# UNITED COMMERCIAL BANK v. BANK OF INDIA AND OTHERS

- **Citation:** [1981] 3 S.C.R. 300
- **Court:** Supreme Court of India
- **Decided:** 1981-03-26
- **Case number:** Civil Appeal No. 132 of 1980
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/united-commercial-bank-v-bank-of-india-and-others-8016
- **Pages:** 30

## Headnote

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300
UNITED COMMERCIAL BANK
v.
BANK OF INDIA AND OTHERS
March 26, 1981
[A.C. GUPTA AND A.P. SEN, Jl]
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 on expert advice if the goods
conformed to the contract-Nature and effect of letter of credit.
Practice-Payment made b.v the paying bank "under reserve" as a result of
discrepancies in the documents submitted by the seller-High Court, if could grant
injunction restrai111i1g the paying bank from collecting the amount paid under
reserve.
Constitution of India-Article 136-Supreme Court, if would inte1fere with
interlocutory orders under Art. 136.
Words and Phrases-Payment "under reserve"-Meaning of.
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 approxi·
mately 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 descrip·.
ti on 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 instruc·
lions in the letter of credit.
In respe~t of the second lot, the appellant bank refused payment on the
ground of the discrepan~ies in the 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
U. CO. BANK V. BANK OF INDlA
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" 3.mount in
respect oft he 27 bills as well "under reserve
0 so that the value in respect of
both the sets of bills paid to the: sellers in two instalments was made uunder
reserve••.
The sellers filed a suit in the High Court.
A f:w 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 inti!rest thereon because, according to it, the
bills of exchange had not been retired by the buyer for the reasons that the
railway receipts were state that the goods had not been supplied according to
the term1 of th~ agreem!nt and that chemical an1lysis of the oil showed that it
was not fit for human consumption.
The - respondent hank in tum wrote to the seller to refund the whole
amount \vhereupon the seller moved the High Court for the grant of an ex
parte Od interim injunction restraining the appellant bank _from recalling or
reci:iving the amount due from the respondent bank which was granted.
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The High Court appointed a Court receiver with power to sell the goods
without any obligation or liability to purchascrS as to their quality, quantity or
edibility. At the __ S3.Ie the seller himself bought the goods for Rs. 18 1akhs odd.
The sale was confirmed by the High Court.
The single Judge of the liigh cOurt thereupon made the temporary Injunction absolute till the disposal of the suit filed by

