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

- **Citation:** [2000] Supp. 3 S.C.R. 542
- **Court:** Supreme Court of India
- **Decided:** 2000-09-29
- **Case number:** Civil Appeal No. 5626 of2000
- **Bench:** M. Jagannadha Rao, U.C. Banerjee
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/federal-bank-ltd-v-v-m-jog-engineering-ltd-and-ors-17603
- **Pages:** 31

## Headnote

Code of Civil Procedure, 1908: Order 39 Rules 1 and 2.
Temporary injunction-Grant of-Principles-Letter of Credit (UC)-
C Buyer entered into contract with sellers for supply of reinforced steel bars
and structural steel-Buyer opened UC with "Issuing Bank" which required
certain documents to be produced by seller for payment by "Negotiating
Bank"-After delivery of the goods seller asked "Negotiating Bank" to make
payment against UC and endorse required documents-"Negotiating Bank"
D sent UC and documents to "Issuing Bank"-"Issuing Bank" certified
genuineness of UC and documents and assured reimbursement to "Negotiating
Bank" on due date-Accordingly, "Negotiating Bank" made payment to
seller after deduction of its commission-Subsequently, "Issuing Bank" found
on scrutiny non-submission of certain documents-Buyer also informed
"hsuing Bank" of forgery by some person-Buyer filed suit for injunction-
£
"Negotiating Bank" imp_leaded, but no specific relief against it claimed-
"Jssuing Bank" restrained from releasing payment-Validity-Held: Once
the "Issuing Bank" certifies the genuineness of the UC and documents it is
bound reimburse the "Negotiating Bank"-Jt cannot take the plea that on
fresh scrutiny the documents were not in.conformity with the UC-Temporary
F injunction vacated
Temporary injunction-Grant of-Principles-Letter of Credit (UC)-
Buyer opened UC with "Issuing Bank"-Buyer alleged fraud against sellerNo allegation of fraud or knowledge of fraud against "Negotiating Bank"-
"Negotiating Bank" made payment to seller against UC after confirming
G genuineness of documents from "Issuing Bank"-However, "Issuing Bank"
refused to reimburse "Negotiating Bank" on the ground that documents were
-
not in conformity with UC-Temporary injunction restraining "Issuing Bank"
~,,
from making payment granted-Validity-Held: Temporary injunction can
be issued only where there is (i) fraud or (ii) irretrievable damage-If there .
is no allegation of fraud or knowledge of fraud on the part of "Negotiating
fl
542
FEDERAL BANK LTD. v. V.M. JOG ENGINEERING LTD.
543
Bank", it is not permissible for "Issuing Bank" to refuse payment-However, A
"Negotiating Bank" should not be a mere Collecting Bank or agent but
should be holder in due course-Hence, "Issuing Bank" bound to reimburse
"Negotiating Bank"-Temporary injunction vacated
Uniform Customs and Practice of Documentary Credits, 1983 : Articles B
JO, 11, 15, 16 and 17.
Credit Operations-Nature and principles of-Held : All parties deal
in documents and not in goods-If the "Negotiating Bank" is satisfied that
documents which appear on their face are as per Letter of Credit and then
makes the payment, "Issuing Bank" is bound to reimburse "Negotiating C
Bank"-However, "Negotiating Bank" is required to take reasonable care
with which the documents have to be examined.
Words and Phrases:
"Appear on their face" and "reasonable care "-Meaning of-In the D
context of Arts. I I ( d) and I 5 of Uniform Customs and Practice of Documentary
Credits, 1983.
The respondent-plaintiff (buyer) entered into a contract with the sellers
for purchase of reinforced steel bars and structured steel. The Letter of Credit E
(IJC) opened by the respondent-plaintiff with the "Issuing Bank" required
various documents to be produced by the seller for payment in accordance
with the Uniform Customs and Practice of Documentary Credits, 1983.
The appellant-defendant, the Negotiating Bank, received documents from
the sellers, which included five delivery challans signed by the buyer's officers F
acknowledging receipt of goods. The seller sent a Bill of Exchange for
encashment against the LJC taken out by the buyer. The appellant sent the
BiU of Exchange, with endorsement of the buyer and the LJC and the connected
documents including the 'delivery challan' - as received from the seller - to
the Issuing Bank and got the genuineness of the documents confirmed. The G
Negotiating bank then released a certain sum in favour of the sellers after

## Text

_Characters 0–39,769 of 74,643. This is a partial read: ask again with offset=39769 for what follows._

I
A
FEDERAL BANK LTD.
v.
V.M. JOG ENGINEERING LTD. AND ORS.
SEPTEMBER 29, 2000
B
[M. JAGANNADHA RAO AND U.C. BANERJEE, JJ.]
Code of Civil Procedure, 1908: Order 39 Rules 1 and 2.
