Punjab Wireless Systems Ltd. vs Canara Bank and Others

G.C. Garg, J.—This revision petition is directed against the order of the learned District Judge, Chandigarh whereby the appeal filed by the petitioner against the order of the learned trial Court was dismissed. The petitioner filed a suit for permanent injunction restraining the defendant. Canara Bank from making payment under two letters of credit i.e. 59/1993 and 72 of 1993 each of the value of 7,38,000 U.S. $. In that suit, an application under Order 39 Rules 1 and 2 of the CPC for the grant of a temporary injunction restraining the defendant, Canara Bank from making any payment under the two letters of credit was also moved. The trial court dismissed the application vide order dated 25.3.1994. Appeal there against was dismissed by the learned District Judge, Chandigarh by order dated 13.8.1994. It is how this revision came to be filed at the instance of the plaintiff.

It may be noticed at this stage that the petitioner did not implead M/s. NUVO Holdings of America (for short ''the NUVO''), the beneficiary against whom the petitioner has levelled allegations of fraud and forgery. The petitioner also did not implead, the State Bank of India, Los Angeles Agency, California, USA, which had parted with the money. It was not even alleged in the plaint that the State Bank of India, California had even notice of the fraud. The Canara Bank as also the State Bank of India, Los Angeles Agency were later on impleaded as defendants in the suit on an application moved in that behalf under Order 1 Rule 10 of the Code of Civil Procedure.

Briefly, the facts giving rise to the controversy between the parties are that the plaintiff entered into two contracts with NUVO, one for supply of components parts which were to be used by it for manufacture of modems. Manufactured modems were to be supplied back to NUVO under the second contract. The plaintiff-petitioner placed purchase orders to NUVO and opened two irrevocable letters of credit as detailed in terms of the contract. The contract provided that all the shipments effected from U.S.A., or Taiwan will be inspected by the PUNWIRE Engineers before shipment at M/s. NUVO Holdings America works. Inspection certificate issued by the PUNWIRE Engineers must accompany the other documents to the bank for negotiation."

A dispute arose about the supply contract. Grouse of the petitioner is that NUVO played a fraud on it by despatching the goods under the orders placed by it without the goods being first getting inspected from its Engineers and in the absence of their inspection notes, which was a condition of the letters of credit. It is only on taking delivery of goods that it came to its notice that the goods supplied were junk and the delivery was taken in good faith having regard to the past dealings. On examining the documents, which came to its notice after taking delivery of the goods, it transpired that the documents were discrepant, inasmuch as the certificates purporting to be on the letter-pad of the petitioner-concern and bearing signatures of one Mr. Brar and accompanying documents were forged and fake and no person of the name of Mr. Brar had ever been employed or authorised by the petitioner for clearing the goods and even otherwise the letter-pad on which the alleged certificates had been obtained, was only a photo copy of the letter-pad and was not an original one. This forgery was brought to the notice of the bank by specifically mentioning that inspection certificates forming part of the documents and presented by NUVO were forged documents and payment under the letters of credit be not made without satisfying itself about the genuineness of those documents.

The Canara Bank in its written statement stated that objections were raised by the petitioner vide letter dated 17.8.1993, but lateron vide letter dated 25.8.1993, the plaintiff withdrew the objections and that the objections contained in letter dated 17.8.1993 were virtually the same which have been made the grounds of attack in the present suit. It was only after the withdrawal of the objections, the plaintiff accepted the bills and eventually took delivery of the goods. If the plaintiff had any grievance, it should not have accepted the bills and taken delivery of the goods. Even otherwise, it was pleaded that under Article 17 of the Uniform Customs and Practice for Documentary Credits, the banks assume no liability or responsibility for the firm, sufficiency, accuracy of any document. The documents were duly received and approved by the plaintiff before accepting the bills and there was no discrepancy in the documents and it was in that situation, the plaintiff wrote a letter dated 25.8.1993, accepted the bills and took delivery of the goods. In the situation, it was prayed that payment cannot be stopped. It was enough for the bank that inspection note accompanied the bills and the plaintiff withdrew the objections and took delivery. Allegations of fraud were denied and it was asserted that the plaintiff satisfied itself about the genuineness of the documents.

