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Judgment
M. Chockalingam, J.—This judgment shall govern all the above fifteen appeals. They challenge an order of the learned Single Judge made in
O.A. Nos. 355 and 356 of 2005 in C.S. No. 307 of 2005, O.A. Nos. 409 and 410 of 2005 and Application No. 2461 of 2005 in C.S. No. 341
of 2005 and O.A. Nos. 481 and 482 of 2005 and Application Nos. 2459 and 2460 of 2005 in C.S. No. 417 of 2005. The first respondent in
OSA No. 263 of 2005 as plaintiff filed a suit in C.S. No. 307 of 2005 seeking for a permanent injunction restraining the third defendant from in
any manner invoking and/or realising payment under the LC No. 3308M/05 dated 7.1.2005 issued by the 1st defendant and also for a permanent
injunction restraining the defendants 1 and 2 from making payment under the LC No. 3308M/05 dated 7.1.2005 to the third defendant or anyone
claiming under or through them. While doing so, the plaintiff filed O.A. Nos. 355 and 356 of 2005 for interim injunction with the following
allegations:
(a) The applicant/plaintiff is an importer of melting scrap. They have been dealing with the third defendant, and his representative met the applicant
and represented that they would be in a position to supply light melting scrap. The applicant and the third defendant entered into a sales contract on
6.1.2005 whereby the third defendant agreed to sell light melting scrap consisting of pressed bundles for an agreed quantity of about 500 metric
tonnes. The total value of the sale contract was USD 93,500. The contract further provided that there would be a pre-shipment inspection
certification and the payment terms were agreed to be through a letter of credit (LC) at sight or Usance LC. The documentation would include
commercial invoice, packaging list, certificate of origin issued by the Chamber of Commerce, full set of clean on board bills of lading and pre-
shipment inspection certificate. Pursuant to the contract, the plaintiff opened an LC on 7.1.2005, through the first defendant which was the
applicant''s banker at Chennai for shipment of 250 M.T., out of the original contracted 500 M.T. The LC was amended by an amendment dated
19.1.2005. In that amendment, the LC was converted from CIF to CNF shipment. Thereafter, the LC was further amended and an amended LC
was issued on 10.3.2005. The shipment of a quantity of 265.860 M.T. Light melting scrap of pressed bundles had been shipped through
containers. A commercial invoice was also issued. The packing list was issued by the third defendant. A certificate dated 25.2.2005, was issued
by the third defendant stating that the goods were free of impurities and they would be exactly as per the contract. On the same day, another
certificate was issued by the third defendant to the effect that the goods are actually metallic scrap. A certificate of origin was also issued. The third
defendant also provided a pre-shipment inspection certificate. The documents were sent to the applicant''s bank namely the first defendant herein
by courier. Th6 first defendant verified the same in terms of the LC and relying upon the certification provided in respect of the quality and quantity
of the cargo, the payment under the invoice was accepted, and it was communicated to the second defendant through the first defendant. The
applicant issued a letter dated 9.3.2005 to the first defendant agreeing to make the payment under the invoice after considering the documents and
specifically setting out that the payment was due on 23.5.2005.
(b) The applicant was shocked to see that when the containers were weighed, it showed that they were almost empty even though the seals were
intact. The applicant received information from the other importers who were also importing steel scrap from the third defendant, that there
appeared to be a large scale fraud played whereby the containers were either empty or were containing old used tyres or mud. The applicant
immediately contacted the third defendant who immediately sent a letter dated 22.3.2005 accepting that they had also received information from
certain importers in India that the containers shipped by them were empty. The third defendant claimed that the matter was being investigated. In
fact the South India Importers Association which is the Apex Body for importers also issued a communication dated 24.3.2005 to all its members
that a large scale fraud was being committed by the third respondent by shipping containers having sand or used tyres instead of steel scrap.
(c) A joint inspection was carried out at the Container Freight Station, where the containers were kept. On inspection, it was found that the seals
which were made in the bill of lading were correct and intact. The inspection was done by the applicant, the carrier, the 3rd defendant''s
representative, Customs House Clearing Agent and the Customs Officials and the Associate office of the agency which carried out the pre-
inspection certification namely Alex Stewart. To the shock of the applicant, on opening the containers, they found that it contained used tyres
instead of scrap. Thus, a large scale fraud has been played and even the documents are fraudulent in nature. In such circumstances, no payment
under the LC can be claimed or released. The third defendant cannot claim any payment under the LC. There is every likelihood that in
continuation of its established fraud, the third defendant or its assignees would take payment under the LC. The due date for payment under the
LC is 23.5.2005. However, there is every likelihood that the LC could be negotiated and moneys collected before that in Singapore causing
irreparable and irretrievable hardship and prejudice to the applicant, the first respondent and the second respondent. No hardship or prejudice
would be caused for the grant of interim orders since the third defendant has accepted that the containers were not in accordance with the contract
and in the joint inspection carried out in the presence of its representative, it has been proved that the containers contained used tyres. Balance of
convenience is in favour of the applicant/plaintiff.
The petitions were resisted by the third defendant by filing a counter stating that the suit was not maintainable. No part of cause of action has
arisen within the jurisdiction of this Court. The plaintiff has not even attempted to settle the alleged dispute. Only if the settlement failed, he could
approach the Court and that too at Singapore. It is false to state that the entire LC transactions has been tainted by established fraud. The third
defendant is entitled to draw the payment on the LC furnishing the document, as the LC opened is an irrevocable and an independent one. Alex
Stewart is a third party Inspection and Survey Agency appointed mutually to inspect the cargo and certify as per the mandatory stipulation of
Government of India. It is pertinent to note that the Government of India, Ministry of Finance - Office of the Deputy Commissioner of Customs,
has issued notice wherein procedure was prescribed for import of metal scrap. As per the requirement of the public notice and as per the
conditions in the LC, Alex Stewart has issued a certificate of pre-shipment certificate on 1.3.2005, in which it is clearly stated that light metal scrap
in the form of pressed bundles is the description of metallic scrap that is on voyage; that the quantity is 265.860 tonnes and the country of origin is
Phillippine. The bill of lading is dated 21.2.2005. The risk insurance has to be borne by the buyer viz. the plaintiff. Once the freight has been paid
and the goods has been loaded at Manila, the title in the goods has passed on to the plaintiff as a buyer and the contract specifically provides that
all risk insurance should be obtained by the buyer and not by the seller. This defendant is not aware as to what was the weighment of the
containers on arrival at Chennai. In fact, as admitted by the plaintiff in his mail, dated 22.3.2005, this defendant is a genuine supplier and is
innocent. It is denied that this defendant has played fraud on the plaintiff with the connivance of various other parties. The LC stipulated the
conditions very clearly and when all the conditions of the LC have admittedly been fulfilled by the defendant, this defendant is entitled to receive the
proceeds of the LC. The bank has sent the acceptance advice that payment will be effected on a certain due date which effectively means that the
bank has scrutinized all the documents and has found them to be in order and then only, they have sent the acceptance message to the negotiating
bank in Singapore. Once documents are presented and have been taken delivery of, nothing remains on the part of the seller to be performed.
