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CASE NO.: Appeal (civil)  2578 of 2006

PETITIONER: UBS AG

RESPONDENT: State Bank of Patiala

DATE OF JUDGMENT: 10/05/2006

BENCH: B.P. Singh & Altamas Kabir

JUDGMENT: J U D G M E N T

(Arising out of SLP) No.5639 of 2006) With Civil Appeal No. .....2579....../2006 (Arising out of SLP ) No.6134 of 2006) and Civil Appeal No. ....2580......./2006 (Arising out of SLP ) No.6141 of 2006)

ALTAMAS KABIR, J.

The Petitioner-Bank, namely, United Bank of  Switzerland, Lausanne, Switzerland (hereinafter referred to as  ’USB AG’) filed three separate Summary Suits, being Nos.  8907 of 2000, 1515 of 2000 and 6089 of 1999, against the  State Bank of Patiala, Federal Bank Limited and United  Western Bank, respectively.  The Petitioner-Bank took out  Summons for Judgment No.783 of 2003 in Summary Suit  No.897 of 2000 against the State Bank of Patiala.  Two similar  Summons for Judgment Nos. 784 of 2003 and 786 of 2003  were also taken out by the Petitioner-Bank in connection with  Summary Suit Nos. 1515 of 2000 and 6089 of 1999. Inasmuch as, the said three suits were filed in respect of  various Letters of Credit, where the terms and conditions were  identical and the defence taken were also identical, the said  three Summons for Judgment were taken up for hearing and  disposal analogously and were dismissed  by a common order  dated 28th October, 2005.  The Learned Single Judge of the  High Court of Judicature at Bombay also granted     unconditional  leave to the  Respondent-Banks  to defend their  respective suits. Three separate Special Leave Petitions, being Special  Leave Petition ) Nos. 5639 of 2006, 6141 of 2006 and 6134 of  2006, have been filed against the common judgment disposing  of the said three suits and since they involve common  questions of law and fact, they have been taken up for  admission together. Since the facts in the three matters are more or less  similar, we will first deal with the facts relating to the Special  Leave Petition in respect of the State Bank of Patiala (SLP) No.  5639 of 2006).   On 27th March, 1998, on the request of its client, M/s  Hamco Mining & Smelting Ltd, the State Bank of Patiala  issued an Irrevocable Letter of Credit for a sum of U.S. Dollars  1,320,900 to the Petitioner-Bank.  The beneficiary of the Letter  of Credit was M/s. Frobevia S.A.   The said Letter of Credit  appears to have been issued for the import of 255.00 MT of Tin

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Ingots by M/s. Hamco Mining & Smelting Ltd.  On 30th March  1998, the Petitioner-Bank confirmed the said Letter of Credit,  which was to be valid till 23rd September, 1998.  On 6th April,  1998, upon production of relevant documents by the  beneficiary, the Petitioner-Bank made payment under the said  Letter of Credit to the said beneficiary, namely, Frobevia S.A.   Despite having made payment of the entire amount  covered by the Letter of Credit to the beneficiary, the  Petitioner-Bank agreed to the extension of the maturity date of  the Letter of Credit from 23rd September, 1998 till 21st March,  1999.   On 3rd February, 1999, the advocate for the  Respondent-Bank wrote to the Petitioner-Bank that the  Respondent Bank had received information that M/s. Hamco  Mining & Smelting Ltd, M/s. Frobevia and one Solo Industries  Ltd., having its offices at London and Sharjah, in connivance  with other group companies of Hamco had been perpetrating  huge frauds on several banks in India. It was also mentioned  that from the enquiry undertaken, it was clear that M/s.  Frobevia did not ship any goods on the vessel in question and  the Bill of Lading  negotiated by M/s. Frobevia was fraudulent.   By the said letter, the Petitioner-Bank was informed  further that the Respondent-Bank had been advised not to  make any payment under the above mentioned Letter of Credit                                  dated 27th March, 1998 and the Petitioner-Bank was put ’on  caution’  and was advised not to negotiate the export bills  presented by M/s. Frobevia and further not to make any  payment to M/s. Frobevia in respect of the said Letter of  Credit. Notwithstanding the aforesaid letter dated 3rd February,  1999, the Petitioner-Bank demanded remittance of the entire  amount covered by the Letter of Credit, which was due for  payment on 21st March, 1999.   On receipt of two such  demands made on 17th March 1999 and 23rd March, 1999, the  Respondent-Bank replied drawing the attention of the  Petitioner-Bank to the letter written by its learned advocate on  3rd February, 1999, informing the Petitioner-Bank that it had  been advised not to make any payment under the aforesaid  Letter of Credit dated 27th March, 1998, favouring M/s.  Frobevia S.A. On receipt of the said communication, the Petitioner-  Bank wrote to the Respondent-Bank on 7th April, 1999  indicating that documents presented by the beneficiary had  been negotiated and payments had already been made on 6th  April, 1998 long prior to the allegations of fraud indicated by  the learned advocate of the Respondent-Bank.   It was pointed  out that irrespective of the said fact, under the Uniform  Custom and Practice for Documentary Credit 500  (hereinafter  referred to as ’ UCP 500’) the Respondent-Bank was under an  obligation to reimburse on the due date of the Letter of Credit,  the amount already paid by the Petitioner-Bank to the  beneficiary.  There was no evidence that the beneficiary had  acted fraudulently.  The Respondent-Bank was once again  requested to remit the actual outstanding amount, together  with interest at the rate of 5.7%, from the date of maturity  upto the date of payment to the account of the Petitioner- Bank, that is, UBS AG, Stamford Branch,  C.T., U.S.A. Inasmuch as, despite the repeated demands, the  Respondent-Bank did not reimburse the Petitioner-Bank in  respect of the amount paid to the beneficiary under the Letter  of Credit before receipt of the letter dated 3rd February, 1999,  written by the advocate of the Respondent-Bank, the  Petitioner-Bank sent a legal notice dated 30th June, 1999  informing the Respondent-Bank that on account of their  failure to honour their commitments under ’UCP 500’, the  Petitioner-Bank would be constrained to file a suit for recovery