Temporary injunction-Grant of-Principles-Letter of Credit (UC)-
C Buyer entered into contract with sellers for supply of reinforced steel bars
and structural steel-Buyer opened UC with "Issuing Bank" which required
certain documents to be produced by seller for payment by "Negotiating
Bank"-After delivery of the goods seller asked "Negotiating Bank" to make
payment against UC and endorse required documents-"Negotiating Bank"
D sent UC and documents to "Issuing Bank"-"Issuing Bank" certified
genuineness of UC and documents and assured reimbursement to "Negotiating
Bank" on due date-Accordingly, "Negotiating Bank" made payment to
seller after deduction of its commission-Subsequently, "Issuing Bank" found
on scrutiny non-submission of certain documents-Buyer also informed
"hsuing Bank" of forgery by some person-Buyer filed suit for injunction-
£
"Negotiating Bank" imp_leaded, but no specific relief against it claimed-
"Jssuing Bank" restrained from releasing payment-Validity-Held: Once
the "Issuing Bank" certifies the genuineness of the UC and documents it is
bound reimburse the "Negotiating Bank"-Jt cannot take the plea that on
fresh scrutiny the documents were not in.conformity with the UC-Temporary
F injunction vacated
Temporary injunction-Grant of-Principles-Letter of Credit (UC)-
Buyer opened UC with "Issuing Bank"-Buyer alleged fraud against sellerNo allegation of fraud or knowledge of fraud against "Negotiating Bank"-
"Negotiating Bank" made payment to seller against UC after confirming
G genuineness of documents from "Issuing Bank"-However, "Issuing Bank"
refused to reimburse "Negotiating Bank" on the ground that documents were
-
not in conformity with UC-Temporary injunction restraining "Issuing Bank"
~,,
from making payment granted-Validity-Held: Temporary injunction can
be issued only where there is (i) fraud or (ii) irretrievable damage-If there .
is no allegation of fraud or knowledge of fraud on the part of "Negotiating
fl
542
FEDERAL BANK LTD. v. V.M. JOG ENGINEERING LTD.
543
Bank", it is not permissible for "Issuing Bank" to refuse payment-However, A
"Negotiating Bank" should not be a mere Collecting Bank or agent but
should be holder in due course-Hence, "Issuing Bank" bound to reimburse
"Negotiating Bank"-Temporary injunction vacated
Uniform Customs and Practice of Documentary Credits, 1983 : Articles B
JO, 11, 15, 16 and 17.
Credit Operations-Nature and principles of-Held : All parties deal
in documents and not in goods-If the "Negotiating Bank" is satisfied that
documents which appear on their face are as per Letter of Credit and then
makes the payment, "Issuing Bank" is bound to reimburse "Negotiating C
Bank"-However, "Negotiating Bank" is required to take reasonable care
with which the documents have to be examined.
Words and Phrases:
"Appear on their face" and "reasonable care "-Meaning of-In the D
context of Arts. I I ( d) and I 5 of Uniform Customs and Practice of Documentary
Credits, 1983.
The respondent-plaintiff (buyer) entered into a contract with the sellers
for purchase of reinforced steel bars and structured steel. The Letter of Credit E
(IJC) opened by the respondent-plaintiff with the "Issuing Bank" required
various documents to be produced by the seller for payment in accordance
with the Uniform Customs and Practice of Documentary Credits, 1983.
The appellant-defendant, the Negotiating Bank, received documents from
the sellers, which included five delivery challans signed by the buyer's officers F
acknowledging receipt of goods. The seller sent a Bill of Exchange for
encashment against the LJC taken out by the buyer. The appellant sent the
BiU of Exchange, with endorsement of the buyer and the LJC and the connected
documents including the 'delivery challan' - as received from the seller - to
the Issuing Bank and got the genuineness of the documents confirmed. The G
Negotiating bank then released a certain sum in favour of the sellers after
•
deducting its commission. The Issuing Bank found on scrutiny nonsubmission of certain documents. The respondent-buyer also informed Issuing
Bank offorgery by some person. Thereafter, the respondent-buyer filed a suit
for permanent injunction against the sellers, the Issuing Bank and the
Negotiating bank.
H
544
SUPREME COURT REPORTS [2000) SUPP. 3 S.C.R.
A
While the appellant-Negotiating Bank was impleaded as the 3rd
defendant in the suit, specific relief was not sought against it either in the
suit or in the interlocutory application. In the plaint or in the interlocutory
application, the plaintiff had not alleged 'fraud' or forgery against the
Negotiating Bank nor even knowledge of the fraud/forgery, which was alleged
B against the sellers in respect of .the delivery challans.
The trial court granted a temporary injunction under Order 39 Rule 1
of the Code of Civil Procedure, 1908 restraining the Issuing Bank from paying
any amount to anybody under the UC, pending suit. The High Court refused
to vacate the temporary injunction. This had resulted in the appellantC Negotiating Bank not being able to obtain reimbursement from the Issuing
Bank. Hence this appeal.
Allowing the appeal, the Court
HELD : 1.1. In credit operations, all parties concerned deal in documents,
D and not in goods, services and/or other performances to which the documents
may relate. Article 10 of the Uniform Customs and Practice of Documentary
Credits, ~983, (UCP) refers to the duty of the Bank to honour the commitment
Under Article ll(d) ofUCP, it is sufficient ifthe Negotiating Bank is satisfied
that the documents which appear on their face to be in accordance with the
terms and conditions of the credit. If the Negotiating Bank then pays, the
E Issuing Bank is bound to reimburse the Negotiating Bank. (560-E; 561-C)
F
1.2. Article 15 of the UCP is concerned with the 'reasonable care' with
which the documents have to be examined. This Articl~ has relevance on the
question of'fraud'. It refers to the safeguards to be taken by the Bank. Once
the Bank takes such reasonable care as above stated, Article 15 states the
Bank will have to be reimbursed by the party giving such authority. Clause
(b) of Article 15 states that refusal by the Issuing Bank to pay must be "on
the documents alone" as appear on their face to be inconsistent with the terms
and conditions of the credit. All that is, therefore, necessary is to examine
with reasonable care if the documents on their face conformed to the terms
G and conditions of the Letter of Credit (L/C. ). If the Issuing Bank does not
return them within reasonable time, it may be deemed that it has ratified the
genuineness of the documents. Thus, where the Issuing Bank does not
respond within reasonable time it cannot, under the UCP, dispute the
documents later. [561-D-HJ
H
United Commercial Bank v. Bank of India, [1981) 2 SCC 766; UP Co-
-
...
