and duly paid for by
the bank. A third instalment was also manufactured and
shipped, but the bank in this case refused to take up the
shipping documents and honour the draft on the ground that
items for extra cost of labour were included in the invoice
price of the goods and that the bank had been instructed by
Benjamin Jute Mills to refuse payment in those
circumstances. Rowlatt J. held that in such a case, the
banker must accept and pay for the documents irrespective of
any defence which there may be to a claim under the contract
of sale and that such defence is solely a matter to be
fought out between the buyer and the seller.
In Gutteridge and Megrah’s Law of Bankers’ Commercial
Credits, Sixth Edn. p. 21, the nature of the obligation
created by a banker’s commercial credit is succinctly
stated. A seller of goods relying on such an instrument
believes that he has ‘the direct obligation of the issuing
bank running in his favour, enforceable by him against that
bank, that it will pay his drafts if drawn in compliance
with the terms of the letter of credit’. Banks are not
concerned with
319
the sales contract or the goods; if it were otherwise credit
business would be impossible.
Banker’s commercial credits are almost without
exception everywhere made subject to the code entitled the
‘Uniform Customs and Practices for Documentary Credits’, by
which the General Provisions and Definitions and the
Articles following are to "apply to all documentary credit
and binding upon all parties thereto unless expressly
agreed". A banker issuing or confirming an irrevocable
credit usually undertakes to honour drafts negotiated, or to
reimburse in respect of drafts paid, by the paying or
negotiating intermediate banker and the credit is thus in
the hands of the beneficiary binding against the banker. The
credit contract is independent of the sales contract on
which it is based, unless the sales contract is in some
measure incorporated. Unless documents tendered under a
credit are in accordance with those for which the credit
calls and which are embodied in the terms of the paying or
negotiating bank, the beneficiary cannot claim against the
paying bank and it is the paying bank’s duty to refuse
payment.
General Provision (c) of the Uniform Customs states
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that :
(c) 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.
and Article 8 emphasises this in providing that :
(a) In documentary credit operations all parties
concerned deal in documents and not in goods.
The authorities are uniform to the effect that a letter
of credit constitutes the sole contract with the banker, and
the bank issuing the letter of credit has no concern with
any question that may arise between the seller and the
purchaser of the goods, for the purchase price of which the
letter of credit was issued. There is also no lack of
judicial authority which lay down the necessity of strict
compliance both by the seller with the letter of credit and
by the banker with his customer’s instructions. In English,
Scottish and Australian Bank Ltd. v. Bank of South Africa
Bailhache, J. said :
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It is elementary to say that a person who ships in
reliance on a letter of credit must do so in exact
compliance with its terms. It is also elementary to say
that a bank is not bound or indeed entitled to honour
drafts presented to it under a letter of credit unless
those drafts with the accompanying documents are in
strict accord with the credit as opened.
As Lord Sumner said in Equitable Trust Co. of New York
v. Dawson Partners Ltd., approving the dictum of Bailhache
J.:
It is both common ground and common sense that in
such a transaction the accepting bank can only claim
indemnity if the conditions on which it is authorised
to accept are in the matter of the accompanying
documents strictly observed. There is no room for
documents which are almost the same, or which will do
just as well. Business could not proceed securely on
any other lines.
In Rayner v. Hambros Bank Ltd. the credit called for
documents covering a shipment of ‘Coromandel groundnuts’;
the invoice tendered was for Coromandel groundnuts, but the
bill of lading evidenced a shipment of ‘machine-shelled
groundnut kernels’; country of origin : British India, and
Hambros Bank refused to pay on the ground that the letter of
credit called for an invoice and bill of lading both
covering a shipment of ‘Coromandel groundnuts’ whereas the
bill of lading did not describe the goods in those terms,
their attitude being upheld by the Court of Appeal.
Mackinnon, L.J. after quoting Bailhache, J., in
English, Scottish and Australian Bank Ltd. v. Bank of South
Africa (supra) and Lord Summer in Equtiable Trust Co. of New
York v. Dawson Partners Ltd. (supra) laying down that a
person who ships in reliance on a letter of credit must do
so in exact compliance with its terms, observed :
The defendant bank were told by their Danish
principals to issue a letter of credit under which they
were to accept documents-an invoice and bills of
lading-covering "Coromandel groundnuts in bags". They
were offered bills of lading covering "machine-shelled
groundnut "kernels". The country of origin was stated
to be British
321
India. The words in that bill of lading clearly are not
the same as those required by the letter of credit. The
whole case of the plaintiffs is, in the words of Lord
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Sumner, that "they are almost the same, or they will do
just as well". The bank, if they had accepted that
proposition, would have done so at their own risk. I
think on pure principle that the bank were entitled to
refuse to accept this sight draft on the ground that
the documents tendered, to bill of lading in
particular, did not comply precisely with the terms of
the letter of credit which they had issued.