Neither the negotiating bank nor the issuing bank can be restrained by an order or decree of injunction. This defendant has spent a huge money to
get the scrap from a merchant in Manila and he has paid to his seller at Manila, and if an order of restraint is passed, this defendant will be
deprived of his money for no fault of him. Hence the OA has got to be dismissed.
The first respondent in OSA No. 265 of 2005 as plaintiff filed a suit in C.S. No. 341 of 2005 seeking a permanent injunction restraining the
third defendant from in any manner invoking and/or realising under the FLC/MDM/040435 dated 20.11.2004 issued by the first defendant and
also a permanent injunction restraining the defendants 1 and 2 from making payment under that LC to the 3rd defendant. While doing so, the
plaintiff filed two applications in O.A. Nos. 409 and 410 of 2005 for interim injunction with the allegation that the applicant and the third defendant
entered into a contract dated 16.11.2004, for supply of light melting scrap; that the applicant opened an FLC on 20.11.2004 through the first
defendant; and that the containers contained condemned tyres instead of scrap. The plaintiff has also stated similar allegations as to the large scale
fraud as found in C.S. No. 307of2005.
The said applications were resisted by the third defendant by filing a counter containing similar averments as found in the counter filed in C.S.
No. 307 of 2005.
The first respondent in OSA No. 45 of 2006 as plaintiff filed a suit in C.S. No. 417 of 2005 for a permanent injunction restraining the third
defendant from in any manner invoking and/or realising under the letter of credit bearing No. 041 3-FLC243-04 dated 18.10.2004 issued by the
first defendant and for a permanent injunction restraining the defendants 1 and 2 from making payment under the said LC to the third defendant.
While doing so, the plaintiff filed two applications in O.A. Nos. 481 and 482 of 2005 for interim injunction with the allegations that the applicant
and the third defendant entered into series of sales contract dated 29.11.2004 and 6.1.2005 for supply of light melting scrap; that pursuant to the
contract, the FLC facilitator of the plaintiff, the fourth defendant herein, opened an FLC on 19.10.2004, through the first defendant; and that the
containers contained condemned tyres instead of scrap. The plaintiff has further averred similar allegations as to the large scale fraud as found in
C.S. No. 307of2005.
The said applications were resisted by the third defendant by filing a counter containing similar averments as found in the counter filed in C.S.
No. 307 of 2005.
Originally, interim injunction was granted in O.A. Nos. 409/2005 in CS No. 341/2005 and 481 and 482 of 2005 in CS No. 417/2005. To
vacate the interim injunction originally granted, the third defendant in C.S. Nos. 341 and 417 of 2005 filed Application Nos. 2459 and 2461/2005
while the first defendant in C.S. No. 417/2005 filed Application No. 2460 of 2005.
As could be seen from the materials available, all these appeals have arisen from a common order of the learned Single Judge of this Court
made in O.A. Nos. 355 and 356 of 2005 in C.S. No. 307 of 2005 filed by the plaintiff seeking an order of interim injunction pendete lite
restraining the third defendant from in any manner invoking or realising payment under LC No. 3308M/05 dated 7.1.2005 and also another interim
injunction restraining the defendants 1 and 2 from making payment under the said LC to the third defendant. The plaintiff in C.S. No. 341 of 2005
filed O.A. Nos. 409 and 410 of 2005, the former one seeking for interim injunction restraining the third defendant from invoking or realising
payment under FLC/MDM/040435 dated 20.11.2004 issued by the first defendant, and the latter one seeking for interim injunction restraining the
defendants 1 and 2 from making payment under that FLC. In the said suit, the third defendant filed Application No. 2461/2005 seeking to vacate
the temporary injunction originally granted in O.A. No. 409 of 2005. The plaintiff in C.S. No. 417/2005 filed O.A. Nos. 481/2005 seeking interim
injunction restraining the third defendant from in any manner invoking or realising under 0413-FLC243-04 dated 18.10.2004 issued by the first
defendant. Equally the plaintiff in that suit filed O.A. No. 482 of 2005 seeking interim injunction restraining the defendants 1 and 2 from making
payment under that LC to the third defendant. The third respondent in O.A. No. 481/2005 filed Application No. 2459 of 2005 to vacate the
order of interim injunction originally granted in C.S. No. 417/2005. Also the third respondent in O.A. No. 481/2005 filed Application No. 2461
of 2005 to vacate the order of interim injunction originally granted in C.S. No. 341/2005. Similarly, the first respondent in O.A. No. 482/2005
filed Application No. 2460 of 2005 to vacate the order of interim injunction originally granted in C.S. No. 417/2005. All those applications were
taken up for enquiry by the learned Single Judge and a common order was passed which is the subject matter of challenge before this Court.
The point that arises for consideration in these appeals is whether the interim injunction granted by the learned Single Judge is liable to be
vacated for the reasons stated by the appellants?
Advancing the arguments on behalf of the appellant in OSA Nos. 45 and 46 of 2006, the learned Senior Counsel Mr.R.Krishnaswami would
submit that as could be seen, the averments in the plaint would clearly indicate that the case of the plaintiff rested on the issue of fraud alleged to
have been played on the plaintiff in the matter of supply of goods; that it may or may not be true; that whether a fraud was played upon the plaintiff
in the matter of supply of goods could be decided only after the evidence in that regard was adduced, and that too only in a suit filed by the plaintiff
against the third defendant seller; that the letter of credit did not concern itself with the goods supplied, but only the documents enumerated therein;
that Article 3 of the Uniform Customs and Practice for Documentary Credits (hereinafter referred to as UCPDC) (codified as ICC No. 500)
would make it clear that the credit by their nature are separate transactions from the sales or other contracts on which they may be based, and
banks were in no way concerned with or bound by such contracts even if any reference whatsoever to such contracts was included in the credit,
and consequently, the undertaking of a bank to pay, accept and pay drafts or negotiate or to fulfill any other obligations under the credit was not
subject to claims or defence by the applicant resulting from his relationship with the issuing bank or the beneficiary, and a beneficiary can in no case
avail himself of the contractual relationship existing between the banks or between himself and the issuing bank; that in view of the clear and
unambiguous wording of the UCPDC, the banks were in no way connected with the performance or non-performance of the obligations under the
contract between the plaintiff and the third defendant; and that it has got to be worked out between them inter se. The learned Senior Counsel in
support of his contention relied on a decision of the Supreme Court reported in Fargo Freight Ltd. Vs. The Commodities Exchange Corporation
and Others,
11.Added further the learned Senior Counsel that the banks were concerned only to see whether the documents enumerated in the LC were duly
presented; and that the duty of the bank was only to examine the documents presented in pursuance of the letter of credit in accordance with the
standards set out in Article 13 of the UCPDC. The learned Senior Counsel in support of his contention relied on a decision of the Apex Court
reported in 2001(1) SCC 663= 2001-1-L.W. 332 (Federal Bank v. V.MJOG).