Mr. M.L. Sarin, Senior Advocate, learned counsel for the petitioner reiterated the argument as was raised in the courts below. Mr. Sarin submitted that injunction for stopping payment under the letters of credit is normally not granted but emphasised that the only exception in the matter of granting the injunction is in cases where fraud has been played. According to the learned counsel, NUVO played a fraud and submitted forged and fictitious bills inasmuch as it did not accompany the certificates issued by the plaintiff or by its duly authorised agents. Mr. Sarin. emphasised that the plaintiff had no authorised agent in U.S.A. of the name Mr. S.S. Brar who could act on behalf of the plaintiff and issue certificates under his signatures on its behalf. M/s. NUVO thus committed fraud on the plaintiff and it, therefore, had a right to ask for the grant of injunction against the defendant-bank to honour the bills under the letters of credit. Mr. Sarin in support of his submission relied upon U.P. Cooperative Federation Ltd. Vs. Singh Consultants and Engineers (P) Ltd., wherein it was held as under:

"An irrevocable commitment either in the form of confirmed bank guarantee or irrevocable letter of credit cannot be interfered with except in case of fraud or in case of question of apprehension of irretrievable injustice has been made out. This is the well settled principle of the law in England. This is also a well settled principle of law in India." In para 19 of the Judgment, the Supreme Court further observed.

"where, therefore, a bank had given a performance guarantee, it was required to honour the guarantee according to its terms and was not concerned whether either party to the contract which underlay the guarantee was in default. The only exception to that rule was where fraud by one of the parties to the under lying contract had been established and the bank had notice of the fraud."

However, a little later in that very case, the apex Court made the following observations :

" Whether it is traditional letter of credit or a new device like performance bond or performance guarantee, the obligation of banks appears to be the same. If the documentary credits are irrevocable and independent, the banks must pay when demand is made. Since the bank pledges its own credit involving its reputation, it has no defence except in the case of fraud. The bank''s obligations of course should not be extended to protect the unscrupulous seller, that is, the seller who is responsible for the fraud. But, the banker must be sure of his ground before declining to pay. The nature of the fraud that the courts talk about is fraud of an "egregious nature as to vitiate the entire underlying transaction." It is fraud of the beneficiary, not the fraud of somebody else. If the bank detects with a minimal investigation the fraudulent action of the seller, the payment could be refused. The bank cannot be compelled to honour the credit in such cases. But it may be very difficult for the bank to take a decision on the alleged fraudulent action. In such cases, it would be proper for the bank to ask the buyer to approach the court for an injunction."

Learned counsel for the petitioner also referred to Adward Owen Engineering Ltd. v. Barclays Bank International Ltd. (1978) 1 AllER 976 in support of the contention that in case of fraud injunction can be granted. It is not necessary to dwell upon the above judgment as the same was considered by the apex Court in U.P. Cooperative Federation Ltd''s case (supra). On the above premises, Mr. Sarin submitted that payment under the letters of credit could be made if the documents conformed to the terms of the letters of credit or the plaintiff had waived the discrepancies, otherwise the payment could not be made by the bank. According to the learned counsel, as already noticed above, the documents were discrepant inasmuch as the inspection certificates were forged which were required to be submitted to the bank along with the documents for claiming payment under the letters of credit. The mere fact that its discounting was done by the bank in California on the basis of forged documents, could not be relied upon as the payment could be made only after receiving information from the Canara Bank that the goods or the documents were in order. The State Bank of India discounted the bills of its own and for that act of the bank the plaintiff could not be held liable. During the course of arguments, Mr. Sarin only pointed out that the signatures of Mr. S.S. Brar appearing on the inspection reports accompanying the documents are forged and this discrepancy had been pointed out to the Canara Bank and, therefore, the payment could not be made and that the extending validity was withdrawn on that very day. The Canara Bank, therefore, acted against the letter of credit and the State Bank of India made the payment on 26.10.1993.