## Text

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300
UNITED COMMERCIAL BANK
v.
BANK OF INDIA AND OTHERS
March 26, 1981
[A.C. GUPTA AND A.P. SEN, Jl]
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 on expert advice if the goods
conformed to the contract-Nature and effect of letter of credit.
Practice-Payment made b.v the paying bank "under reserve" as a result of
discrepancies in the documents submitted by the seller-High Court, if could grant
injunction restrai111i1g the paying bank from collecting the amount paid under
reserve.
Constitution of India-Article 136-Supreme Court, if would inte1fere with
interlocutory orders under Art. 136.
Words and Phrases-Payment "under reserve"-Meaning of.
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 approxi·
mately 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 descrip·.
ti on 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 instruc·
lions in the letter of credit.
In respe~t of the second lot, the appellant bank refused payment on the
ground of the discrepan~ies in the 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
U. CO. BANK V. BANK OF INDlA
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" 3.mount in
respect oft he 27 bills as well "under reserve
0 so that the value in respect of
both the sets of bills paid to the: sellers in two instalments was made uunder
reserve••.
The sellers filed a suit in the High Court.
A f:w 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 inti!rest thereon because, according to it, the
bills of exchange had not been retired by the buyer for the reasons that the
railway receipts were state that the goods had not been supplied according to
the term1 of th~ agreem!nt and that chemical an1lysis of the oil showed that it
was not fit for human consumption.
The - respondent hank in tum wrote to the seller to refund the whole
amount \vhereupon the seller moved the High Court for the grant of an ex
parte Od interim injunction restraining the appellant bank _from recalling or
reci:iving the amount due from the respondent bank which was granted.
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The High Court appointed a Court receiver with power to sell the goods
without any obligation or liability to purchascrS as to their quality, quantity or
edibility. At the __ S3.Ie the seller himself bought the goods for Rs. 18 1akhs odd.
The sale was confirmed by the High Court.
The single Judge of the liigh cOurt thereupon made the temporary Injunction absolute till the disposal of the suit filed by 1he sellers on the view that the
appellant was not entitled under the termi of t..'13 letter of cr.!dit to unilaterally
impose a condition of the payment "under reserve'.' or refuse to pay against the
document<> 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
~'-,.._,_Jetter of credit as welt as bought the whole lot of goods for Rs. 18.53 Iakhs.
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Oa the question whether the High Court should, in a
transa~tion between
a banker and a banker, grant an injunction at the instance of the beneficiary of
an irrevocable letter of credit restrainin'g -the issuing bank from recalling the
amount paid under r""5erve from the negotiating bank acting on behalf of the
beneficiary against a document or guaranteefindemnity 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 i_nterlocutory order under
Article 136 of the Constitution.
Allowing the appeal,
HELD: J(a) The High Court was wrong in granting the temporary injunc~
tion restraining the appellant bank from recalling the amouD.t 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
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SUPREME COURT REPORTS
(1981) 3 S.C.R
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. [329 F, 324B-C]
(b) In the instant case the appellant bank was under a duty to its constituB
ent 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]
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(c) The appellant bank knew little or nothing about the mustard oil. Its
ciuty 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 whic:1 the buyer
would be bound to accept. [326 C-D]
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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]
(bJ 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 Lid. [1958] 2 Q.B. 127
and Urguhart Lindsay and Co. Ltd. v. Eastern Bank Lid. [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 El
(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]
U. CO. BANK V. BANK OF INDIA
303
(e) It is settled Jaw 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 bllyer to enmre. that his instructions
relative to the do;uments against which the letter of credit is to be honoured are
complied with. [322 DJ
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(f) A payment under reserve is understood in banking transactions to mean
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that the recipient of money may not deem it as his own but mu5t 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 aJ> interim injunction was
granted. [329 B-C)
English ,Scottish and Australian Bank Ltd. v. Bank of South Africa [1922) 12
Ll.L. Rep. 21 st. 24, E1uitable Trust Co. of New York v. Dawson Partners Ltd.
[1927] 27 Ll.L. Rep. 49, Rayner v. Hambros Bank Ltd. [1943) 1 K.B. 37, Bank
Melli Iran v. Barclays Bank [1951] 2 Ll.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 HJ
(b) In the instant case there was no justific1tion for the High Court to grant
a temporary injunction under order 39 rules l and 2 of C.P.C. to the sellers, the
effect of whkh 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 BJ
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.
P.S. Narim::m, 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.
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SUPREME COURT REPORTS
[J 981] 3 S.C.R.
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Soli J. Sorabjee, E.J. Ba/sara, S. Ganes//, Narain and P.H. Amin
for Respondent No.2 .
Lal Narain
Sinha, Attorney General of India, Ram Ba/c<k
Mahto and B.P. Singh for Respondent No. 3.
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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. l, the Bank of India, and in terms of
the Jetter of guarantee or indemnity executed by that Bank, in a suit
based on a bankers' letter of credit.
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The facts are somewhat complicated, but it is necessary to
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disentangle the facts to bring out the point of law involved.
The respondent No. 2, Messrs Godrej Soaps Limited, hereinafter referred to as 'the plaintiffs', by a contract dated February 2,
1978 agreed to supply to the respondent No. 3, the Biliar 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 apprpximately
Rs. 86 lacs, packed in brand new leakproof 62,040 tins of net 16