12.The learned Senior Counsel would further submit that it should not be forgotten that the injunctions granted by the Courts against letters of
credit, would shake the confidence of the international banks in the integrity of the Indian Banking Industry; that under the, circumstances, the
Courts are ordinarily reluctant to grant interim injunction to restrain invocation of the bank guarantee; that the first defendant has not till date notified
even a single discrepancy with respect to the documents in accordance with Article 14 of the UCPDC; that while so, there was no question of
Canara Bank being restrained from making payment to the appellant with whom the letter of credit constituted an independent contract; that even
assuming that the third defendant has supplied sand and used tyres instead of the iron scrap and it would constitute a fraud on the plaintiff, it would
not be a ground for injuncting them from making payment under the letter of credit; that once the first defendant has accepted the documents, the
appellant herein made payment to the beneficiary; that thereupon, the appellant stood in the position of a holder in due course and is entitled to
payment without reference to the disputes between the plaintiff and the beneficiary; that the learned Single Judge has not taken into consideration
the balance of convenience and equities between the plaintiff and the third defendant; and that on the other hand, in deciding whether to grant
injunction against the payment under the LC or not, the only issue to be decided was whether the documents have been presented and examined in
accordance with the UCPDC or not; but, it was not taken into consideration or decided by the learned Single Judge.
13.Added further the learned Senior Counsel that the learned Single Judge has found that the inspection certificate was not correct; but, the letter
of credit specified that the certifying agency must give a certificate of inspection in respect of the goods; that in the instant case, the certificate has
been duly produced which appears on the face of it, to be valid; that the Canara Bank has not objected to the same; that under the circumstances,
the certificates issued by Alex Stewart were not germane for deciding the question as to the grant of injunction; that it is not correct to state that
fraud has been brought to the notice of the bankers; that the appellant bank was not bound to take cognizance of any inter se dispute between the
plaintiff and the third defendant; that in any event, no proof of notice was given to the appellant bank, and thus, there was no scope for assuming
any constructive or implied notice in such matters; that no notice of fraud by the third defendant has ever been given to the appellant prior to its
payment to the third defendant; that there was no evidence before the Court of notice being given to the appellant prior to its making payment to
the third defendant; that under the circumstances, the appellant has in fact made the payment on the basis of the acceptance of the documents and
hence, the injunction should have been refused; that it is not correct to hold that the appellant had no interest in getting the injunction vacated; and
that the appellant has been repeatedly corresponding with the first defendant who had assured the appellant that they would safeguard their
interest.
14.The learned Senior Counsel would further submit that it is pertinent to point out that no proper notice was served upon the appellant as to the
Court proceedings and hence he did not take proper steps within the time prescribed; that the construction made by the trial Court of the usance
period of the letter of credit was not correct; that the letter was payable at sight; that therefore, the issues of usance were not germane to the
enquiry on hand, and under the circumstances, the order of the learned Single Judge granting injunction has got to be set aside.
15.The learned Counsel appearing for the appellant in OSA Nos. 115 and 116 of 2006 Mr.N.V.Srinivasan would submit that UCPDC issued by
the International Chamber of Commerce, is the universally applicable set of rules governing the use of the documentary letters of credit in
international trade and commerce which govern all international trade transactions; that if applied, the injunction originally granted by the learned
Single Judge should have been vacated; that Article 17 of UCPDC 500 would make it clear that the bank assumes no liability or responsibility for
the form, sufficiency, accuracy, genuineness, falsification or legal effect of any document or for the general or any document or particular conditions
stipulated or assume any liability or responsibility for the description, quantity, weight, quality condition, packing, delivery, value or existence of the
goods rep-resented by any document which would clearly indicate that the appellant is not responsible or has anything to do in the performance or
breach in performance of the contract between the buyer and the seller who are the plaintiff and the third defendant respectively; that in the
international trade operations, bankers are concerned only with the documents and not with the goods, services or other performance; that the
bank guarantee or LC is an independent and distinct contract between the bank and the beneficiary; that it is not qualified by the underlying
transactions; that the primary contract between the person at whose instance the bank guarantee or letter of credit is issued; that when the
documents were found to be in conformity with the terms of the LC, then the bank which issued the LC was bound to honour its commitment
irrespective of the dispute between the seller and the buyer; that an irrevocable LC constitute a definite undertaking of the issuing bank as soon as
the stipulated documents were presented by the negotiating bank to the issuing bank and comply with the terms and conditions of the LC; that
while the issuing bank by confirmed the negotiating bank that the documents are free from discrepancy, the negotiating bank should not have been
injuncted as per UCPDC 500; that the first respondent herein has clearly admitted that the documents as required under the contract between the
first respondent and the third respondent, were sent to the second respondent being the banker of the first respondent; that on receipt of such
documents, the second respondent verified the documents in terms of the foreign LC and relying upon the certification provided in respect of the
quality and quantity of the cargo, the payment under the invoice was accepted; that such acceptance was duly communicated through the 2nd
defendant to the appellant, and thus, it would be quite clear that there was no discrepancy; and that in such circumstances, the appellant was
justified in honouring by making payment.
16.It is further contended by the learned Counsel that the liability of the second respondent namely the issuing bank of the LC to make payment on
the due date to the appellant i.e., the negotiating bank, in the context of the situation where the terms and conditions of the LC were duly complied
with by the third respondent, has got to be recognized; that if not the rights of the appellant being the negotiating bank to get due payment from the
2nd respondent is safeguarded, it would cause irreparable loss and also prejudice by making the injunction absolute against the appellant and the
2nd respondent; that the learned Single Judge has prejudged the issue of the alleged fraud in favour of the first respondent/plaintiff which could be
decided only by letting in evidence at the time of the trial; that the appellant was never put on notice by the first respondent as regards the fraud
alleged to have been committed by the third respondent at any point of time; that the bank presenting the draft for payment was the holder in due
course; that its claim against the LC issuing bank would not be fettered even though the primary transaction was alleged to have been tainted by
fraud, and hence, the injunction granted by the learned Single Judge, has got to be vacated.
17.Advancing the case on behalf of the appellant in O.S.A. Nos. 161 to 163 of 2007, the learned Senior Counsel Mr.T.V.Ramanujam would
submit that there was no privity of contract between the appellant and the first respondent; that the first respondent has no locus standi to sustain
the suit against the appellant; that since the plaintiff had no cause of action against the appellant, the order passed in O.A. Nos. 481 and 482/2005
and Application No. 2460/2005 was liable to be set aside; that as per the sales contract entered into between the first respondent and the third
respondent, the first respondent has agreed to resolve the disputes if any arising between them in Singapore, and hence, the suit itself was not
maintainable before this Court and consequently, the injunction orders passed were ultra vires and against the principles of equity and natural
justice and liable to be set aside; that as per the MOU arrived at between the first respondent and the fourth respondent STCL, the first
respondent has agreed to resolve the dispute with regard to the supply or non supply if any, by way of referring the matter to arbitration; that the
venue of the arbitration in this regard is New Delhi; that under the circumstances, this Court has no jurisdiction to entertain the suit; and that when
the suit itself is not maintainable, no order of injunction could be granted.
