http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 22  

PETITIONER: UNITED COMMERCIAL BANK

       Vs.

RESPONDENT: BANK OF INDIA AND OTHERS

DATE OF JUDGMENT26/03/1981

BENCH: SEN, A.P. (J) BENCH: SEN, A.P. (J) GUPTA, A.C.

CITATION:  1981 AIR 1426            1981 SCR  (3) 300  1981 SCC  (2) 766        1981 SCALE  (1)548  CITATOR INFO :  R          1986 SC1924  (1,4,5)  RF         1992 SC1066  (13)

ACT:      Banking law-Documents  submitted by the seller of goods not in  conformity with  instructions given in the letter of credit-Duties of  the paying bank-Whether bound to determine by physical  examination or  an expert  advice if  the goods conformed to  the contract-Nature  and effect  of letter  of credit.      Practice-Payment  made   by  the   paying  bank  "under reserve" as  a result  of  discrepancies  in  the  documents submitted  by   the  seller-High   Court,  if   could  grant injunction restraining  the paying  bank from collecting the amount paid under reserve.      Constitution of  India-Article  136-Supreme  Court,  if would interfere with interlocutory orders under Art. 136.      Words and Phrases-Payment "under reserve"-Meaning of.

HEADNOTE:      Respondent No.  2 entered  into a  contract to  sell to respondent No. 3 one thousand metric tonnes of "Sizola Brand Pure Mustard  Oil" valued  at  approximately  Rs.  86  lakhs pursuant to  which the  buyer opened a letter of credit with the appellant  bank. After  despatching  the  goods  to  the various destinations  to which they were instructed to send, the seller  presented 20  sets of documents in the first lot and 27  sets of documents in the second, the aggregate value of which  was equivalent  to the amount of letter of credit. The appellant  bank refused  to make  payment "except  under reserve" pointing  to a  discrepancy in the railway receipts which stated  "Sizola Brand  Pure Mustard  Oil Unrefined" as against the description in the instructions of the letter of credit "Sizola Brand Pure Mustard Oil". On instructions from the seller the respondent bank received the money in respect of the  first  lot  of  20  documents  "under  reserve"  and credited  the  amount  to  their  account  with  a  specific notation that  the amount  was paid  "under  reserve"  as  a result of discrepancies between the railway receipts and the instructions in the letter of credit.      In respect  of  the  second  lot,  the  appellant  bank refused payment  on the  ground of  the discrepancies in the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 22  

railway receipts  as before  as also on the ground that some of the railway receipts were "stale".      In the meantime the appellant bank asked the respondent to refund  the amount  paid in  respect of  the first lot of documents under reserve because the 301 bills were  acceptable to  the buyer  due to  discrepancies. Some correspondence  ensued  between  the  parties  and  the banks; eventually  on the  faith of  an undertaking given by the seller  the appellant  bank paid the remainder amount in respect of  the 27 bills as well "under reserve" so that the value in  respect of  both the  sets of  bills paid  to  the sellers in two instalments was made "under reserve".      The sellers filed a suit in the High Court.      A few  days thereafter  the  appellant  bank  served  a letter of  demand on  the respondent  bank for the refund of the entire  amount paid  to it in respect of the two sets of bills together  with interest  thereon because, according to it, the  bills of exchange had not been retired by the buyer for the  reasons that  the railway  receipts were stale that the goods  had not  been supplied  according to the terms of the agreement  and that  chemical analysis of the oil showed that it was not fit for human consumption.      The respondent  bank in  turn wrote  to the  seller  to refund the  whole amount whereupon the seller moved the High Court for  the grant  of an  exparte ad  interim  injunction restraining the  appellant bank  from recalling or receiving the amount due from the respondent bank which was granted.      The High Court appointed a Court receiver with power to sell the  goods  without  any  obligation  or  liability  to purchasers as  to their  quality, quantity  or edibility. At the sale  the seller  himself bought  the goods  for Rs.  18 lakhs odd. The sale was confirmed by the High Court.      The single  Judge of  the High Court thereupon made the temporary injunction  absolute till the disposal of the suit filed by  the sellers on the view that the appellant was not entitled  under  the  terms  of  the  letter  of  credit  to unilaterally  impose  a  condition  of  the  payment  "under reserve" or  refuse to pay against the documents tendered by the sellers merely because of the alleged discrepancies.      A Division  Bench of the High Court summarily dismissed the appellant’s  appeal with  the  result  that  the  seller received the  whole of the amount of the letter of credit as well as bought the whole lot of goods for Rs. 18.53 lakhs.      On the  question whether  the High  Court should,  in a transaction  between   a  banker  and  a  banker,  grant  an injunction  at   the  instance  of  the  beneficiary  of  an irrevocable letter  of credit  restraining the  issuing bank from recalling  the  amount  paid  under  reserve  from  the negotiating bank acting on behalf of the beneficiary against a document  of guarantee/indemnity  at the  instance of  the beneficiary and  (2) whether  this Court  could, in a matter like this,  depart from  its normal  practice and  refuse to interfere with  an interlocutory  order under Article 136 of the Constitution.      Allowing the appeal, ^      HELD :  1(a) The  High Court  was wrong in granting the temporary injunction  restraining the  appellant  bank  from recalling the  amount paid  to the  respondent bank.  Courts usually refrain  from granting  injunction to  restrain  the performance of  the contractual obligations arising out of a letter of credit or a 302 bank  guarantee  between  one  bank  and  another.  If  such