The learned Judge dealing with that part of the
judgment of Atkinson, J., in which he said that "a sale of
Coromandel groundnuts is universally understood to be a sale
of machine-shelled kernels", said:
When Atkinson, J., says that it is "universally
under stood" he means that these gentlemen from Mincing
Lane have told him: "We dealers in Mincing Lane all
under stand these things. We understand that
’Coromandel groundnuts’ are machine-shelled kernels,
and we understand when we see ’C.R.S.’ that means
’Coromandels’. I think that is a perfectly impossible
suggestion.. It is quite impossible to suggest that a
banker is to be affected with knowledge of the customs
and customary terms of every one of the thousands of
trades for whose dealings he may issue letters of
credit.
In Bank Melli Iran v. Barclays Bank the documents
evidencing a shipment of ’100 new, good, Chevrolet trucks’
were held not to be a good tender under a credit calling for
’new’ trucks. Mc Nair J. held that all the documents
tendered and accepted by the defendants were defective and
consequently the defendants were not entitled to debit the
plaintiff with the amount paid against these documents,
although the defendants succeeded on the ground that the
plaintiffs had by their conduct ratified the defendant’s
action in accepting the documents. The dicta in American
cases are to the same effect. In Lamborn v. Lake Shore
Banking Co. Smith J. said:
A party who is entitled to draw against a letter
of credit must strictly observe the terms and
conditions under
322
which the credit is to become available, and, if he
does not, and the bank refuses to honour his draft, he
has no cause of action against the bank.
Again, Hiscock, C. J. in Laudisi v. American Exchange
National Bank said:
The bank has the power and subject to the
limitations which are given and imposed by (the
customer’s) authority. If it keeps within the powers
conferred it is protected in the payment of the draft.
If it transgresses those limitations, it pays at its
peril.
The relevant authorities uniformly lay down in dealing
with commercial letters of credit that the documents
tendered by the seller must comply with the terms of the
letter of credit, and that the banker owes a duty to the
buyer to ensure that the buyer’s instructions relative to
the documents against which the letter of credit is to be
honoured are complied with. The rights of a banker are
described in Halsbury’s Laws of England, 4th Edn., vol.3,
para 141 at p. 106 :
Unless documents tendered under a credit are in
accordance with those for which the credit calls and
which are embodied in the promise of the paying or
negotiating banker, the beneficiary cannot claim
against the paying banker, and it is the paying
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banker’s duty to refuse payment. The documents must be
those called for, and not documents which are almost
the same or which will do just as well. The banker is
not called upon to know or interpret trade customs and
terms. It has been held that where mandate is ambiguous
and a paying banker acts in a reasonable way in
pursuance of it, he may be protected. But this general
rule cannot be stretched so far as to protect a banker
who pays against documents describing goods in terms
which are similar to, but not exactly the same as,
those stipulated in the credit.
The description of the goods in the relative bill of
lading must be the same as the description in the letter of
credit, that is, the goods themselves must in each case be
described in identical terms, even though the goods
differently described in the two documents are, in
323
fact, the same. It is the description of the goods that is
all important. The reason for this requirement is stated in
Davis’ Law Relating to Commercial Letters of Credit, 2nd
Edn. p. 76:
It is not only the buyer who faces the risk of
dishonesty or sharp practice on the part of the seller.
For, in many instances, the banker looks to the goods
for reimbursement of the whole or part of the amount he
pays under the letter of credit. It is equally to his
interests to ensure that such documents are called for
by the letter of credit as will result in goods of the
contract description being ultimately delivered. The
buyer is not compelled to enter into the sales contract
nor is the banker compelled to issue the letter of
credit. If either of these contracts is entered into
then it is for the buyer and the banker respectively to
safeguard themselves by the terms of the contract.
Otherwise they must be prepared to bear any ensuing
loss.