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of their dues. Pursuant thereto, the Petitioner-Bank instituted  Summary Suit No. 897 of 2000 in the Ordinary Original Civil  Jurisdiction of the High Court of Judicature at Bombay under  Order XXXVII of the Code of Civil Procedure, 1908. As indicated, hereinbefore, two similar suits on similar  causes of action, were filed by the Petitioner-Bank against the  Federal Bank Limited and United Western Bank, being  Summary Suit Nos. 1515 of 2000 and 6089 of 2000,  respectively.  Inasmuch as, the three Special Leave Petitions  against the said three suits have been taken up for  consideration together, leave is granted in all the three Special  Leave Petitions. The short point for decision in these appeals is whether  unconditional leave could have been granted to the  Respondent-Banks to defend the suits filed against them by  the Appellant- Bank for their refusal to reimburse the  Appellant-Bank in respect of the amounts disbursed to the  beneficiary of the Letters of Credit before being informed of the  fraud allegedly perpetrated by the beneficiary and the  constituent of the Respondent-Banks. The Letter of Credit issued by the Respondent-Bank  requests the Appellant-Bank to advise the beneficiary that the  Respondent-Bank was establishing an Irrevocable Letter of  Credit for 1,320,900 U.S. Dollars only.   The Letter of Credit  further indicates the 20th of June, 1998 as the expiry date  for  shipment and 10th  of July, 1998, for negotiation in  Switzerland.  It was further stipulated  that the documents for  negotiation were to be presented within 21 days from the date  of the shipping documents  and were to be accompanied by  the documents  evidencing shipment of 255 metric tonnes of  tin ingots.  In paragraph 12 of the Letter of Credit it was  particularly indicated that the credit was subject to Uniform  Customs and Practice for Documentary  Credit (1993 Revision)  as published in International Chambers of Commerce  Publication No.500. According to the Appellant-Bank, the beneficiary  presented the documents indicated by the Letter of Credit for  negotiation to the Appellant-Bank on 6th April, 1998 and on  the basis thereof the Appellant-Bank made payment under the  Letter of Credit to the beneficiary M/s.Frobevia S.A. and  informed the Respondent-Banks accordingly. On 22nd July, 1998, the Respondent-Bank informed the  Appellant-Bank that its documents for U.S. Dollars 1,320,900  referred to in the Letter of Credit  had been accepted to mature  on 23rd September, 1998  on which date  the funds would be  remitted as per the instructions  of the Appellant-Bank.  By a  subsequent  communication dated 21st August, 1998, the  Respondent-Bank informed the Appellant-Bank that the  beneficiary  had agreed to  extend the   maturity date of the  Letter of Credit  from 23rd September, 1998 to 21st March,  1999.  The Appellant-Bank was requested to confirm such   extension.  In response to the said communication, the  Appellant-Bank by its communication dated 31st August, 1998  confirmed the extension of the reimbursement date till 21st  March, 1999. As indicated hereinbefore, notwithstanding  the fact that   the Appellant-Bank  had made payment to the beneficiary  under the Letter of Credit as far back as on 6th April, 1998,  and had  informed  the Respondent-Bank  accordingly, the  Respondent-Bank caused a letter dated 3rd  February, 1999 to  be written by its learned advocate stating that certain frauds  perpetrated by its constituent, M/s. Hamco Mining  &  Smelting  Ltd., M/s. Frobevia and one M/s. Solo Industries  Ltd., had been brought  to  its   notice by several other banks