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 22  

temporary injunctions  were to  be granted  in a transaction between a  banker and  a banker,  restraining  a  bank  from recalling the  amount due when payment is made under reserve to another  bank or  in terms  of the letter of guarantee or credit executed  by it,  the whole  banking  system  in  the country would fail. [329 F, 324B-C]      (b) In  the instant case the appellant bank was under a duty to  its constituent  to scrutinise  the  documents  and could not be compelled to make payment particularly when the description in  the document  did not tally with that in the letter of  credit. It  was fully  entitled to  exercise  its judgment for  its own  protection.  Instead  of  asking  the buyers to  change the description of the goods in the letter of credit the sellers sought to get over the irregularity by instructing the  bankers to execute a letter of guarantee or indemnity. [325 G-H]      (c) The appellant bank knew little or nothing about the mustard oil.  Its duty  was not  to go  out and determine by physical examination  of the  consignments, or employment of experts,  whether   the  goods  actually  conformed  to  the contract  between   the  buyer  and  the  seller,  nor  even determine either  from its  own or expert advice whether the documents called  for the  goods which  the buyer  would  be bound to accept. [326 C-D]      2(a) Bank  issuing or  confirming a letter of credit is not concerned with the underlying contract between the buyer and seller.  The duties  of a  bank under a letter of credit are created  by the  document itself; in any case it has the power and  is subject  to the limitations which are given or imposed by  it, in the absence of the appropriate provisions in the letter of credit. [319 B-C]      (b)  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.  The banker  is not  bound or entitled to honour the bills of  exchange drawn  by the seller unless they and such accompanying documents as may be required thereunder, are in exact  compliance   with  the  terms  of  the  credit.  Such documents must  be scrutinised  with meticulous care. If the seller has  complied with the terms of the letter of credit, however, there  is an absolute obligation upon the banker to pay irrespective  of any  disputes between the buyer and the seller whether  the goods are upto the contract or not. [317 C-D]      Tarapore and Co., Madras v. Tractors Export, Moscow and Anr. [1969] 2 S.C.R. 920 applied.      Hamzeh Malas  and Sons  v. British Imex Industries Ltd. [1958] 2  Q.B. 127  and Urguhart  Lindsay and  Co.  Ltd.  v. Eastern Bank Ltd. [1922] 1 K.B. 318, referred to.      (c) The  refusal of  the  bank  to  honour  a  bill  of exchange drawn  by the  seller on presentation of the proper documents constitutes  a repudiation  of the  contract as  a whole and  the sellers  are entitled to damages arising from such a breach. [317 E]      (d) A  letter of  credit constitutes  the sole contract with the  banker, and  the bank issuing the letter of credit has no  concern with any question that may arise between the seller and  the purchaser  of the  goods, for  the  purchase price of which the letter of credit was issued. [319 G] 303      (e) It  is settled  law that in dealing with commercial letters of  credit the documents tendered by the seller must comply with  the terms  of the  letter of  credit,  and  the banker  owes  a  duty  to  the  buyer  to  ensure  that  his instructions relative  to the  documents against  which  the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 22  