But the liability thus imposed on the issuing
banker carries with it a corresponding right that the
seller shall, on his part, comply with the terms of the
letter of credit and the seller’s obligations have been
construed as strictly as those of the banker.
We have already referred to the statement of law in
Halsbury’s Laws of England which found a place in Paget’s
Law of Banking, 8th Edn. p.648, and we may at the risk of
repetition reproduce the same, to the effect:
Unless documents tendered under a credit are in
accordance with those for which the credit calls and
which are embodied in the promise of the intermediary
or issuing banker, the beneficiary cannot claim against
him; and it is the banker’s duty to refuse payment. The
documents must be those called for and not documents
which are almost the same or which seem to do just as
well.
It the light of these principles, the rule is well
established that a bank issuing or confirming a letter of
credit is not concerned with the underlying contract between
the buyer and seller. Duties of a bank under a letter of
credit are created by the document itself, but in any case
it has the power and is subject to the limitations
324
which are given or imposed by it, in the absence of the
appropriate provisions in the letter of credit.
It is somewhat unfortunate that the High Court should
have granted a temporary injunction, as it has done in this
case, to restrain the appellant from making a recall of the
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amount of Rs. 85,84,456 from the Bank of India in terms of
the letter of guarantee or indemnity executed by it. The
courts usually refrain from granting injunction to restrain
the performance of the contractual obligations arising out
of a letter of credit or a bank guarantee between one bank
and another. If such temporary injunctions were to be
granted in a transaction between a banker and a banker,
restraining a bank from recalling the amount due when
payment is made under reserve to another bank or in terms of
the letter of guarantee or credit executed by it, the whole
banking system in the country would fail.
In view of the banker’s obligation under an irrevocable
letter of credit to pay, his buyer-customer cannot instruct
him not to pay. In Hamzeh Malas v. British Imex Industries
Ltd. the plaintiffs, the buyers, applied for an injunction
restraining the sellers, the defendants, from drawing under
the credit established by the buyer’s bankers. This was
refused, Jenkins, L.J. stating, at p. 129, that:
........ the opening of a confirmed letter of
credit constitutes a bargain between the banker and the
vendor of the goods which imposes on the banker an
absolute obligation to pay....
and that ’this was not a case in which the Court ought to
exercise its discretion and grant the injunction’. The same
considerations apply to a bank guarantee.
A letter of credit sometimes resembles and is analogous
to a contract of guarantee. In Elian and Anr v. Matsas and
Ors. Lord Denning, M.R., while refusing to grant an
injunction stated:
...... a bank guarantee is very much like a letter of
credit. The courts will do their utmost to enforce it
according to its terms. They will not in the ordinary
course of things, interfere by way of injunction to
prevent its due implementation. Thus they refused in
Malas v. British Imex Industries
325
Ltd. But that is not an absolute rule. Circumstances
may arise such as to warrant interference by
injunction.
A Bank which gives a performance guarantee must honour
that guarantee according to its terms. In R.D. Harbottle
(Mercantile) Ltd. v. National Westminster Bank Ltd., Kerr,
J. considered the position in principle. We would like to
adopt a passage from his judgment at p. 761:
It is only in exceptional cases that the courts
will interfere with the machinery of irrevocable
obligations assumed by banks. They are the life-blood
of international commerce. Such obligations are
regarded as collateral to the underlying rights and
obligations between the merchants at either end of the
banking chain. 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 as available to
them or stipulated in the contracts. The courts are not
concerned with their difficulties to enforce such
claims; these are risks which these merchants take. In
this case the plaintiffs took the risk of the
unconditional wording of the guarantees. The machinery
and commitments of banks are on a different level. They
must be allowed to be honoured, free from interference
by the courts. Otherwise, trust in international
commerce could be irreparably damaged.
(Emphasis supplied.)
The observations of Kerr, J. have been cited with approval
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by Lord Denning, M. R. in Edward Owen Engineering Ltd. v.
Barclays Bank International Ltd.