...
FEDERAL BANK LTD. v. V.M. JOG ENGINEERING LTD.
545
operative Federation Ltd. v. Singh Consultant and Engineers (P) Ltd, (1988) A
1 SCC 174; Royal Bank of Scotland pie. v. Cassa df Ris parimio de/le
Provincia Lombard, (1993) Financial Times 21.1.1992; Gian Singh and Co.
Ltd. v. Banque de L 'Indochine, (1974) 1WLR1234; Basse and Selve v. Bank
of Australia, (1904) 20 TLR 431; Hansson v. Hamel and Horley Ltd, (1922)
2 AC (HL) 36; Bankers Trust Co. v. State Bank of India, (1991) Lloyds Rep.
443; Co-operative Centrale etc. v. Sumitomu Bank Ltd. The Royan, (1987) 1 B
Lloyds Rep. 345; K'Jraganda Ltd v. Midland Bank, (1999) 1 All ER 801 and
Glencore International AG v. Bank of China, (1996) 1 Lloyds Rep. 135, 1997
Current Law Year Book 328, referred to .
2.1. Courts ought not to grant injunction to restrain encashment of Bank C
guarantees or Letters of Credit. Two exceptions are : (i) fraud and (ii)
irretrievable damage. If the plaintiff is prima facie able to establish that the
case comes within these two exceptions, temporary injunction under Order
39 Rule 1 of the Code of Civil Procedure, 1908 can be issued. [566-A-B]
2.2. The contract of the Bank guarantee or the Letter of Credit is D
independent of the main contract between the seller and the buyer. The Bank
is to honour the demand for encashment if the seller prima facie complies
with the terms of the Bank guarantee or Letter of Credit, namely, ifthe seller
produces the documents enumerated in the Bank guarantee or Letter of
Credit. If the Bank is satisfied on the face of the documents that they are in
conformity with the list of documents mentioned in the Bank guarantee or E
Letter of Credit and there is no discrepancy, it is bound to honour the demand
of the seller for encashment. While doing so it must take reasonable care. It
is not permissible for the Bank to refuse payment on the ground that the
buyer is claiming that there is a breach of contract. Nor can the Bank try to
decide this question of breach at that stage and refuse payment to the seller. F
Its obligation under the document has nothing to do with any dispute as to
breach of contract between the seller and the buyer. (566-E-F]
Uniform Customs and Practice of Documentary Credits, (1983) issued
by International Chamber of Commerce, referred to.
3 .. Ifthe appellant-Federal Bank was merely a Collecting Bank or agent
which had approached the Issuing Bank and ifthe Issuing Bank was sought
to be restrained by the buyer before payment was made by the Issuing Bank
G
to the Collecting Bank, the Collecting Bank could not have compelled the
Issuing Bank to release the money for collection if the buyer informed the
Issuing Bank in his plaint that the documents to be presented to it by the H
546
SUPREME COURT REPORTS [2000] SUPP. 3 S.C.R.
A Collecting Bank were forged or fraudulent. But where, on the other hand,
the Negotiating Bank, i.e. the appellant, has said on the basis of a clearance
given by the Issuing Bank as to genuineness of documents, and seeks
reimbursement, then the Negotiating bank is in the position of a holder in
due course and can claim that the suit of the buyer must fail if it sought to
B restrain the Issuing Bank from reimbursing the Negotiating Bank. (569-G-H]
ITC Ltd v. Debts Record Appellate Tribunal, (1998) 2 SCC 70, relied
on.
R.D. Harbottle (Mercantile) Ltd v. National Westminster Bank Ltd.,
C (1978] QB 146; Edward and Owen Engineering Ltd. v. Barclays Bank
International Ltd., (1978) QB 159; Bolvinter Oil SA v. Chase Manhattan
Bank, (1984) 1 All ER 351; United Trading Corp. SA v. Allied Ards Bank,
(1985) 2 Lloyds Rep. 554; Guarantee Trust Co. of New York v. Hannay, (1918)
2 KB 623 (KB), Saloman and Nandszus, (1899) 92 LT 325 and Szetejn v. J.
Heney Schrodar Banking Corp., (1941) 31 NYS 2d. 631, referred to
D
Raymond Jack: "Documentary Credits", (1991) pp. 191-192, referred
to.
4.1. The contract between the Issuing Banker and the paying or
E Negotiating (intermediary) Banker may partake of a dual nature. The
relationship is mainly that of principal and agent In order that he may claim
reimbursement for any payment he makes under the credit or the indemnity
of an agent, the intermediary Banker must obey strictly, the instructions he
receives, for by acting on them, he accepts them and thus enters into
contractual relations with the Issuing Bank. (569-G-H)
F
G
Virgo Steels v. Bank of Rajasthan, AIR (1998) Bo!". 82, approved.
Westminster Bank Ltd. v. Banca Nazionale di Credito, (1928) 32 LL Rep.
306; Pagels' Law of Banking, 9th Edn., (1982) pp. 543-544, referred to.