18.Added further the learned Counsel that it is pertinent to point out that the letter of credit is a trade instrument which settles the trade between
the two parties who are located in two different countries; that in order to bring uniformity in matters pertaining to the letters of credit, the
International Chamber of Commerce (ICC) at Paris for the letters of credit, the Rules under UCPDC have got to be applied; that as per Article 9
of the said Rules, the issuing banker should honour the LC on due date upon the beneficiary complying with the LC terms and conditions; that the
third respondent has discharged the LC terms and conditions, and consequently the appellant was under paramount duty and obligation to honour
the LC on the due date; that as per the UCPDC Rules, the LC issuing bank should only deal with the documents and documents alone; that if the
beneficiary furnishes documents confirming the compliance of the LC conditions, the LC issuing bank has no other alternative except to make
payment to the beneficiary on the due date; that by way of opening the irrevocable letters of credit, the appellant bank has guaranteed the due
payment of the invoice amount for the supplies effected to the third respondent herein upon complying with the conditions contained in the LC; that
if the LC opening bank committed default in honouring the LC on due date consequent to the compliance of the terms and conditions of the LC by
the supplier, the same would not only affect the image of the LC opening bank namely the appellant, but also cause an indelible stigma in the minds
of the trading community on the nation as a whole; that the very quintessence of LC is that immaterial of the fact whether the buyer made the
payment to the seller or not, upon the seller''s compliance of the terms and conditions of the LC the issuing banker should honour the LC on due
date; and that having opened the irrevocable letters of credit through the fourth respondent, the first respondent herein had no locus standi
whatsoever to stop honouring of the LC.
19.The learned Senior Counsel would further add that Article 3 A and 3B read with 4 of the UCPDC Rules makes it clear that the banks deal only
with the documents but not goods and also the undertaking of the bank to pay, accept or to incur liability under the letter of credit was not subject
to the claims, defences raised by the plaintiff; that Article 9A of the UCPDC Rules makes it mandatory on the part of the LC issuing bank to
honour its commitments upon the beneficiary complying the terms and conditions as stated in the LC; that in the transaction relating to the
international trade, the currency and the trade practices involved in the respective countries are different; that the seller who is the exporter is not
sure of the credit worthiness of the buyer; that in fact, by way of issuing the irrevocable letter of credit, the issuing bank confirms to the supplier that
the consideration for the goods supplied would be paid on due date upon the seller fulfilling the terms and conditions specified in the LC
irrespective of the fact whether the buyer made payment to the supplier or not; that the third respondent has supplied the goods to the first
respondent only on the irrevocable letters of credit issued; that the third respondent had fully complied with the conditions stipulated in the LC and
then the appellant has no option except to honour the same; that the issuing banker pays the consideration to the seller independent of the buyer;
that the buyer cannot withhold the payments under any pretence; that if the buyer wishes to complain about the goods, he must do so separately
from the documentary letter of credit; that in view of Article 9 of the UCPDC Rules, the issuing bank is under paramount duty to honour the LC
amount upon the beneficiary complying with the terms and conditions of LC; and that the nonpayment of the LC amount by the appellant to the
third respondent would not only affect the reputation and image of the appellant, but also would spoil the reputation of the country as a whole in the
international market.
20.Added further the learned Senior Counsel that the FLC transactions were based on documents, and hence supply or non-supply of the stocks
by the third respondent has nothing to do with the honouring of the LC; that it is pertinent to point out that under the terms of the contract of sale
entered into between the plaintiff and the third defendant, the plaintiff had alternative remedy, and hence interim injunction should not have been
granted; that the plaintiff has miserably failed to establish a prima facie case and the balance of convenience in their favour; that the plaintiff has also
suppressed certain facts and information and it has approached the Court with unclean hands; that whether there was any fraud committed by the
first respondent and whether the quality of the stocks supplied were below or substandard were all triable issues between the plaintiff and the third
defendant; that the appellant was also not put on notice with regard to the alleged fraud prior to the confirmation of the payment on the due date to
the negotiating banker; that the alleged fraud was not brought to the notice of the appellant either before acceptance of the documents or before
confirmation of the payment on due date to the negotiating banker and hence it would be quite clear that the plaintiff has not made out a prima facie
case for an interim injunction.
21.It is further submitted by the learned Senior Counsel that it is not correct to state that the compensation received by the fourth respondent from
the inspecting agency was independent of the sale transaction between the plaintiff and the third defendant; that the fraud was brought to the notice
of the appellant only on 23.3.2005 and 5.4.2005; but, the appellant has confirmed the payment under the LC to the negotiating bank well before
the said notice of fraud, and hence it was not a fit case where injunction could be granted, and the order of the learned Single Judge has got to be
set aside.
22.The learned Senior Counsel Mr.B.Kumar, appearing for the appellants in OSA Nos. 263 to 270 of 2005 would submit that the order of the
learned Single cannot be sustained; that it is pertinent to note that the sine qua non for grant of injunction in case of encashment of LC is fraud of
egregious nature and that it should be of the beneficiary; that in this regard, the decision of the Supreme Court in Federal Bank''s case (2001(1)
SCC 663) has got direct application; that the photographs, the bill of lading, the pre-inspection certificates, the weight of the containers as
disclosed at the time of shipment and the purchase made by the seller in Philippines would reveal that the fraud if at all it had happened, is not by
the beneficiary but by somebody else; that the sale contract clearly provides that ""all risk insurance"" would be taken by the buyer; that if he has not
chosen to insure the goods, he has to face the consequences; that in the instant case, the ultimate sufferer is the seller namely the appellant as it has
discounted the bills and had the LC cleared by the negotiating bank on the acceptance made by the issuing bank; that in such circumstances, the
issuance of injunction would ultimately only prejudice the interest of the seller namely the appellant; that the letter issued by Alex Stewart clearly
states that the contents are true disclosures; that the alleged disclaimer by Alex Stewart is never mentioned in the plaint nor in the affidavits but has
been obtained well after the counter has been filed and vacate stay sought for; that it is pertinent to point out that the said Alex Stewart has attested
the signature of the person who would issue pre-shipment certificate at Manila; that the signatures and formats are all same in all the certificates;
that STCL cannot be allowed to disown such of those certificates; that the issuance of five cheques by the appellant would not amount to
acceptance of his liability; that it is to be seen that the STCL by accepting the cheques has waived all the claims against the appellant; that there is
no privity of contract between the appellant and Jai Bhavani and hence the plaint by Jai Bhavani is not at all maintainable.
23.Added further the learned Senior Counsel that the Apex Court has repeatedly held that fraud should be an established fraud; that the plaintiff
has having not even pleaded an established fraud in the document of letter of credit is not entitled to injunction; that in the instant case, there is no
established fraud and that too by the beneficiary namely the appellant; that the agreement produced by STCL having been entered by it with Alex
Stewart is enough to demonstrate that the certificates are true certificates issued by Alex Stewart; that the action of STCL receiving the amount
from Alex Stewart would absolve the appellant from all liability even though no liability could be fastened on the appellant; that the LC issuing bank
has verified the documents and sent the acceptance to the negotiating bank; that the said negotiable instruments were sold by STCL to plaintiff on
high seas sale basis which means that STCL has also checked and verified the documents to be in order; that UCPDC 500 has been specifically
made applicable between the parties in all the LCs opened by the other plaintiffs and STCL and hence the parties are bound by the provisions of
the same.
24.It is further contended by the learned Senior Counsel that the Apex Court has clearly held that the issuing bank and negotiating bank should
have been put on notice about the fraud if there had been documentary fraud before acceptance by the issuing bank and before the LC could be
honoured and it has nothing to do with the period of time provided in usance LC; that this Court has absolutely no jurisdiction as the contract
between the parties makes Singapore laws specifically applicable and for settlement of the disputes at Singapore, and hence the order of the
learned Single Judge has got to be set aside.