letter of  credit is  to be honoured are complied with. [322 D]      (f) A  payment under  reserve is  understood in banking transactions to  mean that  the recipient  of money  may not deem it  as his  own but  must be  prepared to  return it on demand. The  balance of convenience clearly lies in allowing the normal  banking transactions  to go forward. The sellers have failed  to establish  that they  would  be  put  to  an irreparable loss  unless are interim injunction was granted. [329 B-C]      English, Scottish  and Australian  Bank Ltd. v. Bank of South Africa [1922] 12 L1.L. Rep. 21 st. 24, Equitable Trust Co. of New York v. Dawson Partners Ltd. [1927] 27 L1.L. Rep. 49, Rayner v. Hambros Bank Ltd. [1943] 1 K.B. 37, Bank Melli Iran v.  Barclays Bank  [1951] 2  L1.L. Rep. 367, Lamborn v. Lake Shore  Banking Co.  [1921] 196 App. Div. 504 at p. 507; 188 NYS  162 at  p. 164  and Laudisi  v.  American  Exchange National Bank  [1924] 239  NYS 234;  146  N.E.  347  at  348 referred to.      3(a) The  powers of this Court under Article 136 of the Constitution  though  untrammelled,  are  subject  to  self- ordainerd restrictions.  The Court  does not, as a matter of rule, interfere  with interlocutory  orders, save under very exceptional circumstances. [327 H]      (b) In  the instant case there was no justification for the High  Court to  grant a temporary injunction under order 39 rules  1 and  2 of  C.P.C. to  the sellers, the effect of which virtually  was to  restrain a  transaction  between  a banker and a banker. Courts view with disfavour the grant of such temporary  injunction. The High Court has prejudged the whole  issue   by  holding  that  the  appellant  could  not unilaterally  impose   the  conditions   of  payment  ‘under reserve’ nor  was it justified in holding that the documents were ‘clean’. [328 B]

JUDGMENT:      CIVIL APPELLATE  JURISDICTION : Civil Appeal No. 132 of 1980.      Appeal by  Special Leave  from the  Judgment and  Order dated 17.10.79 of the High Court of Bombay in Appeal No. 382 of 1979 in Suit No. 1028/78.      F.S. Nariman,  P.H. Parekh,  K.R. Modi,  R.A.  Kapadia, Raian Karnjawala and M.H. Shah for the Appellant.      K.K. Venugopal,  Vinay Bhasin,  Rakesh  Sahani,  Vineet Kumar, G.E. Vahanvati and S.J. Thacker for Respondent No. 1. 304      Soli J.  Sorabjee, E.J.  Balsara, S. Ganesh, Narain and P.H. Amin for Respondent No.2.      Lal Narain  Sinha, Attorney General of India, Ram Balak Mahto and B.P. Singh for Respondent No. 3.      The Judgment of the Court was delivered by      SEN, J.  This appeal  by special leave is from an order of the  Bombay High  Court dated August 24, 1979, granting a temporary injunction  restraining the  appellant, the United Commercial Bank.  By  this  order  the  appellant  has  been restrained from  making a  recall of  a sum of Rs. 85,84,456 paid by  it under  reserve against  the  relative  bills  of exchange drawn  against the  letter of  credit issued by it, from respondent  No. 1,  the Bank  of India, and in terms of the letter  of guarantee or indemnity executed by that Bank, in a suit based on a bankers’ letter of credit.      The facts are somewhat complicated, but it is necessary to disentangle  the facts  to bring  out the  point  of  law