A.(]. Davis : 'The Law Relating to Commercial Letters of Credit' 2nd
Edn., (1954) p; 92 and Principles of lnernational Trade Law, 2nd Edn., (1999)
p. 298, referred to.
4.2. The Negotiating Bank took the precaution in getting clearance for
H the document from thP. Issuing bank and the latter gave such clearance. It is,
FEDERAL BANK LTD. v. V.M. JOG ENGINEERING LTD. [M. JAGANNADHA RAO, J.] 547
therefore, not open to the Issuing Bank to contend that on fresh scrutiny, it A
found that the documents were not in conformity with the Letter of Credit or
that the buyer had so informed it. (572-A-B)
....
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 5626 of2000 .
From the Judgment and Order dated 8.10.99 of the Bombay High Court B
in A.O. No. 818of1999.
A.B. Divan, V.A. Mohta, Rajeev Dhawan, Makarand D. Adkar, S. Ganesh,
Rajan Narain, Ms. Mohini Narain, Ms. Kavita Dahiya, Ms. Pooja Sriram,
Vishwajit Singh, Rajesh Kumar and Satish Aggarwal for the appearing parties. c
The Judgment of the Court was delivered by
M. JAGANNADHA RAO, J. Leave granted.
The appellant Federal Bank at Bombay was the 3rd defendant in the suit D
and has a branch at Pune. It has preferred this appeal against the order of
the High Court dated 8.10.99 summarily dismissing the appellant's appeal
AFO No. 818of1999. The appeal was preferred against the order of the trial
Court dated 29.4.99 whereby the trial Court had confirmed an ex-parte interim
injunction dated 20.5.98 granted by it earlier, rejecting the appellant's application
to vacate the same. The matter relates to a Letter of Credit issued by the 2nd E
defendant, Bank of Maharashtra, Pune (3rd respondent) at the instance of the
....
plaintiff-buyers (lst respondent), Mis. V.M. Jog Engineering Co., Pune. The
sellers are Mis. Jaswant Steel, Nagpur (1st defendant) (1st respondent). The
appellant Federal bank was the negotiating Bank (3rd defendant) while the 3rd
respondent, Bank of Maharashtra was the Issuing Bank.
F
The main point arising in the case can be stated briefly as follows :
The appellant, the Negotiating Bank received documents from the sellers
which included five delivery challans purportedly signed by the buyers'
officers acknowledging receipt of goods. The seller sent a Bill of Exchange G
for encashment against the Letter of Credit for 2 crores, taken out by the
..
buyers. The appellant sent the Bill of Exchange, with endorsement of the
buyers and the Letter of Credit and the connected documents including the
'delivery challan' - as received from the seller - to the Issuing Bank and got
the genuineness of the documents confirmed. The Negotiating bank then
released Rs. 1,94,39,252 in favour of the sellers on 25.3.98, after deducting its H
-
548
SUPREME COURT REPORTS [2000] SUPP. 3 S.C.R.
A commission. But the buyers have obtained a temporary injunction against the
Issuing Bank from honouring the Letter of Credit. This has resulted in the
appellant Negotiating Bank not being able to obtain reimbursement from the
Issuing Bank. The trial Gourt and the High Court, after noting that the
Negotiation Bank had released to the seller the above sum upon due
certification of the seller's documents by the Issuing Bank - have thus
B precluded the Negotiating Bank from getting reimbursement from the Issuing
Bank. One other peculiar feature of the case is that while the appellant-,
Negotiating Bank was impleaded as the 3rd defendant in the suit, specific
relief was not sought against it either in the suit or in the interlocutory
application. In fact, it was stated by the plaintiff-purchaser that the Negotiating
C Bank need not be heard in the interlocutory application and that the said Bank
had no locus standi. Both the courts below thought it fit to accept th is
contention and grant injunction under Order 39 Rule I Code of Civil Procedure
restraining the Issuing Bank from paying any amount to anybody under the
Letter of Credit, pending suit. In the plaint or in the interlocutory application,
the plaintiff has not alleged 'fraud' or forgery against the Negotiating Bank
D nor t:ven knowledge of the fraud/forgery which is alleged against the sellers
i~ respect of the delivery challans.
Aggrieved by the order of temporary injunction passed under Order 39
Rule I CPC; the Negotiating Bank has come up in appeal.
E
As the case involves issues relating to Banking Practice and
F
interpretation of the Uniform Customs and Practice of Documentary Credits
(1983) (hereinafter called the UCP) issued by the International Chamber of
Commerce, - relied upon by the Negotiating Bank in detail - we propose to
deal with the articles in UCP (1983 revision) and their relevance.
The following are the facts :
The plaintiff-(buyers) at Pune entered into a contract in February 1998
with the sellers at Nagpur for purchase of 1450 M.T. of reinforcement steelbars and structural-steel, conforming to IS: 1786. These were needed for the
G buyer's works at two projects, one at Palm Beach, Andheri and another for
a fly-over project at Bombay. Two purchase orders (Nos. 104, 105) for supply
of 1450 MT were placed upon the sellers by the buyers on 7.2.98 for each
of these projects . ..-...~ time for supply of material was 31.3.98. The buyer
availed of a Letter of Credit dated 19.2.98 from the Issuing Bank to the tune
of Rs. 2 crores with negotiation initially to be restricted to the State Bank of
H India, Wardha. The expiration date was 31.3.98 but was extended upto 30.4.98.
-
..