25.In answer to the above, the learned Senior Counsel Mr.P.S.Raman appearing for the first respondent/plaintiff would submit that the letters of
credit stipulates 120 days for honouring the payment by the bank; that at the time of joint inspection made at Chennai Port, it was found that the
containers covered by the respective bills of lading contained either sand or used tyres; that in such circumstances, it amounted to a rank fraud
played by the third defendant; that the same was duly intimated to the issuing bank immediately; that the case on hand would come under the
exceptional circumstances; that it is pertinent to point out that the period for payment mentioned under the LC is 120 days; but, before the expiry
of that period, the payments have been made; that it is quite evident that a large scale fraud has been played and even the documents are fraudulent
in nature, and under the circumstances, the order of the learned Single Judge has got to be sustained.
26.The learned Senior Counsel Mr.R.Krishnamoorthy appearing for the fourth respondent in OSA Nos. 268 to 270 of 2005 would submit that
the cheques issued by the third respondent to the fourth respondent by a communication dated 18.4.2005, for the value of the consignments
covered by 54 containers, were subsequently dishonoured by the third respondent itself; and that the conduct of the third respondent has further
aggravated the fraud alleged.
27.Arguing on behalf of the second respondent in OSA Nos. 263 and 264/2005 and 115 and 116/2006, the learned Counsel
Mr.S.Venkateswaran would submit that the third defendant exported the commodities in terms of LC and communicated the same to the plaintiff;
that thereafter, the documents were sent to the plaintiff''s banker; that on verification of the documents in terms of the LC by the bank, the payment
was accepted, and it was duly communicated to the second respondent herein; that as per UCPDC 500, the bankers deal only in documents and
as per Article 8 of the UCPDC they are in no way concerned with trade dispute if any; that it is pertinent to note that the LC opening bank had
confirmed that the documents were found to be in order, and hence, the payment was honoured; that the Apex Court has held that when a prayer
for injunction is made, the Courts shall not interfere unless prima facie fraud or irreparable loss is established; that a bank guarantee or LC is an
independent and distinct contract between the bank and the beneficiary and is not qualified by the underlying transaction; that the machinery and
commitments of banks are on a different level; that they must be allowed to be honoured free from interference by the Courts; that if the plaintiff is
prima facie able to establish that the case comes within the two exceptions as held by the Supreme Court namely fraud and irretrievable damage,
temporary injunction can be issued; that it has also been held that the contract of the bank guarantee or LC is independent of the main contract
between the seller and the buyer; that in case of irrevocable bank guarantee or LC, the buyer cannot obtain injunction against the banker on the
ground that there was a breach of contract by the seller; that the bank is to honour the demand for encashment if the seller prima facie complies
with the terms of the bank guarantee or LC; that if there is no discrepancy, it is bound to honour the demand; that in the instant case, it has been
done in accordance with law; and that if the plaintiff is really aggrieved, then he ought to contest the case only at Singapore and not before this
Court.
28.The following would emerge as facts admitted:
In all these suits, the plaintiffs are the buyers. The third defendant Octrix Holdings (S) Pte. Ltd., is the supplier who agreed to supply larger quantity
of light melting scrap consisting press bundles to the specifications of the plaintiffs. Pursuant to the negotiations between the plaintiffs and the third
defendant, all of them entered into independent sales contract whereby the third defendant agreed to sell the light melting scrap for an agreed
quantity loaded in containers. The unit price for the sale was also agreed at USD 187 per M.T., CNF, Chennai, and the total value of the sale
contract was also agreed. The first defendant in all the suits was the banker of the plaintiffs i.e., the issuing bank, while the second defendant bank
was the negotiating foreign bank on behalf of the third defendant seller. It was agreed that there would be a pre-shipment inspection certification,
and the payment terms were agreed to be through a LC at sight or Usance LC. It is not in controversy that the parties agreed as a term in the
contract that the documentation would include 3 copies of the commercial invoice, 2 copies of the packaging list, certificate of origin issued by the
Chamber of Commerce, full set of clean on board bills of lading and pre-shipment inspection certificate. The first defendant in all the suits namely
the issuing bank, issued irrevocable letters of credit in favour of the third defendant seller to be negotiated through the second defendant. In respect
of the containers, pre-shipment inspection certificates were issued by M/s.Alex Stewart International Corporation B.V. Certifying that the
containers consist of consignments were inspected both before and during stuffing into the containers. The certificates were also as to the quality
and quantity and also to the effect that the cargoes were safe for normal use. After the containers were unloaded in the Chennai Port, they were
weighed. At that time, it was found that the consignments were far below than what was said to have been contained as per the packing list
furnished by the third defendant. Entertaining suspicion, the containers were opened in the presence of the representatives of the plaintiff as well as
the third defendant along with the insurance surveyors and the fourth defendant in C.S. No. 4.17 of 2005 namely Spices Trading Corporation Ltd.
(STCL) through whom the transaction was facilitated. It was admitted that the consignments covered by different invoices contained either used
tyres or sand. The fourth defendant STCL issued a communication on 8.4.2005 to the said Alex Stewart about the same. The said agency by a
reply dated 15.4.2005 confirmed the same and would further add that 54 containers covered by the bills of lading dated 13.2.2005 to 27.5.2005
were not known to them; that the pre-shipment inspection certificates issued by them were also not known to them; that the certification issued was
of incorrect letterhead on a different address; and that apart from that, format of the letterhead was also found varied. The difference in the
signatures of the authorized officials and the discrepancies in the pre-shipment certificate sent by the third defendant along with the bills of lading
were also pointed out. Pursuant to the communication addressed by the STCL to Alex Stewart following the defects found at the time of the
inspection and also questioning the issuance of pre-shipment inspection certificate, the Alex Stewart came forward to pay a particular sum as
compensation pursuant to which an agreement was entered into on 11.6.2005 between STCL and Alex Stewart when it was stated that it was
with a view to continue the patronage of the institution for utilising the services for inspection of future cargo of STCL.
As far as C.S. No. 307 of 2005 was concerned, a letter of credit was opened on 7.1.2005 and amended letters of credit dated 19.1.2005
and 10.3.2005 were issued, while in the case of C.S. No. 341 of 2005, the LC was dated 20.11.2004, and in the case of C.S. No. 417 of 2005,
the LC was dated 18.10.2004. A communication was addressed by South India Importers Association to its members that the third defendant had
committed fraud by loading sand, used tyres and rubbish instead of steel scrap. Under the stated circumstances, the plaintiffs have filed the
respective suits for permanent injunction. While doing so, they have sought for interim orders with the averments in the affidavits in support of the
applications that the interim orders have got to be granted restraining the defendants 1 and 2 from honouring and the third defendant from invoking
or realising the amounts covered under the letters of credit.