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 22  

involved.      The respondent  No. 2,  Messrs  Godrej  Soaps  Limited, herein-after referred  to as ‘the plaintiffs’, by a contract dated February  2, 1978  agreed to  supply to the respondent No. 3,  the Bihar  State Food and Civil Supplies Corporation Limited, hereinafter referred to as ‘the Bihar Corporation’, one thousand  metric tonnes  of ‘Sizola  Brand pure  Mustard oil’ the total value of which was approximately Rs. 86 lacs, packed in brand new leakproof 62,040 tins of net 16 kg. each at the  rate of Rs. 137 per tin. The contract provided inter alia that  the Bihar  Corporation were  to open  a letter of credit with  the appellant,  the United Commercial Bank, for the said amount, which the Bihar Corporation duly did.      The letter of credit issued by the appellant was in the following terms :      United Commercial Bank      Nariman Point Branch      United Commercial Bank      Frazer Road, Patna Branch, 13th June, 1978.      Office :      Malbourne Road,      Calcutta-1. 305      To      M/s Godrej Soaps Ltd.,      Eastern Express Highway,      Vikhroli, Bombay 400 079.      Dear Sirs,                  LETTER OF CREDIT No. 1/78           At  the  request  of  Bihar  State  Food  &  Civil      Supplies Corpn.  Ltd., Patna,  we hereby  establish our      confirmed irrevocable  Letter of  Credit in  favour  of      your goodself  for account of Messrs Bihar State Food &      Civil Supplies  Corpn. Ltd.,  East Boring  Road, Patna,      for any  sum or sums not exceeding in all Rs. 86,00,000      (say Rupees  eighty  six  lakhs  only)  outstanding  at      anyone time  available by your drafts at sight drawn on      Messrs Bihar  State Food  & Civil  Supplies Corpn. Ltd.      without recourse  to drawers  for full invoice value of      merchandise to  be described  in the invoice as : 62040      tins of  Sizola Brand  Pure Mustard Oil packed in brand      new leak  proof tins  of net  16 kgs.  each @  Rs.  137      (Rupees  one   hundred  thirty  seven  only)  per  tin.      Despatched from  Bombay accompanied  by  the  following      documents :      (i)  Signed detailed invoices in duplicate.      (ii) Railway  Receipts  consigned  to  or  endorsed  in           favour of  UNITED COMMERCIAL BANK marked ‘FREIGHT/           TO PAY’  evidencing despatch  by  Railway  of  the           merchandise as stated above.                Signed Delivery  order on your godown at.....           fvg. United  Commercial Bank covering the delivery           of the above-mentioned merchandise.      (iii)Insurance Policies  or Certificate  covering usual           transit risks  and rail  issued in  duplicate  and           endorsed in blank by Transit Insurance at the cost           of openers  not exceeding one per cent of value of           goods to  be effected  by beneficiary  and  to  be           included in the invoice.      Railway Receipt/Delivery  order must be dated not later than 306      Bills of  Exchange must  be dated  and  negotiated  not later than 20.7.1978.      sd. Accountant                     sd. Manager.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 22  