FEDERAL BANK LTD. v. V.M. JOG ENGINEERING LTD. [M. JAGANNADHA RAO, J.] 549
The Letter of Credit issued by the Issuing Bank on 19.2.98 listed out A
the various "documents" which had to be produced by the sellers for payment
under the Letter of Credit opened by the buyer with the Issuing Bank: These
were described as follows :
(1) "The Beneficiary drafts drawn on the applicant without recourse
to the drawer and marked under bank of Maharashtra, Tilak Road, B
Pune branch/inland L/C No. 1198 dated 19.2.98 for 100% of the Invoice
value at 90 days Usance from the date of receipt of material at
Andheri and Palm Beach, Marg Bridge, Near Nerul, Navi Mumbai sites.
(2) Invoices signed by the beneficiary or his constituted agent in
copies of gross value of the goods certifying goods are as per order/ C
indent and evidencing despatch of the undemoted goods.
(3) Receipt dated not later than 31.3.98 marked freight prepaid.
(4) ........................... .
(5) ........................... .
(6) Copies of Octroi receipts for the amount claimed in invoice.
(7) Copy of Weigh Slip for empty and Loaded transport Vehicle.
(8) Photocopy of Manufacturer's test certificate.
(9) Copy of Delivery Chal/ans-cum-invoices issued by Jaswant Steel
Rolling Mills Pvt. Ltd. duly signed by Project Authorities with an
endorsement as the material received in good condition and indicating
the date of receipt of material at sites."
D
E
Thereafter, it is stated in the L/C in clause 10 "Last date of Negotiation F
of documents 20.4.1998 but not later than 20 days from despatches".
(This clause was later deleted on 19.3.98 when the appellant was
nominated as Negotiating Bank in place of the State Bank of India).
The Special Instructions in the L/C for the Negotiating Bank were as
follows:
G
Special instructions for the negotiating Bank.
1. Negotiations under this credit are restricted to State Bank of India
Hinganghat, Distt. Wardha (M.S.).
2. Negotiations should be marked separately on the back of the H
550
SUPREME COURT REPORTS [2000] SUPP. 3 S.C.R.
A
documentary credit N.A.
B
c
3. To reimburse themselves, the negotiating bank will send us the full
set of original documents by Registered Post alongwith a certificate
of compliance of the terms and conditions of the credit and request
for demand drafts/pay order.
4. ······························
5. ······························
6. Total drawings under this credit should not exceed Rs. 2,00,00,000
(Rupees two crores only)
It was lastly stated in the L/C as follows :
"This credit carries our confirmation and we hereby engage with the
drawers endorsers and/or bonajide holders of draft(s) drawn under •
and negotiated in confirmity with the terms and conditions of this
D
credit will be duly honoured on presentation of documents or at
maturity.
E
Except as otherwise expressly stated, this credit is subject to Uniform
Customs and Practice for documentary credits (1983 Revision),
international Chamber of Commerce, Publication No. 400.
Yours faithfully,
for Bank of Maharashtra
Copy to : (I) State Bank of India."
F
Hinganghat Branch Distt. Wardha (M.S.)
(2) V.M. Jog Engineering Ltd. Pune
Thus, the. Lie confirms the rights of bonafide holders of the drafts that
may be issued by the drawers-sellers and to honour on presentation of
G documents or at maturity. It is also clear that the UC is subject to UCP (1983
Revision).
For the purposes of the main point arising in the case, it is important
to note clause 9 of the Letter of Credit. That clause requires that one of the
document to be produced by the seller for payment should be the "copies of
H the delivery Chai/ans-cum-invoices" issued by Jaswant Steel Rolling Mills
FEDERAL BANK LTD. v. V.M. JOG ENGINEERING LTD. [M. JAGANNADHA RAO, J.] 551
Pvt. Ltd. (Plaintiff-buyer) duly signed by Project Authorities, with an A
endorsement-that the material was recovered in good condition and indicating
the date of receipt of material at sites.
On 19.3.98, the appellant became the Negotiating Bank in the place of
State Bank of India. The Issuing bank informed the seller that the Negotiating
Bank would be the Federal Bank (appellant) and not the State Bank of India, B
Further, it was stated that clause l 0 of the Letter of Credit (referred to above)
stood deleted.
On the same day, 19.3.98 seller sent a Bill of Exchange (called technicalfy
as a Draft) to its dealer at Visakhapatnam against the Letter of Credit No.
1/98 dated 19.2.98 stating as follows :
C
"At 90 (ninety) days from the date of invoice pay to Mis The Federal
Bank Ltd., Bombay Samachar Marg, Fort, Mumbai of order a sum of
Rs. 2,00,000.00 (Two crores only) towards value of material given as
below:
DD/Inv. No.
Date
Amount
104
19.2.98
Rs. l ,00,00,000
105
19.2.98
Rs. l,00,00,000
Sd
For Jaswant Steel Rolling Ltd.
This was addressed to the seller's agent at Vijag Steel Plant. Copies were sent
to purchaser (Plantiff). This Bill of Exchange contains endorsements purported
signed by the Vice-President of the buyers as follows :
"accepted for payment on maturity"
and
Sd
Vice-President (Accounts)
for V.M. Jog Engineering Co. (Buyer)
"We confirm having received the despatch documents".
Sd
Vice-President (Accounts)
for V.M. Jog Engineering Co. (Buyer)
D
E
F
G
H
552
SUPREME COURT REPORTS [2000] SUPP. 3 S.C.R.
A
It will be noticed that ninety days from 19.2.98 would be 20.5.1998. That
would be the date on which the Negotiating Bank could claim fro~ the
Issuing Bank, the monies if any, it might have paid to the seller.