After hearing learned counsel for the parties and going through the pleadings, I am of the opinion that the petitioner has not been able to make out a prima facie case for the grant of injunction. The trial court as also the appellate court on a due consideration of the matter declined the injunction, and in my view quite rightly. In United Commercial Bank Vs. Bank of India and Others, , the Supreme Court relying upon Tarapore and Co. Vs. V/O Tractoroexport and Another, , 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 irrespective of any dispute that may be between the buyer and the seller as to whether the goods are up to contract or not. This shows that the obligation of the bank is absolute. In para 32 of the judgment, it was observed that banker''s commercial credits are almost without exception everywhere made subject to the code entitled the ''Uniform Customs and Practices for Documentary Credits'', by which the General Provisions and Definitions and the Articles following are to "apply to all documentary credit and binding upon all parties thereto unless expressly agreed. A little later, it was observed that the rule is well established that a bank issuing or confirming a letter of credit is not concerned with the underlying contract between the buyer and the seller. Duties of a bank under a letter of credit are created by the document itself, i.e. the letter of credit in this case, and is subject to the limitations which are given or imposed by it i.e. the letter of credit.

As per the facts as noticed above, it is the admitted case that the plaintiff had taken delivery of the goods without any protest. The fact whether the goods had been inspected by its authorised agent was in the knowledge of the plaintiff. If the plaintiff of its authorised representative had not accepted the goods before the shipment took place, it ought to have straightaway objected to the shipment of the goods and informed the bank in that behalf but the plaintiff waited not only for the arrival of the goods without raising any protest but also had withdrawn the protest, if any, vide its letter dated 25.8.1993 which it had allegedly lodged to the Bank on 17.8.1993. A subsequent letter of that date in the facts and circumstances of this case was not such which could bind the bank, especially having regard to the decision of .the Supreme Court in United Commercial Bank''s case (supra). Even by withdrawing the letter dated 17.8.1993 it is not established that in documents are forged. It need not be over-emphasised that contract of sale of goods is independent of letter of credit.

As regards the discrepancies in the documents, it is the consistent stand of the bank that it found the documents to be in order and, therefore, it was protected under Article 17 of the Uniform Customs and Practices for Documentary Credits. All documents when scrutinised with a reasonable care to ascertain the genuineness thereof appear on their face to be in accordance with the terms and conditions of the letters of credit. The documents which appear on the face of it to be consistent, the bank is obliged to make the payment. Even otherwise the specimen signatures of the Quality Engineer, who was to examine the goods before the shipment took place, did not form part of the letters of credit. In this case, no discrepancy was discovered either by the negotiating bank or by the issuing bank. The bankers are expected to form their own opinion without reference to the principal and it was only required to ascertain, whether the documents presented were as per the terms and conditions of the letter of credit. This is more so when the petitioner itself took delivery of the goods without waiting for the original documents and despite it having the knowledge if any, that it had not deputed any Engineer to examine the quality of the goods before the shipment: withdrawal of objections on 25.8.1993 also supports the above conclusions. In the present case, the transaction is covered by a documentary letter of credit and thus, I have no reason to take a view different than the one taken by the courts below, namely, that the plaintiff has failed to show a prima facie case for the grant of an injunction.

For the reasons recorded above, and agreeing with the reasoning and conclusions arrived at by the learned District Judge, Chandigarh, I find no merit in this revision petition and the same is consequently dismissed, but with no order as to costs. However, on the oral prayer made by Mr. Sarin, learned counsel for the petitioner, it is ordered that the operation of this order shall remain stayed for a period of two weeks so as to enable the petitioner to approach the Supreme Court if so advised and obtain appropriate interim directions.