    The schedule annexed specified the various destinations to which the goods were to be despatched.      Between June 22, 1978 and June 26, 1978, the plaintiffs from time  to time despatched an aggregate of 24,400 tins of their mustard  oil by  invoices bearing Nos. 4501 to 4520 of the aggregate value of Rs. 36,52,960 to various destinations mentioned in  the schedule  annexed to the letter of credit. Between June  17 to  July 1,  1978  the  plaintiffs  further despatched an  aggregate of  23,080 tins  of the  said goods covered by invoices Nos. 4521 to 4539 of the aggregate value of Rs.  34,70,312 on  July 7 and 8, 1978 the plaintiffs also despatched an  aggregate of  10,560 tins covered by invoices Nos. 4540 to 4547 of the aggregate value of Rs. 14,61,184.      The plaintiffs  presented the  documents for payment of Rs. 85,84,456  in  two  lots.  There  were  twenty  sets  of documents in the first lot, the total value of which was Rs. 36,52,960, the  second lot  in 27 sets of the total value of Rs. 49,31,496.  The first  lot consisted of four sets of the value of  Rs. 7.30  lacs, seven sets of Rs. 12.78 lacs, five sets of Rs. 9.13 lacs and four sets worth Rs. 7.30 lacs, the second of  27 sets,  consisting of 19 sets of Rs. 34.17 lacs and 8  sets of  Rs. 14.16  lacs. It  is these  two  lots  of documents which are the subject matter of the suit.      When the documents were presented by the plaintiffs for payment of  Rs. 36,52,960  against the first lot of 20 sets, and Rs.  49,31,496 against  the second  lot in  27 sets, the appellant, United  Commercial Bank  refused to  make payment ‘except under reserve’ on the ground of ‘discrepancies’. The main discrepancy  was that  the goods  were described in the railway  receipts   as  "Sizola   Brand  Pure   Mustard  Oil ‘Unrefined"’. The  plaintiffs accordingly  instructed  their bankers, the  Bank  of  India,  to  accept  payment  of  Rs. 36,52,960  against   the  first   lot  of  documents  ‘under reserve’.  The   appellant  accordingly  made  an  aggregate payment of  Rs. 36,52,960 to the Bank of India, that is, the negotiating bank,  by three  cheques of  Rs.  7,30,502,  Rs. 12,78,636 and  Rs. 16,43,832. It is significant to note that Bank of  India in  their turn  credited the  account of  the plaintiffs,  who   were  their   constituents,  also  ‘under reserve’, with a 307 specific notation that ‘it was paid under reserve on account of discrepancies’.      As regards  the second  lot comprising  of 27  sets  of documents, 19  sets were presented by the plaintiffs on July 3, 1978,  with sight  drafts of Rs. 1,82,648 each along with bills of  exchange together  with the relevant documents. On July 5,  1978  the  appellant  addressed  a  letter  to  the plaintiffs refusing  to make any payment under the letter of credit due to ‘discrepancies’ as well as some of the railway receipts  being  ‘stale’.  It  was  clearly  stated  by  the appellant "We  are unable to negotiate the documents and are returning the  same to  you. However,  if you  so desire, we shall send the documents on collection basis and shall remit the amount  to you  on receipt of proceeds". Admittedly, the discrepancies remained till July 12, 1978 as the description of goods  in the  railway receipts  still  remained  "Sizola Brand Pure Mustard Oil ‘Unrefined"’ till the plaintiffs made a request  to the  Central Railways  for the deletion of the word ‘Unrefined’.      On July  12, 1978  the appellant  addressed a letter to the Bank  of India  making a  demand for  the refund  of the amount of  Rs.36,52,960 paid under reserve in respect of the first lot  of documents  stating "In this connection we wish to state  that we  are now  advised by our Patna Office that

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 22  

the bills  are not  acceptable to  the  Corporation  due  to discrepancies. We  shall therefore,  thank you if you kindly remit the  amount with  interest at 5 per cent from the date of payment  to you  by us  to the  date of payment by you to us." On  the same  day, the  appellant addressed a letter to the plaintiffs  in regard  to the second lot of 27 documents that the  documents were not acceptable due to discrepancies and, therefore,  no payment could be made against them under the letter  of credit.  On the next day, i.e., July 13, 1978 the plaintiffs  addressed  a  letter  to  the  appellant  in respect of  the first  lot of  20 documents  ‘negotiated and paid  by   you  under   reserve’,  stating   that  the  word ‘Unrefined’ in  the railway  receipts should  not have  been treated as  a discrepancy,  forwarding copies  of  telegrams sent by  the Central  Railway to  the  various  destinations deleting  the  word‘unrefined’,  with  a  request  that  the appellant may,  as regards  the 27  documents of  the second lot,  ‘negotiate   the  documents   and  pay  for  the  same forthwith’. On the same day, the plaintiffs also addressed a letter to  the  Bihar  Corporation  stating  that  the  word ‘Unrefined’ had  no relation to the quality but was inserted for the  purpose of paying a lower freight, and further that the railway  authorities had  agreed to  amend  the  railway receipts by deleting the word ‘Unrefined’. 308      On July 13, 1978 the plaintiffs addressed the following letter to their bankers, the Bank of India :                                             July 13, 1978.      Bank of India,      Foreign Exchange Dept.,      Mahatma Gandhi Road,      Bombay 400 023.                                   Attn : MR. SIRUR      Dear Sirs.                19 documents  for  Rs.  1,92,648  each  drawn                under L/C  No. 1/78 dated 13.6.1978 of United                Commercial Bank Patna Office.           We are enclosing 19 documents as referred to above      and request  you to  forward the  same  to  the  United      Commercial Bank, Nariman Point, Bombay for negotiations      of payment.           We request  you to  collect these  funds forthwith      and credit our Cash-Credit Account No. 1 with you.           We have complied with all the terms and conditions      of the Letter of Credit and feel that United Commercial      Bank would make the payment to you without reserve. You      may accept  the payment  under reserve if insisted upon      by them.                                   Asst. Financial Controller      The Bank  of India  accordingly  wrote  letter  to  the appellant stating  "we would  accept payment under reserve". On July  14, 1978  the appellant  addressed a  letter to the Bank of  India returning  the 27  documents relating  to the second lot  signifying  their  inability  to  negotiate  the documents due  to discrepancies  in the description of goods in the  railway receipts,  stating that mere deletion of the word ‘Unrefined’  could not make the railway receipts clean, and furthermore,  because some  of the railway receipts were ‘stale’. It also intimated the plaintiffs by their letter of even  date  that  they  could  lift  the  ‘reserve’  without obtaining prior  permission of  their constituents  i.e. the Bihar Corporation. 309      The plaintiffs,  being apprehensive that their bankers, the Bank  of India,  would be  bound to refund Rs.36.52 lacs

