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

4. The appellant, the Negotiating Bank received documents from the sellers which included five delivery challans purportedly signed by the buyers officers acknowledging receipt of goods. The seller sent a Bill of Exchange for encashment against the Letter of Credit for 2 crores, taken out by the buyers. The appellant sent the Bill of Exchange, with endorsement of the buyers and the Letter of Credit and the connected documents including the `delivery challanas received from the Sellerthe Issuing Bank and got the genuineness of the documents confirmed. The Negotiating Bank then released Rs. 1,94,39,252 in favour of the sellers on 25.3.1998, after deducting its commission. But the buyers have obtained a temporary injunction against the Issuing Bank from honouring the Letter of Credit. This has resulted in the appellant Negotiating Bank not being able to obtain reimbursement from the Issuing Bank. The trial Court and the High Court, after noting that the Negotiating Bank had released to the seller the above sum upon due certification of the sellers documents by the Issuing Bankhave thus precluded the Negotiating Bank from getting reimbursement from the Issuing Bank. One other peculiar feature of the case is that while the appellant, Negotiating Bank was impleaded as the 3rd defendant in the suit, specific relief was not sought against it either in the suit or in the interlocutory application. In fact, it was stated by thethat the Negotiating Bank need not be heard in the interlocutory application and that the said Bank had no locus standi. Both the courts below thought it fit to accept this contention and grant injunction under Order 39 Rule 1, Code of Civil Procedure restraining the Issuing Bank from paying any amount to anybody under the Letter of Credit, pending suit. In the plaint or in the interlocutory application, the plaintiff has not alleged `fraud or forgery against the Negotiating Bank nor even knowledge of the fraud/forgery which is alleged against the sellers in respect of the delivery challans.5. Aggrieved by the order of temporary injunction passed under Order 39 Rule 1 CPC, the Negotiating Bank has come up in) at Pune entered into a contract in February 1998 with the sellers at Nagpur for purpose of 1450 M.T. of reinformentl, conforming to IS:1786. These were needed for the buyers works at two projects, one at Palm Beach, Andheri and another for aproject at Bombay. Two purchase orders (Nos. 104, 105) for supply of 1450 MT were placed upon the sellers by the buyers on 7.2.1998 for each of these projects. The time for supply of material was 31.3.1998. The buyer availed of a Letter of Credit dated 19.2.1998 from the Issuing Bank to the tune of Rs. 2 crores with negotiation initially to be restricted to the State Bank of India, Wardha. The expiration date was 31.3.1998 but was extended upto 30.4.1998.8. The Letter of Credit issued by the Issuing Bank on 19.2.1998 listed out the various "documents" which had to be produced by the sellers for payment under the Letter of Credit opened by the buyer with the IssuingThereafter, it is stated in the L/C in clause 10 "last date of Negotiation of documents 20.4.1998 but not later than 20 days from despatches." (This clause was later deleted on 19.3.1998 when the appellant was nominated as Negotiating Bank in place of the State Bank of India).Thus the L/C confirms the rights of bona fide holders of the drafts that may be issued by theand to honour on presentation of documents or at maturity. it is also clear that the L/C is subject to UCP (1983 revision).11. For the purposes of the main point arising in the case, it is important to note clause 9 of the Letter of Credit. That clause requires that one of the document to be produced by the seller for payment should be the "copies of the deliveryissued by Jaswant Steel Rolling Mills Pvt. Ltd.duly signed by Project Authorities, with an endorsement that the material was recovered in good condition and indicating the date of receipt of material at sites.12. On 19.3.1998, the appellant became the Negotiating Bank in the place of State Bank of India. The Issuing Bank informed the seller that the Negotiating Bank would be the Federal Bank (appellant) and not the State Bank of India. Further, it was stated that clause 10 of the Letter of Credit (referred to above) stood deleted.13. On the same day, 19.3.1998 the seller sent a Bill of Exchange (called technically as a Draft) to its dealer at Visakhapatnam against the Letter of Credit No. 1/98 dated 19.2.It will be noticed that ninety days from 19.2.1998 would be 20.5.1998. That would be the date on which the Negotiating Bank could claim from the Issuing Bank, the monies if any, it might have paid to the seller. Â?3dÂ?3 But, it is the contention of thethat the first despatch of the goods was on 28.8.1998 and that payment would be due to the Negotiating Bank only on 26.6.1998. Theon the other hand contended that once the Vice President of the buyer company confirmed the despatch document dated 19.2.1998, ninety days would expire by 20.5.1998 and thein case it paid to the sellers under the Bill of Exchange issued by the sellers, the appellant should be repaid on 20.5.1998 and not on 26.6.1998.16. On 20.3.1998, the sellers wrote to theThe letter dated 20.3.1998 by the appellant (Negotiating Bank) to the Issuing Bank stated that they were enclosing the original Letter of Credit for 2 crores, Usance 90 days, due date 20.5.1998 (they were counting 90 days from 19.2.1998) and that they were enclosing the "documents" sent to them by sellers along withThe Issuing Bank, after receiving the documents, wrote back to the Negotiating Bank in its crucial letter on 23.3.On the basis of the above letter dated 23.3.1998 sent by the Issuing Bank to the Negotiating Bank, the letter discounted the Bill of Exchange drawn from the seller and paid Rs. 1,94,39,252 under the L/C on 25.3.1998 to the sellers.23. On 24.3.1998 the Negotiating Bank wrote to the Issuing Bank that the latter had returned the L/C, along with confirmation and also the documents. It said that the Negotiating Bank shall be delivering the documents again to the Issuing Bank on due date and that "the same is returned herewith which you may kindly acknowledge". `Encl. as above. (A contention was raised by the Issuing Bank in its affidavits in the trial Court that by this letter, the Negotiating Bank was agreeing to send some other documents and they were not sent later at the time of seeking reimbursement on 20.5.1998).24. The Negotiating Bank, having parted with Rs. 1,94,39,252 upon confirmation of the genuineness of the documents by the Issuing Bank, was waiting to claim reimbursement by the Issuing Bank on the `due date, 20.5.1998.25. But then, there was a sudden surprise. It received a letter from the Issuing Bank on 19.5.1998 that the Issuing Bank had found on "scrutiny in May 1998", that the Negotiating Bank had not submitted (1) "Deliveryissued by sellers duly signed by project authorities with an endorsement that the material is received in good condition and indicating that the date of receipt of material at sites as per clause No. 10 of our L/C. (2) All relevant motor transport receipts as per clause No. 3 of our L/C. They stated that after receipt of the above documents as per terms of L/C, they would be able to consider further." This has obvious referred (reference ?) to clause 9 of the L/C extracted above.On these facts, the trial Court refused to vacate the injunction in its order dated 29.4.1999. This order was confirmed by the High Court. The Negotiating Bank has come up in appeal by Special Leave.31. In this appeal, we have heard the submissions of learned counsel for the appellant Sri S. Ganesh and of the learned senior counsel for the buyers Sri V.A. Mohta and of Sri Rajesh Kumar, for the Bank of Maharashtra. Â?3â€ºÂ?3  Å

Court's reasoning:
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.