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which had established  Letters of Credit at the instance of  M/s.    Hamco Mining &  Smelting Ltd.  It was also mentioned   that  the clear implication was that the   Letters of  Credit   were fraudulently  encashed   by production of  bogus Bills of  Lading and other shipping  documents.  By the  said letter the  Appellant-Bank  was  put ’on caution’  not to negotiate  the  export bills, if any, presented by M/s. Frobevia and further not  to make any payment whatsoever to M/s. Frobevia in respect  of the Letter of Credit. While considering the  application filed by the Appellant- Bank   for summary judgment, the High Court took note of   the fraud said to have been perpetrated by  M/s.Hamco Group  of Industries and that it was the case of the Defendant-Bank   that they had been defrauded by their constituent  in  obtaining the Letter of Credit. The learned Single Judge also  took note of  the submission made on behalf of  the  Defendant-Bank that it had come to its notice that the Letter  of Credit had been sought to be encashed  without import of  any goods, on the basis of bogus documents and that  even  the Bill of Lading  and shipping documents used for obtaining   the Letter of Credit and subsequent encashment thereof were  fraudulent. The learned Single Judge  also took note of the  submission made on behalf of the Plaintiff-bank that since the  Letter of Credit was a written contract, on  the date of maturity  the Defendant-Bank   was  bound  to  honour the commitment  made therein.  The learned Judge also noted that it was the   case of the Plaintiff-Bank  that even  before communication  by  the Respondent-Bank of the fraud  said to have been  perpetrated by the constituent of the Respondent-Bank, the  Appellant-Bank had already paid over the amount to the  beneficiary which amount  was to be  reimbursed by the   Respondent-Bank. On  consideration of the submissions made, the learned  Single Judge was of the view  that the suit  raises serious  triable  issues and in that view of the matter unconditional  leave was granted to the Defendant-Banks to defend their  respective suits. The reasoning of the learned Single Judge of the High  Court in granting  such leave has been questioned in these  appeals on the ground that  the High  Court had completely  misconstrued the  law relating  to Letters of Credit which is  sometimes  referred to as the  life-blood  of international  commerce. The main contention raised on behalf of the Appellant- Bank  is that since it had no knowledge of any fraud  perpetrated by the constituent of the Respondent-Bank  before  making payment under the Letter of Credit in question, the  Respondent-Bank could not refuse to reimburse the Appellant- Bank  of payments already made to the beneficiary under the  Letter of Credit before such  intimation was received.  It was  also the case of the Appellant-Bank that since it had no  knowledge of the fraud said to have been committed  with  regard to the  Bills of Lading and the Letter of Credit itself, it  negotiated documents presented before it by the beneficiary   and made payment accordingly as per the instructions of the  Respondent-Bank. Appearing for the  Appellant-Bank, Mr.  Ashok Desai,  learned senior advocate, referred to and relied on the decision  of this Court in  Oil & Natural Gas Corporation Ltd. vs.  SBI,  Overseas Branch, Bombay,  (2000) 6 SCC 385,    wherein   while dealing with  a summary  suit under Order  XXXVII  and  a similar  question involving  leave to defend in respect of a  bank guarantee, this Court  held that  an  unconditional bank  guarantee must be given effect to  even where there is a