- But, it is the contention of the buyer-plaintiff that the first despatch of
the goods was on 28.3.98 and that payment would be due to the Negotiating
B Bank only on 26.6.98. The appellant Bank on the other hand contended that
once the Vice President of the buyer company confirmed the despatch
document dated 19.2.98, ninety days would expire by 20.5.98 and the appellant
Bank, in case it paid to the sellers under the Bill of Exchange issued by the
sellers, the appellant should be repaid on 20.5.98 and not on 26.6.98.
C
On 20.3.98, the sellers wrote to the appellant Bank (through their dealers
at Visakhapatnam, Shriram Investment Services Ltd.) to discount the Bill of
Exchange for Rs. 2 crores and pay the proceeds. The bill along with other
"documents" so sent by or on behalf of the sellers were received by the
appellant Bank. The above letter of the sellers to the appellant Bank reads as
D follows:
E
F
"Please find enclosed herewith the documents drawn under Bank of
Maharashtra, Pune L/C No. 1/98 dated 19.2.98.
Drawer
Jaswant Steel Rolling Mills PVt. Ltd. Nagpur (sellers)
Drawee
V.M. Jog Engineering Ltd., Pune (buyers)
Amount
Rs. 2,00,00,000 (Rupees two crores only)
Usance
90 days
Due date
.......
Kindly discount the same @ 15.25% p.a. and issue the cheque in
favour of the Federal Bank Ltd.- Ale. Jaswant Steel Rolling Mills Pvt.
Ltd. payable at Mumbai."
In other words, the sellers demanded payment on the Bill of Exchange
G against the L/C by producing these documents before the Negotiating Bank.
The Negotiating Bank was to pay the amount minus its commission. I could
draw the released amount from the Issuing Bank on the 90 day from 19.2.98
the date of despatch document i.e. 20.5.98.
The appellant-Negotiating Bank then took the extra precaution of sending
H to the Issuing Bank - the L/C and the "documents" sent by the sellers for
I
FEDERAL BANK LTD. v. V.M. JOG ENGINEERING LTD. [M. JAGANNADHA RAO, J.] 553
confirmation. This is stated to be part of the Banking practice.
A
The letter dated 20.3.98 by the appellant (Negotiating Bank) to the
Issuing Bank stated that they were enclosing the original Letter of Credit for
2 crores, Usance 90 days, due date 20.5.98 (they were counting 90 days from
19.2.98) and that they were enclosing the "documents" sent to them by sellers
along with L/C:
B
"Draft dt. 19.3.98
Invoice dated 19.2.98 (5 sheets)
L/R-Delivery Challan dt. 19.2.98 (5 sheets)
UC: Above L/C in original is enclosed. Please return the same with C
the signatures duly verified and certified."
It was also said in the said letter by the Negotiating Bank that they 'have
negotiated the documents today' and they 'confirm having noted the drawings
on the original LC. ' The letter of the Negotiating Bank further states :
Instructions:
I. Acknowledge receipt quoting your and our reference number.
2. Confirm due date of payment.
D
3. VerifY and certifY the signatures on the LC and confirm that the E
signatories on the LC have the required authority to issue the same.
4. Confirm t~at the documents are in order and payment will be made
on due date.
Reimbursement :
(i) Remit Bill amount on due date itself by your Pay Order drawn in
our favour.
(ii) Remit Bill amount by Telephonic/Telegraphic transfer (TI) through
your branch at Bombay with instructions to reimburse to us on due
F
date itself."
G
We have already stated that the Bill of Exchange (or draft) was also sent
by the sellers to the Negotiating Bank, through their dealer. This Bill was one
of the documents thus received by the Negotiating Bank. It contained the two
endorsements purported to have been made by or behalf of the buyers (to
which we have already made reference) and purporting to be signed by the H
554
SUPREME COURT REPORTS (2000] SUPP. 3 S.C.R.
A Vice-President (Accounts) of the buyers. These endorsements read as follows
B
c
"Accepted for the payment on maturity.
Sd\-
Vice-President (Accounts)
for V.M. Jog Engineering Ltd. (buyers)
We confirm having received the despatch documents.
Sd\-
Vice-President (Accounts)
for V.M. Jog Engineering Ltd." (buyers)
As far as proof of delivery of the despatched goods is concerned, the
position was as follows. Among the documents accompanying the L/C were
the five invoices dated 19.2.98 (5 sheets) and the five delivery challans dated
19.2.98 (5 sheets). The five delivery challans contained the signature of one
Mr. P. Waghmode who purported tci sign on behalf of the buyers and two of
D the five delivery challans purportedly contained the counter-signature of the
Vice-President (Accounts) of the buyer dated 21.2.98 and 28.2.98 respectively.
The office stamp of the buyer's company was found on all the five delivery
challan.>. The endorsement of Mr. Waghmode on the delivery challans also
stated that goods were received in good condition.
E The Issuing Bank, after receiving the documents, wrote back to the Negotiating
Bank in its crucial letter on 23.3.98 as follows :
F
G
H
"Re:
•
Our inland L/C No. 1/98 dated
192.98
For Rs. 2,00,00,000 fvg. Jaswant
Steel Rolling Pvt. Ltd.
We have received the abovesaid L/C in original along with your
covering letter. We have confirmed the due date on 20.5.98 and the
documents are in order and paym<:nt of the above mentioned L/C
1/98 will be made on 20.5.98.