As could be seen from the averments in the plaints and also in the affidavits in support of the applications seeking for interim injunction
pendente lite by the plaintiffs, it would be quite clear that they have sought for the reliefs of permanent injunction that the first defendant, the banker
of the plaintiff and the second defendant, the negotiating bank, should be restrained from making payment under the letters of credit, and the third
defendant should be restrained from invoking the same specifically alleging that a fraud has been played on the document and in particular, the pre-
shipment inspection report. The pre-shipment inspection certificates in respect of all the containers were issued by a common agency Alex Stewart
International Corporation B.V. A perusal of the the said certificates would clearly indicate that the consignments were stuffed with the steel scrap
as per the quantity and quality agreed and also free from any harmful subject. When those containers were unloaded at Chennai Port and weighed,
entertaining suspicion, they were opened in the presence of the representatives of the buyer and the seller along with the insurance surveyors. The
joint inspection report issued on inspection as found in page 161 of the booklet would clearly indicate that 10 out of total 54 containers covered
under the bill of lading from 13.2.2005 to 27.5.2005, contained used tyres and sand. Only on inspection, the plaintiffs came to know that a fraud
has been committed by stuffing the containers with used tyres and sand by the third defendant. The contention put forth by the appellants'' side that
a proper inspection was made by the inspection agency namely M/s.Alex Stewart; that they have given a certificate that the containers contained
only scrap; that something would have happened subsequent to the shipment and hence, no fraud could be attributed has got to be
discountenanced. Now, at this juncture, the contention put forth by the plaintiffs'' side that pre-shipment inspection certificate itself was fraudulent
has got to be accepted since the seal that was found on the containers and the bill of lading was found to be one and the same. This fact was also
certified by the surveyor at the time of inspection when they were opened at Chennai Port. Hence it would be quite clear that the stuffing of the
used tyres and sand in the containers should have taken place before the time of shipment in the foreign country. Such a pre-shipment inspection
report could not have come into existence without the connivance of the third defendant seller and also the certifying agency namely Alex Stewart.
At this juncture, it is pertinent to point out that when this fact came to the knowledge of the fourth defendant who acted on behalf of the plaintiffs
buyers, the fourth defendant STCL issued a communication to the said Alex Stewart. The Alex Stewart came forward to state that they had
nothing to do with the bills of lading issued by the third defendant, by a communication dated 18.4.2005 to the fourth defendant. Though the third
defendant came forward to state that there was no fault on their side, M/s.Alex Stewart came forward to give the whole value of the materials by
way of cheques. It is pertinent to point out that all the cheques when placed for encashment were dishonoured. The learned Senior Counsel for the
first respondent brought to the notice of the Court that the Director General of Foreign Trade has issued a circular on 21.11.2005 informing the
trade industry that the certificate issued by eight agencies including that of M/s. Alex Stewart International Corporation would not be accepted and
investigation was on regarding the certificate issued. All the above would clearly indicate that it was a conscious act of the third defendant in stuffing
the containers with sand and used tyres instead of iron scrap. In order to satisfy the requirement of transportation, a fabricated pre-shipment
inspection report was also procured and placed along with the bill of lading.
31.The main bone of contention by the plaintiffs who seek to sustain the order of injunction pendente lite is that both the issuing bank namely the
first defendant and the negotiating bank namely the second defendant, were put on notice as to the act of fraud committed by the seller and hence
the banks themselves should withhold the payment instead of allowing the seller who has committed fraud on documents, to encash the same. On
the contrary, the main contention put forth by all the appellants are that firstly, as per the contract entered into between the third defendant seller
and the plaintiff buyer, the agreed quantities of iron scrap were stuffed in containers; that necessary pre-shipment inspection certificates were issued
on proper inspection, and since the goods were handed over for shipment and the bill of lading was received and produced, the title to the
property has actually passed from the seller; that secondly, even if a fraud has been played on the plaintiffs by the third defendant as alleged, it
could be only in the matter of goods supplied in which the banks either issuing or negotiating, has no concern, and thus banks are not obliged under
the credit, since the credits as per the UCPDC are separate and independent transactions; that thirdly, when the documents enumerated in the
letters of credit were presented, the only duty cast upon the banks is to examine the documents in accordance with the standards stipulated in
UCPDC, and if found to be all right, then the appellant bank has no option than to honour and make payment to the beneficiary, and thus, the
negotiating bank stood in the position of a holder in due course and entitled to payment without reference to the disputes between the buyer and
the seller; that apart from all the above, as per the international practice and also as per the UCPDC Rules either in the case of bill of credit at sight
or Usance, when documents are presented and found to be correct, they were to be honoured; that pending the letters of credit, in some of the
cases, payments have been made and in some of the cases, payments have not been made; that the alleged fraud is a matter between the buyer
and the seller; that the contracts between the buyer and the seller and the contract between the banking companies are two different transactions
and independent contracts and hence the plaintiffs buyers cannot have any recourse against the banking companies as has been done in the instant
case.
32.Both the appellants and the respondents'' side have relied on Uniform Customs and Practice on Documentary Credits (UCPDC). The following
Articles therein, in the opinion of the Court, are relevant for the purpose of this case.
Article 3
Credits v. Contracts
(a) Credits, by their nature, are separate transactions from the sales or other contract(s) on which they may be based and banks are in no way
concerned with or bound by such contracts), even if any reference whatsoever to such contract(s) is included in the credit. Consequently, the
undertaking of a bank to pay, accept and pay Draft(s) or negotiate and/or to fulfil any other obligation under the credit, is not subject to claims or
defences by the applicant resulting from his relationships with the Issuing Bank or the Beneficiary.
(b) A Beneficiary can in no case avail himself of the contractual relationship existing between the banks or between the applicant and the issuing
bank.
Article 4
Documents v. Goods/Services/Performances
In credit operations all parties concerned deal with documents, and not with goods, services and/or other performance to which the documents
may relate.
Article 9
Liability of issuing and confirming banks
(a) An irrevocable Credit constitutes a definite undertaking of the Issuing Bank, provided that the stipulated documents are presented to the
Nominated Bank or, to the Issuing Bank and that the terms and conditions of the Credit are complied with:
......
(b) A confirmation of an irrevocable Credit by another bank (the ""Confirming Bank"") upon the authorisation or request of the Issuing Bank
constitutes a definite undertaking of the Confirming Bank, in addition to that of the Issuing Bank, provided that the stipulated documents are
presented to the Confirming Bank or to any other Nominated Bank and that the terms and conditions of the Credit are complied with:
Article 13
Standard for examination of documents
(a) Banks must examine all documents stipulated in the Credit with responsible care, to ascertain whether or not they appear, on their face, to be in
compliance with the terms and conditions of the Credit. Compliance of the stipulated documents on their face with the terms and conditions of the
Credit, shall be determined by international standard banking practice as reflected in these Articles. Documents which appear on their face to be
inconsistent with one another will be considered as not appearing on their face to be in compliance with the terms and conditions of the Credit.
Documents not stipulated in the Credit will not be examined by banks. If they receive shall documents, they shall return them to the presenter or
pass them on without responsibility.
(b) The Issuing Bank, the Confirming Bank, if any, or a Nominated Bank acting on their behalf, shall each have a reasonable time, not to exceed
seven banking days following the day of receipt of the documents, to examine the documents and determine whether to take up or refuse the
documents and to inform the party from which it received the documents accordingly.
(c) If a Credit contains conditions without stating the document(s) to be presented in compliance therewith, banks will deem such conditions as not
stated and will disregard them.