The appellant was under a duty to its constituent, the
Bihar Corporation, to scrutinize the documents, and could
not be compelled to make payment particularly when the
description in the documents did not tally with that in the
letter of credit. It was fully entitled to exercise its
judgment for its own protection. When the appellant against
the first lot of 20 documents refused to make payment except
’under reserve’ and against the second lot of 27 documents
even ’under reserve’ the remedy of the plaintiffs was to
approach the ’openers’, i.e., Bihar Corporation, to instruct
the appellant to effect
326
a change in the description of the goods from ’Sizola Brand
Pure Mustard Oil’ to Sizola Brand Pure Mustard Oil
"Unrefined" in the letter of credit. Instead of adopting
that course, the irregularity in the description in
documents tendered for payment was sought to be got over by
the plaintiffs by instructing their bankers, the Bank of
India, to execute a letter of guarantee or indemnity. When
the bills of exchange tendered to the Bihar Corporation were
dishonoured when presented on August 3, 1978, the legal
consequences must follow as between the appellant and the
Bank of India. There was the inevitable chain of events
which could not be prevented by the grant of an injunction.
The appellant presumably knew little or nothing about
mustard oil. Bankers are not dealers in mustard oil in such
a case as this, but dealers in documents only. The appellant
as the issuing bank was presented with documents and asked
to pay a very large sum of money in exchange for them. Its
duty was not to go out and - determine by physical
examination of the consignments, or employment of experts,
whether the goods actually conformed to the contracts
between the buyer and the seller, nor even determine either
from its own or expert advice whether the documents called
for the goods which the buyer would be bound to accept. The
banker knows only the letter of credit which is the only
authority to act, and the documents which are presented
under it. If these documents conform to the letter of
credit, he is bound to pay. If not, he is equally not bound
to pay. The letter of credit called for ’Sizola Brand Pure
Mustard Oil’ while the railway receipts carried the
description "Siloza Brand Pure Mustard Oil ’Unrefined’ " and
it was not within the province of the appellant to say that
the latter description meant identically the same thing as
the former.
In an action against a purchaser for reimbursement, it
is only necessary to prove that the goods tendered were the
goods purchased, no matter how described, i.e., the
purchaser was offered that which he had contracted for,
while in such a case as this, in an action by the
beneficiary against the issuing bank, it makes no difference
whether the goods tendered were in fact identical to the
goods purchased, the only question being: Did the documents
conform to the letter of credit ?
It is clear from the letters addressed by the appellant
to the Bank of India on June 23, 27 and 28, 1978 that the
payment of Rs. 36,52,960 by three cheques for Rs. 7,29,872
Rs. 12,78,536 and Rs. 16,43,833 were payments made under
reserve Admittedly
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when these amounts were paid by the appellant to the Bank of
India, the railway receipts were not clean because they
contained the description "Sizola Brand Pure Mustard Oil "
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Unrefined". The appellant had taken the precaution of saying
"Please note that the payment is made to you ’under reserve’
owing to the following discrepancies". There was a foot-note
added: "Please note that this payment is made to you subject
to repayment on demand of the bill amount, without loss of
exchange to ourselves plus interest and other charges
incurred by us, and or by our principals, if the documents
are not acceptable to the openers or buyers in view of the
discrepancies whatsoever". It was also added: "Please also
note that this ’reserve’ will remain in force until released
by us in writing". Acceptance of these amounts by the Bank
of India on behalf of the plaintiffs was upon these terms.
The Bank of India and the plaintiffs were thus fully aware
that the appellant was not prepared to pay except ’under
reserve’. The plaintiffs in their letters addressed to the
appellant dated June 22 and 23, 1978 had added in ink the
post-script: "In case of discrepancies, pay to our bankers,
Bank of India". These letters were in respect of 11 out of
20 documents; it is not suggested that others stand on a
different footing. The letters conveyed a request to
"negotiate the sight drafts for payment". Thus, the payment
of Rs. 36,52,960 against the first lot of 20 documents was
’under reserve’ and was also covered by the letter of
guarantee or indemnity.
As regards the second lot of 27 documents, the payment
of Rs. 49,31,496 the appellant was not prepared to pay even
’under reserve because the Bihar Corporation had refused to
accept the consignment on the ground not only of
discrepancies but also because the mustard oil was not fit
for human consumption. There was no question of the
appellant paying this large sum of money except against the
letter of guarantee or indemnity executed by the Bank of
India. It was represented by the Bank of India that it had
made arrangements for due payment of the bills of exchange.
When the bills of exchange were dishonoured on being
presented on August 3, 1978 the amount of Rs. 49,31,496
became immediately repayable on demand.
There still remains the question whether the court
should interfere with an order of this nature. The Court’s
powers under Art. 136 of Constitution are untrammelled, but
they are subject to self-ordained restrictions. The Court
does not, as a matter of rule, interfere with interlocutory
orders, save under very exceptional circumstances.
