Case: Federal Bank Ltd Vs. V.M. Jog Engineering Ltd.

from reimbursing the Negotiating Bank. These principles prima facie flow from Shientag, J.s judgment which has been followed both in England and by this Court, in several cases. Legal relation of a Negotiating Bank vis-a-vis the Issuing Bank : 62. The contract between the Issuing Bank and the paying or negotiating (intermediary) banker may partake of a dual nature. The relationship is mainly that of principle and agent, mandator and mandatory. In other that he may claim reimbursement for any payment he makes under the credit or the indemnity of an agent, the intermediary banker must obey strictly, the instructions he receives, for by acting on them, he accepts them and thus enters into contractual relations with the Issuing Bank. The instructions may take the form of an authority either to pay against documents or drafts accompanied by document, or to negotiate drafts drawn either on the Issuing Bank or on the buyer. The authority may be accompanied by instructions to the intermediary banker to confirm the credit, that is, to place himself in binding contractual relationship with the beneficiary. There is ordinarily no privity between the intermediary banker and the buyer. But the intermediary banker, though initially the agent of the Issuing Bank, may also act as principal in relation to him. (Pagets Law of Banking, 9th Ed., 1982 pp. 543, 544). 63. A.G. Davis in his `The Law Relating to Commercial Letters of Credit (2nd Ed.) (1954) (p. 92 et see) deals with the rights of a Negotiating Bank. These rights are partly based on the law relating to negotiable instruments and partly on the law applicable strictly to letters of credit. So far as the rights of the Negotiating Bank against the seller are concerned, his position will be that as in the case of a `bill of exchange as against the drawer. The author deals with its rights against the seller as a holder in due course unless the seller drew the bill `sans recourse. He also deals with the risks of the Negotiating Bank in cases of revocable credits. But so far as irrevocable credits are concerned, he says that the terms of the credit have to be looked into. Some terms indeed contain an undertaking by the Issuing Bank with the seller and purchasers for value of drafts on credits, to honour those drafts if, of course, the terms of the credit are complied with. He says : "But even in the absence of express words, a promise in favour of such third persons may be implied from the terms of the Letter of Credit and surrounding circumstances................... where an intermediary banker pays against documents other than those for which the credit calls and tenders them to the issuing banker, he may nevertheless be able to recover from the issuing banker if the latter delays in deciding whether he will repudiate or accept." 64. Roche, J. in Westminster Bank Ltd. v. Banca Nazionale di Credito, 1928(32) LL Rep. 306 at 312 said : "if parties keep documents which are sent (to) them....in consequence of some mandate which they themselves have issued, and keep them for an unreasonable time, that may amount to a ratification of what has been done as being done within their mandate." The issuing Bank, as principal may ratify the acts of its agent, the corresponding bank which is its agent and by doing so, relieve the corresponding bank of a liability it would otherwise have. 65 One ruling referred to by the learned counsel Shri S. Ganesh for the appellant is directly in point. In Virgo Steels v. Bank of Rajasthan, AIR 1998 Bom. 82 . In that case, the UCO Bank issued a Letter of Credit at request of Virgo Steel in favour of Western Mini-steel Ltd. It provided that documents under the credit could be negotiated through any Bank. The drawer drew the Bill of Exchange which was negotiated by the Bank of Rajasthan. On receipt of the said drafts, the Bank of Rajasthan wrote to the UCO Bank, sending the documents for its confirmation. The UCO Bank confirmed the signature of the partner as per their records and said that they could release payment directly to the Bank of Rajasthan. Subsequently, the UCO Bank found that Virgo Steels, in connivance with some officials of the Branch, got the L/Cs opened much in excess of the limit authorised by UCO Bank. The UCO Bank disowned liability to pay the Bank of Rajasthan on due date. M.B. Shah, J. (as he then was) speaking for the Bench, rejected the plea of UCO Bank and found it liable to the Bank of Rajasthan. It was held :"Whether the drawer or the acceptor or some officers of the UCO Bank committed fraud would hardly be a defence for