Article 15
Disclaimer on Effectiveness of Documents
Banks assume no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any document(s), or for the
general and/or particular conditions stipulated in the document(s) or superimposed thereon; nor do they assume any liability or responsibility for the
description, quantity, weight, quality, condition, packing, delivery, value or existence of the goods represented by any document(s), or for the good
faith or acts and/or omissions, solvency, performance or standing of the consignors, the carriers, the forwarders, the consignees or the insurers of
the goods, or any other person whomsoever.
From the above Articles found in UCPDC, it would be quite clear that the credits and the contract between the seller and the buyer are
separate transactions, and the banks are not concerned with or bound by the contracts between the parties. The obligation of a bank under the
credit is an undertaking to pay, accept or negotiate and it is not subjected to claims or defence by the applicant. The beneficiary cannot also avail
the contractual relationship either between him and the other party or he cannot be allowed to take advantage of the contractual relationship
between the banks or between the applicant and the issuing bank. The credit operations always deal with documents and not with goods. An
irrevocable credit constitutes a definite undertaking of the issuing bank. If the stipulated documents are presented to the nominated bank or to the
issuing bank and the terms and conditions of the credit are complied with and if the credit provides for negotiation, it has to be paid without
reference to the drawers. The banks should examine all the documents stipulated in the credit with responsible care to ascertain whether or not
they appear on the face to be in compliance with the terms and conditions of the credit. The compliance of stipulated documents should be
determined by international standard banking practice. But, they do not incur any liability or the responsibility for the form, sufficiency, accuracy,
genuineness, falsification or legal effect of any documents or for the description of the quantity, weight, quality, the condition, packing, delivery,
value or existence of the goods represented by any documents, etc.
The Supreme Court had an occasion to consider whether a temporary injunction under Order 39 Rule 1 of the CPC to restrain the invocation
or encashment of the bank guarantee or letters of credit can be made in a case reported in (2001) 1 SCC 663 {Federal Bank Ltd. v. V.M. Jog
Engineering Ltd and others) and has held as follows:
In several judgments of this Court, it has been held that courts ought not to grant injunction to restrain encashment of bank guarantees or
letters of credit. Two exceptions have been mentioned - (i) fraud, and (ii) irretrievable damage. If the plaintiff is prima facie able to establish that the
case comes within these two exceptions, temporary injunction under Order 39 Rule 1 CPC can be issued. It has also been held that the contract of
the bank guarantee or the letter of credit is independent of the main contract between the seller and the buyer. This is also clear from Articles 3 and
4 of UCP (1983 Revision). In case of an irrevocable bank guarantee or letter of credit the buyer cannot obtain injunction against the banker on the
ground that there was a breach of the contract by the seller. The bank is to honour the demand for encashment if the seller prima facie complies
with the terms of the bank guarantee or the letter of credit, namely, if the seller produces the documents enumerated in the bank guarantee or the
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 the letter of credit and there is no discrepancy, it is bound to honour the demand of the seller for encashment. While doing so it must
take reasonable care. It is not permissible for the bank to refuse payment on the ground that the buyer is claiming that there is a breach of contract.
Nor can the bank try to decide this question of breach at that stage and refuse payment to the seller. Its obligation under the document having
nothing to do with any dispute as to breach of contract between the seller and the buyer. As to its knowledge of fraud or forgery, we shall
presently deal with it.
In the course of the said judgment, the Supreme Court has also referred to the decision made in Sztejn V. J.Heney Schroder Banking Corpn. (
(1941) 31 NYS 2D 631). The following passage of the said case has also been extracted in the judgment of the Supreme Court:
Where the seller''s fraud has been called to the bank''s attention before the drafts and documents have been presented for payment, the principle
of the independence of the bank''s obligation under the letter of credit should not be extended to protect the unscrupulous seller. It is true that even
though the documents are forged or fraudulent, if the issuing bank has already paid the draft before receiving notice of the seller''s fraud, it will be
protected if it exercised reasonable diligence before making such payment.
In paragraph 59 of the said judgment, Their Lordships have held ""...the Issuing Bank to release money for collection if the buyer informed the
Issuing Bank in his plaint that the documents to be presented to it by the Collecting Bank were forged or fraudulent.
From the decision of the Supreme Court referred to above, a temporary injunction restraining the invocation of the letters of credit or encashment
of bank guarantee cannot be made except under two circumstances namely the fraud and irretrievable damage. If the principle laid down by the
Supreme Court in the above case wherein the judgment of Shientag, J., has been referred to, which is also followed in Courts in India and England,
is applied, this Court is of the considered opinion that the present case would fall under both the exceptions of fraud and irretrievable damage.
It is true that the letter of credit is an independent transaction from the main contract between the seller and the buyer as contended by the
appellants. It is also true that taking advantage, the buyer who is the plaintiff herein should not be allowed ordinarily to ask for and obtain injunction
against the banker in the case of irrevocable letter of credit as one in the instant case, that there was a breach of contract by the seller. Needless to
say that as per the Articles 3 and 4 of UCPDC Rules, the banker has to honour the demand for the encashment of the letter of credit if the third
defendant seller complies with the terms of the letter of credit i.e., if the seller produces the documents enumerated in the letter of credit. Now, the
contention put forth by the learned Counsel for the appellants that if the bank is satisfied on the face of the documents that they were in conformity
with the list of documents mentioned in the LC and if there was no discrepancy they were bound to honour the demand of the seller for
encashment. They have to exercise the reasonable care what they are expected to do as per the international standard banking practice. But, in the
instant case, the consistent case of the plaintiffs is that both the issuing and negotiating banks were put on notice as to the fraud that has been
played by the seller and the documents which were placed were fraudulently obtained. Further, it is a case where the plaintiffs have sought for the
relief that a fraud has been played by the third defendant by presenting false and fraudulent documents. It is not the case of the plaintiffs that there
was any breach of contract on the part of the third defendant subsequently. According to the plaintiffs, they came to know about the fraud
committed by the third defendant by presenting false documents only on the inspection made at Madras Port on 24.3.2005. The fourth defendant
has immediately communicated to the certifying agency Alex Stewart. Immediately the plaintiffs informed the first defendant issuing bank to stop all
payments under the LC. Within a short span of time, all the suits were filed before the Court stating the entire facts and they have also sought for
interim injunction. It is pertinent to point out that the second defendant in the suits namely the appellant in OSA Nos. 45 and 46/2006 has neither
appeared nor filed counter affidavit, but after the orders of injunction have been passed, they have preferred appeal as if they were aggrieved
without raising any contention before the learned Single Judge.
The contentions put forth by the third defendant beneficiary that he is entitled to have the benefit of the documents and bill of credit and if there
is any breach found or even for the alleged fraud, the plaintiff could not file a suit for injunction like this, and he must file a separate suit where the
third defendant would have an opportunity to put forth his defence or even the agreement between them would make it clear that whenever any
dispute arises between the parties, they have to go for arbitration, and the laws of Singapore would govern them. Attractive though the contentions
may be, but this cannot be countenanced both factually and legally. Having entered into a contract with the plaintiff agreeing to sell a large quantity
of iron scrap and placing the documents including pre-shipment inspection report pertaining to the quantity, quality, etc., and at the time of
unloading a part of the consignment having been found to be sand and used tyres at the time of inspection done in the presence of the
representatives of the third defendant also, he cannot now be permitted to say that he should be allowed to take the money of the buyer, and the
remedy open to the buyer is to go for arbitration or before the Court of law at Singapore and wait for decades. At this juncture, it is pertinent to
point out that once the fraud committed by him by placing false documents is alleged, the plaintiff is entitled to maintain a suit against the issuing
bank and negotiating bank from invoking the LC and making payment to him.