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The grant of a temporary injunction by the High Court
under O. 39 rr. 1 and 2 appears to be wholly unwarranted.
For reasons already stated, the appellant was within its
rights in making a recall of the amount of Rs. 85,84,456
paid ’under reserve’ and/or in terms of the letter of
guarantee or indemnity. We fail to appreciate any
justification for grant of a temporary injunction to the
plaintiffs, the effect of which virtually is to restrain a
transaction between a banker and a banker. The courts view
with disfavour the grant of such temporary injunction.
In the instant case, the High Court has assumed that
the plaintiff has a prima facie case. It has not touched
upon the question where the balance of convenience lay, nor
has it dealt with the question whether or not the plaintiffs
would be put to irreparable loss if there was no injunction
granted. In dealing with the prima facie case, the High
Court assumes that the appellant was in breach. There is no
basis for this assumption at all. The High Court in this
case has pre-judged the whole issue by holding that the
appellant could not unilaterally impose the condition of
payment ’under reserve’, nor was it justified in holding
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that the documents were ’clean’. The question whether the
appellant was in breach is an issue to be tried in the suit.
The question whether the documents were ’clean’ or ’unclean’
is a vexed question on which no opinion could be expressed
at this stage. It is also premature at this stage to assume
that there was no ’due presentation’ of the bills of
exchange and their refusal.
No injunction could be granted under O. 39, rr. 1 and 2
of the Code unless the plaintiffs establish that they had a
prima facie case, meaning thereby that there was a bona fide
contention between the parties or a serious question to be
tried. The question that must necessarily arise is whether
in the facts and circumstances of the case, there is a prima
facie case and, if so as between whom ? in view of the legal
principles applicable, it is difficult for us to say on the
material on record that the plaintiffs have a prima facie
case. It cannot be disputed that if the suit were to be
brought by the Bank of India, the High Court would not have
granted any injunction as it was bound by the terms of the
contract. What could not be done directly cannot be achieved
indirectly in a suit brought by the plaintiffs.
Even if there was a serious question to be tried, the
High Court had to consider the balance of convenience. We
have no doubt
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that there is no reason to prevent the appellant from
recalling the amount of Rs. 85,84,456. The fact remains that
the payment of Rs. 36,52,960 against the first lot of 20
documents made by the appellant to the Bank of India was a
payment under reserve while that of Rs. 49,31,496 was also
made under reserve as well as against the letter of
guarantee or indemnity executed by it. A payment ’under
reserve’ is understood in banking transactions to mean that
the recipient of money may not deem it as his own but must
be prepared to return it on demand. The balance of
convenience clearly lies in allowing the normal banking
transactions to go forward. Furthermore, the plaintiffs have
failed to establish that they would be put to an irreparable
loss unless an interim injunction was granted.
It was, however, tried to be impressed upon us that the
balance of convenience lay in granting the injunction since
the appellant would not be put to any loss because it had
furnished the letter of guarantee against 100 per cent
margin, i.e. on deposit being made by the Bihar Corporation
of Rs. 85,84,456 for meeting the payment to be made under
the credit. It was also said that the effect of recalling of
Rs. 85,84,456 from the Bank of India will result in the
plaintiffs facing a serious credit-freeze, as the Bank of
India will, on its turn, recall the amount from the
plaintiffs. We are afraid, these considerations cannot
prevail. For all these reasons, we are constrained to hold
that there was no justification for the High Court to grant
a temporary injunction under o. 39 rr. 1 and 2 of the Code
of Civil Procedure, 1908.
It the result, the appeal succeeds and is allowed with
costs. The order passed by the High Court dated August 24,
1979 granting a temporary injunction restraining the
appellant, the United Commercial Bank, from recalling Rs.
85,84,456 from the Respondent No 1, the Bank of India is set
aside, and the application filed by the plaintiffs, Messrs.
Godrej Soaps Ltd. for the grant of a temporary injunction
under O. 39, rr.1 and 2 of the Code of Civil Procedure, 1908
is rejected with a direction that the High Court shall try
to dispose of the suit as expeditiously as possible, and in
any event, within six months from today. The costs of the
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appellant shall be borne by the Respondents Nos. 1 and 2
equally.
P B.R. Appeal allowed.
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