We have verified and certified the signatures on the L/C and
confirm that the signatories to the L/C have the required authority to
issue the same.
We returned herewith the abovementioned L/C 1/98."
FEDERAL BANK LTD. v. V.M. JOG ENGINEERING LTD. [M. JAGANNADHA RAO, J.] 555
In other words, the Issuing Bank certified the signatures and assured the A
Negotiating Bank, that it would reimburse the Negotiating Bank on the due
date, 20.5.98. Obviously, the Issuing Bank proceeded on the basis that the
delivery was on 19.2.98 as stated in the document (and not on 28.3.98, as
contended by the buyers in the plaint).
On the basis of the above letter dated 23.3.98 sent by the Issuing Bank B
to the Negotiating Bank, the latter discounted the Bill of Exchange drawn from
the seller and paid Rs. 1,94,39,252 under the L/C on 25.3.98 to the sellers.
On 24.3.98 the Negotiating Bank wrote to the Issuing Bank that the
latter had returned the L/C, along with confirmation and also the documents.
It said that the Negotiating Bank shall be deliverir.g the documents again to C
the Issuing Bank on due date and that "the same is returned herewith which
you may kindly acknowledge". 'Encl : as above'. (A contention was raised
by the Issuing Bank in its affidavits in the trial Court that by this letter, the
Negotiating Bank was agreeing to send some other documents and they were
not sent later at the time of seeking reimbursement on 20.5.98).
D
The Negotiating Bank, having parted with Rs. 1,94,39,252 upon
confirmation of the genuineness of the documents by the Issuing Bank, was
waiting to claim reimbursement by the Issuing Bank on the 'due date', 20.5.98.
But then, there was a sudden surprise. It received a letter from the E
Issuing Bank on 19.5.1998 that the Issuing Bank had found on "scrutiny in
May 1998", that the Negotiating Bank had not submitted (1) "Delivery
challan-cum-invoices issued by sellers duly signed by project authorities
with an endorsement that the material is received in good condition and
indicating that the date of receipt of material at sites as per clause No. I 0 of F
our L/C (2) All relevant motor transport receipts as per clause No. 3 of our
LC. They stated that after receipt of the above documents as per terms of
L/C, they would be able to consider further." This has obvious referred to
clause 9 of the L/C extracted above.
On 20.5.98, there was a further letter by the Issuing Bank to the G
Negotiating Bank that (I) As per special instructions for the Negotiating
Bank, "clause No. 3 of our L/C, full set of original documents along with a
certificate of compliance of the terms and conditions of credit is not received
by us". "Original L/C, duly discharged has not been received by us. You are
requested to send the above documents". According to the appellant, by the
letter the Issuing Bank was going back on its earlier certification and assurance H
556
SUPREME COURT REPORTS [2000) SUPP. 3 S.C.R.
A to reimburse the appellant as per its letter dated 23.3.98 addressed to the
Negotiating Bank.
Meanwhile, the Issuing Bank had alerted the buyers on 15.5.98 that the
Negotiating Bank had produced certain documents purportedly dated 19.2.98
containing an endorsement that the material was received in good condition
B as per order. The buyers stated in their plaint that it was only then that they
learnt that the "sellers" had committed 'forgery' by showing that one 'Mr. P.
Waghmode' had made the said fraudulent endorsements on the demand
vouchers on behalf of the buyers. They contended that there was nobody by
the name Mr. P. Waghmode in their service much less with necessary
C authorisation, to act or receive the goods on behalf of the buyers. They
stated that on 17.5.98, Mr. Bhapkar, Project Manager of the buyers visited the
factory of the sellers and found that only 654 MT of steel was shown in the
sellers' accounts as having been supplied and not the full quantity. A further
contention was that, in fact, only 523 MT was supplied and not 654 MT. On
18.5.98, the buyers informed the Issuing Bank that forgeries had been committed
D by "some persons" in the documents presented to the Issuing Bank.
The buyer was conscious that on 20.5.98, the Negotiating Bank would
press for payment from the Issuing Bank. The buyer then filed the suit against
the sellers (1st defe~dant), the Issuing Bank (2nd defendant) and the
E Negotiating Bank (3rd defendant) for permanent injunction. No specific relief
was claimed against the Negotiating Bank but it was prayed that the Issuing
Bank should not release any amount under the L/C. In the entire body of the
plaint there is no a/legation imputing any fraud to the Negotiating Bank,
much less even knowledge of fraud Allegation of fraud and forgery were
made only against the sellers. In the interlocutory application, though injunction
F was prayed against the Issuing Bank, the Negotiating Bank was not brought
into the array. Injunction was obtained on 20.5.98 by the buyers against the
Issuing Bank not to honour the L/C. The said Bank then wrote on 20.5.98 to
the Negotiating Bank that in view of the Court's order, they would not be able
to release any amount in favour of the Negotiating Bank, after the due date
G i.e. 20.5.98.