The contention put forth by the learned Counsel for the banking institutions is that the transaction between the issuing bank and the negotiating
bank would constitute an agreement and independent of the major contract between the buyer and the seller and when the bill of credit is placed
along with the documents required, the issuing bank has to honour the same by making the payment, and in the instant case, the letters of credit
were placed before the issuing bank, and all the documents mentioned therein were in order and under the circumstances, the bank has no option
than to honour the same. Ordinarily, this contention has got to be accepted. But, in the case on hand, the letters of credit when looked into, would
clearly reveal that they became due after the lapse of 120 days from the date of negotiation. As rightly pointed out by the learned Senior Counsel
for the plaintiffs, in no one case, the period of 120 days was over when the fraud committed on documents by the third defendant was brought to
the notice of the banking institutions and even the suits were filed within a short span of time.
It is not in controversy that the letters of credit Usance were issued in all the cases. The letters of credit that were issued were not at sight
which requires the payment at sight i.e., on verifying the correctness of the documents placed. But, in the case of Usance LC, it would mean
prospective date agreed by the parties for honouring the payment. It is not in controversy that the bills of credit in question were Usance and the
originally agreed period was 120 days, which would mean the letter of credit became due after the expiry of 120 days. The learned Counsel
appearing for the banks attempted to interpret that the due date for payment would mean that a demand could be made by the other bank if not
paid within 120 days, and there was no impediment for the issuing bank to honour the same within 120 days. This contention cannot be accepted
for two reasons. Firstly, ""Usance"" itself denotes and signifies the time appointed for payment of the bills. Under the sale contracts in order to make
out a distinction in the term of payment, the clauses ""LC at sight"" and ""Usance LC"" are incorporated. It is not a case where all these LCs issued
were LCs at Sight. Admittedly, the LCs which were drawn, were Usance LCs. It has been clearly understood and agreed that the payment
becomes due on the expiry of the 120 days. In no one case when the fraud was found and at the time when both the issuing and the negotiating
banks were put on notice, 120 days was over. Secondly, as far as the LCs issued in the instant case, are concerned, it is claimed that part of them
have already been negotiated and part of them have not been negotiated. Insofar as the cases where the bills have been negotiated and payments
even if at all made, the banks have not even cared that those LCs were Usance LCs, but have hastily honoured the LCs. In a given case like this,
where the letters of credit were Usance LCs and it also stipulates a period of 120 days, the banker of the plaintiff upon whom he reposed
confidence and trust was duty bound not to negotiate and honour the bills immediately detrimental to the interest of the plaintiff. That apart, the
affidavit filed by the appellants in OSA 45 and 46 of 2006 namely the Bank of New York in paragraph 7 has given a table giving the details stating
that it had already made payment to the third defendant in respect of the sums due under the letter of credit long before the injunction was granted.
From the tabular column it would be quite clear that the LCs became due for payment only on 20.6.2005, 22.6.2005, 29.6.2005, 11.7.2005 and
14.7.2005 respectively; but, the payments were made on 23.2.2005, 28.2.2005, 8.3.2005, 15.3.2005 and 21.3.2005 respectively even before
the due dates. It is a case where the parties have agreed that the terms of payment was under Usance as indicated in the LC, and thus, without
caring for the same, both the banks have acted and thus, the banking institutions have committed themselves to run the risk by negotiating and
making the payment.
The contention that there was no impediment for negotiating the bill immediately though it becomes due only on the expiry of 120 days, cannot
be accepted. The parties have agreed as to the term of payment under Usance LCs. Under such circumstances, the banking institution without
taking into consideration that it was Usance LC cannot negotiate the bill of credit or make payment and raise a defence that they were entitled to
do so under the international standard banking practice or UCPDC Rules. In cases where the bills have not been negotiated and payments not
made, they cannot seek permission to negotiate or for making payment in the circumstances attendant in view of the fact that though the documents
were presented, they were not encashed.
The learned Senior Counsel for the appellants raised another contention stating that the 4th defendant who was acting on behalf of the buyer
after the inspection of the consignment at Madras Port was made, has addressed a communication to Alex Stewart, pursuant to which an
agreement was made on 11.6.2005 between Alex Stewart and the fourth defendant STCL. The said agreement would clearly reveal that the
certifying agency Alex Stewart has agreed to pay certain amount to STCL in 4 monthly equal instalments. It was also mentioned therein that the
plaintiff should not derive any benefit in any manner on account of the said agreement, and the fourth defendant was to deal with the plaintiff
separately on merit in line with the terms and conditions of the import. Pointing to this agreement, the learned Counsel would submit that the fourth
defendant was a Government of India Undertaking; that there was no separate transaction between the fourth defendant and Alex Stewart; that as
per the agreement, certain sums were to be paid in four monthly equal instalments, and in such circumstances, the plaintiff could make a claim and
get that amount, but not done so. This contention cannot be accepted for more reasons than one. Firstly, insofar as the payment which was agreed
to be made under the said agreement dated 11.6.2005 referred to above, was paid only ""as a goodwill gesture to have the continuous patronage
by the STCL to M/s.Alex Stewart International Corporation B.V."" Secondly, it was specifically agreed that the plaintiff should not have any benefit
in any manner on account of the agreement. Thirdly, the plaintiff was neither a party to the agreement nor was put on notice about this agreement.
Needless to say the conduct of STCL as could be evident from the agreement, cannot be appreciated. But, at the same time, pointing to the
agreement entered into between the fourth defendant and Alex Stewart, the third defendant could not be allowed to make an unlawful gain on the
strength of the forged document or fraud committed. The banking companies cannot also take shelter under the said agreement.
As could be seen above, the third defendant against whom established fraud is shown to have been committed cannot be permitted to say that
he was entitled to take the money in view of the presentation of the forged document namely pre-shipment inspection report. As far as the banking
companies are concerned, both issuing and negotiating, they cannot take under the shelter on the principle of the independence of the banks
obligation under the letters of credit in question in view of the invoice issued by the third respondent that the parties have agreed to provide 120
days period from the date of negotiation for making the payment. Despite the same, they have acted with haste and apart from that, the said
principle of independence of their obligation could not be extended to protect the third defendant an unscrupulous seller and that too, when the
banking companies had notice of such fraud. A part from all the above, before granting interim injunction under Order 39 Rule 1 of C.P.C, the
Court has to look into a prima facie case and balance of convenience. The learned Single Judge has taken into consideration the said factors and
has made the interim order absolute and has also dismissed the applications for vacating the same which, in the considered opinion of this Court,
does not require any disturbance. In such circumstances, all these original side appeals deserve an order of dismissal. Accordingly, they are
dismissed confirming the order of the learned Single Judge and leaving the parties to bear their costs.