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 8 of 22  

pursuant to  the notice  of demand  served by  the appellant inasmuch as  the payment  was made  under  reserve,  kept  a plaint ready  on July  17, 1978  for grant  of  a  perpetual injunction against  the  appellant,  and  on  the  same  day addressed a  letter to  the appellant  asking for payment of Rs.49,31,496 against  the second lot of documents, enclosing a  letter  of  guarantee  or  indemnity  executed  by  their bankers, which reads :                                            Date July 17,1978      United Commercial Bank,      Nariman Point,      Bombay 400021.                                        Attn : Mr.P.K. Sharma      Dear Sirs,           Letter of  Credit No.  1/78 of  your Patna  Office           dated 13.6.78-Two  sets, each  containing 19  &  8           negotiable documents.           We are  in receipt  of your  letters  bearing  No.      Fex/Exp/78 dated  12.7.78  and  14.7.78  on  the  above      subject.           We refer to our submission of 19 documents through      our bankers,  Bank of  India and  8 documents submitted      directly by  us to  you for negotiation and payment. We      learnt from  you that  you have  returned the set of 19      documents  to   Bank  of  India  pointing  out  certain      discrepancies in  the documents  to them.  The set of 8      documents has  been  returned  to  us  by  you  stating      certain  discrepancies   under  cover  of  your  letter      Fex/Exp/GSR/78 dated 12.7.78.           One of  the discrepancies  pointed out  by you  in      both the  sets of  documents (19  & 8) is regarding the      appearance of  the  word  ‘unrefined’  in  the  railway      receipts, as  the same  word does  not  appear  in  the      Letter of  Credit along  with the  words "Sizola  Brand      Pure Mustard  Oil". Out of abundant precaution, we then      obtained and gave you copies of telegrams issued by the      Central Railway  to the  Station Masters of the various      destination stations,  to which  the goods were booked,      to the  effect that the word "unrefined" is superfluous      and, therefore, deleted. You have taken 310      the stand  that by  this action  of the Central Railway      also the  documents still  does not  continue to  be in      accordance with the letter of credit.           Out of  abundant precaution, we are now submitting      herewith the  railway receipt  returned by  you wherein      the word "unrefined" has been physically deleted by the      railway authorities.           We are  also enclosing  a  letter  of  undertaking      which is  letter of  undertaking issued by our bankers,      the Bank  of  India,  in  your  name  indemnifying  you      against demurrage,  wharfage  and  such  other  charges      which you  may have  to pay  at  various  destinations,      where the  goods have  been consigned.  This action  of      ours is  without prejudice  to any  of our  rights  and      contentions.           We now  request you  to Pay  for  these  documents      forthwith.                                                    Director.           The Bank  of India  executed a letter of indemnity      or guarantee to the effect :                                                Bank of India                                              70/80, M.G.Road                                               Bombay-400023.      United Commercial Bank,                18th July, 1978.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 9 of 22  