It was only then that the Negotiating Bank came to know that though
it had been impleaded in the suit as the 3rd defendant, it had not been
impleaded in the application for injunction. It moved the Court for vacation
of the order stating that they had sent the L/C and documents including the
H delivery challans dated 19.2.78 to the Issuing Bank for due checking and that
· FEDERAL BANK LTD. v. V.M. JOG ENGINEERING LTD. [M. JAGANNADHA RAO, J.] 557
the Issuing Bank in their crucial letter dated 23.3.98 had certified the A
genuineness of the endorsements on the L/C and the signatures on the
documents. Further, the Bill of Exchange drawn by the sellers against the
L/C contained the signature of the Vice-President of the buyers (we have
already extracted the endorsement) and the delivery challans were signed by
Mr. P. Waghmode, with the endorsement "received material in good condition" B.
and two of these endorsements were counter signed by Vice President of the
buyer with his stamp and that once the Issuing Bank had certified the above
documents presented by the sellers to the Negotiating Bank, the Negotiating
Bank could not but pay the sellers and they had paid Rs. 1,94,39,252 to the
sellers on 25.3.98. The Negotiating Bank pointed out that no allegations of
fraud or forgery were made against it nor even knowledge thereof attributed C
to it.
On these facts, the trial Court refused to vacate the injunction in its
order dated 29.4.99. This order was confirmed by the High Court. The
Negotiating Bank has come up in appeal by Special leave.
In this appeal, we have heard the submissions of learned counsel for
the appellant Sri S. Ganesh and of the learned Senior counsel for the buyers
Sri V.A. Mohta and of Sri Rajesh Kumar, for the Bank of Maharashtra.
D
Learned counsel for the appellant Sri S. Ganesh contended that the E
plaintiff-buyers had deliberately not impleaded the appellant in the injunction
application and they obtained injunction in collusion with the Issuing Bank.
They could not have stated in the trial Court that the Negotiating Bank need
#
not be heard. Learned counsel pointed out that no allegation of fraud was
made in the plaint nor in the injunction application against the Negotiating
Bank and the allegations were made only on the sellers for allegedly committing F
forgery of documents. Learned counsel pointed out that not even knowledge
of fraud or forgery was attributed to the appellant.· The appellant had obtained,
by way of caution, the confirmation from the Issuing Bank as per Banking
Practice in regard to the genuineness of the endorsements on the Bill of
Exchange and L/C and on the documents (including the delivery challans) G
produced by the sellers and that the Issuing Bank had confirmed the
genuineness of the same and had, in fact, promised to reimburse the
Negotiating Bank on the due date i.e. 20.5.98 (i.e. 90th day after the date of
delivery 19.2.98). The Bill of Exchange was also signed by the Vice President
of the buyer and necessary endorsement was made. Counsel also referred us
to Articles of the Uniform Customs and Practice for Documentary Credits H'.
558
SUPREME COURT REPORTS [2000) SUPP. 3 S.C.R.
A (1983 Revision) which stood incorporated in the Letter of Credit dated 19.2.98
(and in particular Article 16{b) and (e)) and pointed out that even in cases
where Issuing Bank did not refuse to certify the documents in reasonable
time, the Article states that the Issuing Bank "shall, be precluded from
claiming that the documents are not in accordance with the terms and ccinditions
B of the credit". Here, on facts, there is an express acceptance of the genuineness
of the documents and this is an afortiori case. The Banks are governed by
a separate contract and were not concerned with disputes as to nonperformance - or non-delivery of goods - by the seller to the buyer.
On the other hand, the learned counsel for the Issuing Bank, Sri Rajesh
C Kumar contended before us (and in their written submissions) that it was true
that on 23.3.98 the Issuing Bank had certified to the Negotiating Bank that
the documents were in order. "But when in May, 1988, the Negotiating Bank
claimed to be reimbursed, the Issuing Bank scrutinised and it was revealed
that the documents were not in order". It also contended that the primary
duty to verify the documents was that of the Negotiating Bank and that the
D confirmation obtained from the Issuing Bank of no value.
Sri V.A. Mohta, learned senior counsel for the buyers-plaintiff wanted
to contend that the injunction obtained by the plaintiff had to be maintained.
Learned counsel was confronted with his client's stand in the trial Court that
the Negotiating Bank had no concern with the injunction. Learned senior
E counsel was told that in view of the peculiar stand taken by his client in the
trial Court, in case this Court declared that the injunction would not come in
the way of the Negotiating Bank getting reimbursed by the Issuing Bank, his
clients could not have any objection to it. Counsel, however, submitted that,
in that event, the Issuing Bank should not debit the buyer for the amount the
F said Bank would reimburse to the Negotiating Bank. Counsel was informed
that that question does not arise in this appeal.
The following points arise for consideration in this appeal :
(1) In the context of the need for Banks to take reasonable care to
G scrutinise the documents produced before it for honouring the L/C, what is
the relevance of the UCP Code issued by the International Chamber of
Commerce, which was here expressly incorporated in the L/C?
(2) If it is the case of the plaintiff-buyer that there is 'fraud' on the part
of the sellers in relation to the documents and if it is not its case that the
H Negotiating Bank was guilty of fraud or had knowledge of fraud by the seller,
---
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/
FEDERAL BANK LTD. v. V.M. JOG ENGINEERING LTD. [M. JAGANNADHA RAO, J.] 559
could the Negotiating Bank not seek reimbursement from the Issuing Bank, A
as a holder in due course of the Bill of Exchange, against the L/C?
(3) Whether, once the Issuing Bank had certified the documents whiCh
were presented to the Negotiating Bank by the sellers, the said Bank could
tum round and refuse reimbursement on the ground that on further scrutiny
made by its - long after the Negotiating Bank parted with monies - was not B
correct or was mistaken ?
Point I
This point mainly deals with the UCP Code (1983 Revision) which was
incorporated by reference into the L/C. As the interpretation of the UCP is C
commercially 0f considerable importance, we would like to deal with the
relevance of the UCP Code in some detail.
This Court had occasion in United Commercial Bank v.