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dispute between  the parties and that unless there is a plea  relating to fraud  the Court does not have jurisdiction to grant  unconditional leave to defend.  Mr. Desai submitted that in the  instant case the plea relating to fraud was taken by the  Respondent-Bank  against its own constituent and such fact  was intimated to the Appellant-Bank long after the payment  under the Letter of Credit had been made to the beneficiary.    Similar sentiments were expressed  by this Court in   Dwarikesh Sugar Industries Ltd.  vs.  Prem Heavy Engineering  Works  (P) Ltd. And Anr., (1997)  6 SCC 450, wherein while  dealing with a bank guarantee this Court held that the  principle  of undue  enrichment  was not applicable  to  encashment  of bank guarantees. Mr. Desai also referred to another decision of this Court  in Federal Bank Ltd. vs.  V.M. Jog Engineering Ltd. And Ors.,   (2001) 1 SCC 663,  wherein it was  observed that in the case of  a bank guarantee or letter of credit  the Court should not issue  an order of injunction  restraining encashment thereof on  ground of breach of the  main contract between the buyer and   the seller.  A contract of bank guarantee or  letter of credit is  independent of the main contract and the only exceptions are  when fraud is committed by the seller or where encashment  results in irretrievable damage.   This Court went on further   to hold that where  the negotiating bank makes payment to  the seller after obtaining confirmation from the issuing bank   about the genuineness of the letter of credit, bill of exchange  and other related documents  and seeks reimbursement from  the issuing bank, the encashing bank cannot be  restrained by  injunction from obtaining reimbursement.        Mr. Desai  also referred to the relevant provisions of the  UCP 500, and in particular Article 14 thereof, which deals  with reimbursement on negotiation of documents presented to  the Confirming-Bank on the instructions of the Issuing-Bank.   It was urged  that the Respondent-Bank had no defence since   no triable issues arise  in the suits  as filed.   The stand taken  on behalf of the Respondent-Bank was  that the Appellant-Bank  could claim reimbursement  only on  the due date of payment as stipulated in the Letter  of Credit  agreed upon between the issuing bank and the confirming  bank.  It was urged that since the fraud  committed  by M/s.  Hamco Mining & Smelting  Ltd. had been discovered  and  intimated to the Appellant-Bank before the due date of  reimbursement, the Respondent-Bank was entitled to withhold  payment under the Letter of Credit.  It was also urged that  several triable issues arise in the suit, which had been taken  note of by the High Court while granting unconditional leave to  defend the suit. Mr.R.F. Nariman, learned senior advocate, appearing for   the Respondent-Bank  contended that one such triable issue  was whether payment had  at all been made by the Appellant- Bank to the beneficiary under the Letter of Credit  before being  informed of the fraud perpetrated by M/s. Hamco Mining &  Smelting Ltd.  It was  contended that in the correspondence  exchanged between the  two banks, except for intimation that  the documents presented by the beneficiary had been  negotiated by the Appellant-Bank, there was nothing  else on  record to indicate that  payment had, in fact,  been made on  6th April, 1998, the same date on which the documents were  presented for negotiation.  Apart from the above, it was submitted that the Court  would have to consider whether the Appellant-Bank  had  satisfied itself  about the  genuineness  of  the documents  presented  and had obtained confirmation from the  Respondent-Bank  before making payment to the beneficiary   of the Letter of Credit.  In fact, one of the points urged on

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behalf of the Respondent-Bank  was that payment, if any,  made by the Appellant-Bank to M/s. Frobevia S.A. may  have  been  under some private  agreement and not under the Letter   of Credit. It was contended that it was sufficient to indicate to the  Court before which a suit was pending, that there was a  triable issue for which leave to defend the suit was required to  be given. Reference was made to the decision of this Court in  Raj  Duggal  vs. Ramesh Kumar Bansal,  1991 Supp. (1) SCC 191,  where a question had been raised  regarding  leave to defend  in  a    suit  under Order XXXVII of the Code of Civil  Procedure.  While considering the said question, this Court   set out the principles to decide whether leave  should be  granted or denied in the following manner :- "3. Leave is declined where the court is of the  opinion that the grant of leave would merely  enable the defendant to prolong the litigation by  raising untenable and frivolous defences.  The  test is to see whether the defence raises a real  issue and not a sham one, in the sense that if  the facts alleged by the defendant are  established there would be a good or even a  plausible defence on those facts.  If the court is  satisfied about that leave must be given.  If  there is a triable issue in the sense that there is  a fair dispute to be tried as to the meaning of a  document on which the claim is based or  uncertainty as to the amount actually due or  where the alleged facts are of such a nature as  to entitle the defendant to interrogate the  plaintiff  or to cross-examine his witnesses  leave should not be denied. Where also, the  defendant shows that even on a fair probability  he has a bona fide defence, he ought to have  leave. Summary judgments under Order 37  should not be granted where serious conflict as  to matter of fact or where any difficulty on  issues as to law arises. The court should not  reject the defence of the defendant merely  because of its inherent implausibility or its  inconsistency."