non-payment of the amount due to the Bills of Exchanges negotiated by the Bank of Rajasthan, a third party."and that"UCO bank has never raised any contention that some officers of Bank of Rajasthan, which is altogether a third party, was involved in any alleged fraud or conspiracy."The Court relied upon a circular of the Reserve Bank of India dated 1.4.1992. UCO Bank was held bound by its own confirmation of the documents. We are in respectful agreement with the judgment.66. In view of the above reasons, this appeal is to be allowed.67. Sumarising, we hold that when the plaintiff buyer has no case that the appellant-Negotiating Bank had any knowledge of fraud, and when it took precaution in getting clearance for the document from the issuing Bank on 20.3.1998 and such clearance was given on 23.3.1998 by the latter, it was not open to the Issuing Bank to contend that on fresh scrutiny in May, 1998, it found that the documents were not in conformity with the letters of Credits or that the buyer had so informed them. Prima facie, the appellant was in the position of a holder in due course. Points 2 and 3 are decided in favour of the appellant.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]62. The contract between the Issuing Bank and the paying or negotiating (intermediary) banker may partake of a dual nature. The relationship is mainly that of principle and agent, mandator and mandatory. In other that he may claim reimbursement for any payment he makes under the credit or the indemnity of an agent, the intermediary banker must obey strictly, the instructions he receives, for by acting on them, he accepts them and thus enters into contractual relations with the Issuing Bank. The instructions may take the form of an authority either to pay against documents or drafts accompanied by document, or to negotiate drafts drawn either on the Issuing Bank or on the buyer. The authority may be accompanied by instructions to the intermediary banker to confirm the credit, that is, to place himself in binding contractual relationship with the beneficiary. There is ordinarily no privity between the intermediary banker and the buyer. But the intermediary banker, though initially the agent of the Issuing Bank, may also act as principal in relation to him. (Pagets Law of Banking, 9th Ed., 1982 pp. 543,One ruling referred to by the learned counsel Shri S. Ganesh for the appellant is directly in point. In Virgo Steels v. Bank of Rajasthan, AIR 1998 Bom. 82 . In that case, the UCO Bank issued a Letter of Credit at request of Virgo Steel in favour of WesternLtd. It provided that documents under the credit could be negotiated through any Bank. The drawer drew the Bill of Exchange which was negotiated by the Bank of Rajasthan. On receipt of the said drafts, the Bank of Rajasthan wrote to the UCO Bank, sending the documents for its confirmation. The UCO Bank confirmed the signature of the partner as per their records and said that they could release payment directly to the Bank of Rajasthan. Subsequently, the UCO Bank found that Virgo Steels, in connivance with some officials of the Branch, got the L/Cs opened much in excess of the limit authorised by UCO Bank. The UCO Bank disowned liability to pay the Bank of Rajasthan on due date. M.B. Shah, J. (as he then was) speaking for the Bench, rejected the plea of UCO Bank and found it liable to the Bank of Rajasthan. It was held :"Whether the drawer or the acceptor or some officers of the UCO Bank committed fraud would hardly be a defence forof the amount due to the Bills of Exchanges negotiated by the Bank of Rajasthan, a third party."and that"UCO bank has never raised any contention that some officers of Bank of Rajasthan, which is altogether a third party, was involved in any alleged fraud or conspiracy."The Court relied upon a circular of the Reserve Bank of India dated 1.4.1992. UCO Bank was held bound by its own confirmation of the documents. We are in respectful agreement with the judgment.66. In view of the above reasons, this appeal is to be allowed.67. Sumarising, we hold that when the plaintiff buyer has no case that theBank had any knowledge of fraud, and when it took precaution in getting clearance for the document from the issuing Bank on 20.3.1998 and such clearance was given on 23.3.1998 by the latter, it was not open to the Issuing Bank to contend that on fresh scrutiny in May, 1998, it found that the documents were not in conformity with the letters of Credits or that the buyer had so informed them. Prima facie, the appellant was in the position of a holder in due course. Points 2 and 3 are decided in favour of the appellant.