kg. each at the rate of Rs. 13 7 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-I.
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u. co. BANK v. BANK OF INDIA (Sen, J.)
To
M/s Godrej Soaps Ltd.,
Eastern Express Highway,
Vikhroli, Bombay 400 079.
Dear Sirs,
LETTER OF CREDIT No. 1/78
305
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 good self 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.
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Railway Receipt/Delivery order must be dated not later than
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13.7.1978.
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SUPREME COURT REPORTS
[1981] 3 S.C.R
Bills of Exchange must be dated and negotiated not later than
20.7. 1978.
sd. Accountant
sd. Manager.
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 I, 1978 the
plaintiffs further despatched an aggregate of 23,080 tills 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, alio 'under reserve', with a
•
u. co. BANK v. BANK OF INDIA (Sen, J.)
307
specific notation that 'it was paid under reserve on account of discre·
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pancies'.
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 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 authorit.ies had agreed to amend the railway receipts by
deleting the word 'Unrefined'.
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SUPREME COURT REPORTS.
[1981] 3 S.C.R.
On July 13, 1978 the plaintiffs addressed the following letter to
their bankers, the Bank of India :
Bank of India,
Foreign Exchange Dept.,
Mahatma Gandhi Road,
Bombay 400 023.
Dear Sirs.
July 13, 1978.
Attn: MR. SJRUR
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.I 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 Jot 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 Bibar Corporation.
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u. co. BANK v. BANK OF INDIA (Sen, J.)
309
The plaintiffs, being apprehensive that their bankers, the
Bank of India, would be bound to refund Rs.36.52 lacs 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 :
United Commercial Bank,
Nariman Point,
Bombay 400021.
Dear Sirs,
Date July 17,1978
Attn : Mr.P.K. Sharma
Letter of Credit No. I /78 of your Patna
Office
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dated 13.6. 78-Two sets,
each containing 19
& 8
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,1egotiable documents.
We are in receipt of your )etters 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
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Masters of the various destination stations, to which the
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goods were booked, to the effect that the word "unrefined"
is superfluous and, therefore, deleted. You have taken
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SUPREME COURT REPORTS
(1981] 3 S.C.R.
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
J 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 :
United Commercial Bank,
Mafatlal Centre,
Nariman Point Branch,
Bombay.
Dear Sirs,
Bank of India
70/80, M.G.Road
Bombay-400023.
18th July, I 978.
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 t_his/these
bill (s)
exchange by reason of the following discrepancies claims
by you:
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We have made arrangements for due payment of this/
these bill (s).
311
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 be~n 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
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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
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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,
Assi~tant 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 endorsment.
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 th date of refund, stating that the bills of exchange had not
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313
been retired by the Bihar Corporation, that is the buyers, due to
discrepancies. The letter reads :
Fex/exp/ I 1 I0/78
2nd August, 1978
Bank of India
70/80 M.G. Road, Bombay 400 023.
Attn: Mr. PUDV AL, 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 I /78 dated 13.6.1978-negotiated by us under reserve.
Please refer to our letter No. 646/78 dated !st August,
1978.
Jn 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 /he 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 tor 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 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
b_'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 eithet 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 ouy 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
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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 indeed no stale documents.
Upon these grounds, he held that the
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plaintiffs had aprimafacie 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
u. co. BANK v. BANK OF INDIA (Sen, J.)
315
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.
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The appellant being aggrieved by the order of the learned Single
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Judge dated August 24, 1979 preferred an 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
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except a few.
The plaintiffs by their solicitor's letter dated August
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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 B~nk, 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 b)' these
second defendants show that no discrepancy was made a
ground of dishonour.
Having regard to the observatio.ns 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 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 whk:h 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 controvery 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, reH
straining the issuing bank from recalling the amount paid under
reserve from the negotiating bank, acting on behalf of the beneficiary
against a docwmeot of i:uarantee/indemnity at the instance of the
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317
beneficiary ? Another question also arises as to whether the Court
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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
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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 is>uing and drawee bank was dealt with by this Court in
Tarapore and Co. Madras v. Tractors Export, Moscow and Anr.(1)
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.(2) and Urguhart Dnds:iy and Co. Ltd. v. E:istern
Bank Ltd.(3) and observed at p.