It was  urged that the defence was not required  to show  that it would inevitably succeed in the suit, but that a  plausible defence, capable of being tried, was sufficient  to   grant leave to a defendant to defend a  suit of this nature.  The  principle in such matters was to grant  leave to a defendant to  defend  a suit  if there was the  slightest possibility of a triable  defence.   In addition,  it was contended that  the appeals were not  maintainable as the impugned order of the High Court  granting leave to the Defendant-Banks to defend their  respective  suits did not amount to a judgment against which  an appeal would lie.  Placing reliance  on the decision of  this  Court in Shah Babulal Khimji vs. Jayaben D. Kania And Anr.,  (1981) 4  SCC 8, Mr. Nariman  submitted that no civil right of  the  Appellant-Bank had been adversely affected  by grant of  such leave and that as far as the Appellant-Bank was  concerned, the suits filed by it remained and the defendants  therein would only get an opportunity to defend the same. On  consideration of the submissions made on behalf of  the respective parties, we are unable to agree with the  submissions advanced on behalf of the Respondent-Bank  in   these appeals.  While  the principles indicated by Mr. Nariman

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in matters relating to   grant of  leave to a  defendant to defend  a  suit under Order XXXVII of the Code of Civil Procedure are  undoubtedly sound, in the facts of this case, however, no  triable issue can be raised which would warrant grant of  unconditional leave to the Respondent-Bank  to defend the  suit filed by the Appellant-Bank. International commerce  operates on trust and  relies  to a large extent on  arrangements between banks on behalf of their respective   clients, giving rise to ’UCP 500’ which governs the Letter  of  Credit involved in the instant case.  Prior to  3rd February,  1999, when the  advocate for the Respondent-Bank wrote to  the  petitioner-bank, there  is nothing on record to suggest  that any fraud had been perpetrated by  the applicant and the  beneficiary or that the Appellant-Bank  had been requested   not to negotiate  the documents to  be presented by the  beneficiary.  In fact,   four and  a half months    after  6th April,   1998, when the Letter of Credit had already been negotiated,   the Respondent-Bank requested the Appellant-Bank to extend  the maturity date of the Letter of Credit from 23rd September,  1998 to 21st March, 1999. The facts of these three appeals are  clear and simple.   The Letters of Credit were issued by the issuing \026bank  to the  confirming-bank with a  request to  inform the  beneficiary  that an irrevocable  Letter of Credit  had been  established  for  the sum indicated   therein to be paid by the Appellant-Bank  on negotiation  of documents  to be presented by the  beneficiary.  Such documents  having been presented  by the  beneficiary to the Appellant-Bank,  it made payment under the  Letter  of Credit to the beneficiary and  was entitled to receive  reimbursement for the same from the Respondent-Bank.  If  the fraud had been detected  earlier and the Appellant-Bank  had been   informed of such fraud and put on caution  prior to  making payment, the Respondent-Bank may  have had a  triable  issue to go to trial.  That is not so in these  three  cases.    In these  cases, the fraud  was detected after the   Letters of Credit  had been  negotiated  and hence  such fraud   alleged to have been  committed by the constituent of the  Respondent-Bank  cannot be set up even as a plausible   defence  in the suit filed  by the Appellant-Bank.  The High Court, appears to have been   persuaded  to   hold that  serious triable issues arise in the present suits  since the  record reveals  that a  fraud had been  committed   in obtaining the Letter of Credit.  Even if the constituent  of  the Respondent-Bank had committed fraud in obtaining the  Letter of Credit, the same would not  be a triable issue to  decide whether the Appellant-Bank  was entitled to  reimbursement under the Letter of Credit  before such fraud  was brought to its notice.  The High Court has wrongly  interpreted  Clause 8 of the Letter of Credit in holding  that the  plaintiff’s claim  for encashment  of   the Letter of Credit  could  not  be  accepted because prima facie Clause 8 of the said  Letter of Credit  did not provide for    discounting  of the said        Letter of Credit  and in view of such discounting the plaintiff  would not be entitled to claim reimbursement on the ground  that the said amount  had been paid to the beneficiary.   The  Letter of Credit itself shows that the same was to be negotiated   as  had been done by the Appellant-Bank.    As far as the submission regarding the maintainability  of  the appeals are concerned, we are satisfied  that the principles   enunciated in Babulal Khimji’s case (supra) which apply to  Letters Patent Appeals, will not apply  to appeals for which  special leave is  granted under Article 136 of the Constitution.  In such circumstances, these appeals succeed and are  allowed.  The judgment and order of the High Court in these  three appeals  are set aside  and the unconditional leave

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granted to the Respondent-Bank  to defend the suit is revoked.