    Mafatlal Centre,      Nariman Point Branch,      Bombay.      Dear Sirs,           In  consideration   of  your   having   negotiated      Documentary Bills  of Exchange  drawn by  Godrej  Soaps      Ltd., drawn on Bihar State Food & Civil Supplies Corpn.      dated (various  dates) under  the commercial  letter of      credit. No.  L/C 1/78  dt.  13.6.78  issued  by  United      Commercial Bank,  Frazer Road  Branch  for  account  of      Bihar State  Food and  Civil Supplies Corpn., We hereby      ‘unconditionally’  agree   to  hold  you  harmless  and      indemnified  for   all  consequences  of  nonacceptance      and/or non/payment  of this/these  bill (s) exchange by      reason of the following discrepancies claims by you:           .....          .....          ..... 311           We have  made  arrangements  for  due  payment  of      this/these bill (s).           We further unconditionally agree that in the event      of the  bills being  dishonoured on due presentation on      account of  the above  discrepancies claimed  by you to      reimburse and  on demand  the equivalent  of the  above      mentioned bill(s)  together with  all  other  expenses,      demurrage and all such other charges incurred by you in      connection with dishonoured bill (s).           Notwithstanding  anything  contained  hereinbefore      our liability  under this  bond is  restricted  to  Rs.      86,00,000 (Rupees  Eighty Six  lacs  only)  apart  from      charges enumerated  above and  it will  remain in force      till 17.8.1978.  Unless a  claim under the guarantee is      made against  us in  writing and  received by us before      that date  all your  rights under  the  said  guarantee      shall  be  forfeited  and  we  shall  be  relieved  and      discharged from all liability thereunder.                                            for BANK OF INDIA                             sd. P. Accountant sd. P. Manager      It is  significant to  note that  it was represented by the Bank  of India  acting on  behalf of the plaintiffs, "We have made  arrangements for  the payment  of  these  bills", meaning thereby  that the  Bihar Corporation  had agreed  to retire the bills of exchange.      On July  19, 1978 the representative of the plaintiffs, Messrs Godrej  Soaps Ltd.  met the  representatives  of  the appellant, the  United Commercial  Bank at  Bombay.  It  was pointed out  to him  that first  set of 20 documents had not been accepted  by the Bihar Corporation due to discrepancies and that the appellant had, therefore, by their letter dated July 12,  1978 made a demand for refund of Rs. 36,52,960. As regards the  second lot  of 27  documents towards  which the balance amount  of Rs.  49,31,496 was payable to the Bank of India, in  terms of  the letter  of indemnity  or  guarantee executed by  it he  was informed  that the instructions were awaited from  the head  office and  was asked to come in the evening on  the same day. The plaintiffs on the same day, i. e., on  July 19, 1978, brought the suit in the Original Side of the  Bombay High  Court alongwith  an application for the grant of  a temporary  injunction to  restrain the appellant from recalling the amount of 312 Rs. 36,52,960  but the  learned Single  Judge, Bharucha  J., declined to  grant an  ex parte ad interim injunction, while allowing liberty  to the  plaintiffs to  take out  notice of motion returnable  on August  4, 1978 but it appears that no such notice was ever taken out.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 10 of 22  

    When the  appellant came  to  know  of  the  suit,  the plaintiff’s representative  made an  endorsement at the foot of the letter dated July 17, 1978:           As per  Mr. Sharma’s  talk with Mr.K.R. Gokulam we      hereby undertake not to proceed with this suit.                                               sd.R.V. Shekar                                                    19.7 1978      On the  faith of  the undertaking  the  appellant  made payment of Rs.49,31,496 to the Bank of India in terms of the letter of indemnity.      There is  controversy between  the parties  as to  what transpired before  the payment of Rs.49,31,496 and as to the meaning of the aforesaid endorsement. We refrain from making any observations  as they would tend to prejudice the rights of the  parties. But  one thing  is clear  that R.V. Shekar, Assistant Financial  Controller, Godrej  Soaps was acting on behalf of  the plaintiffs,  and the  word ‘we’ meant Messrs. Godrej Soaps  Limited’. Further, that payment was secured by making the endorsement.      The Bank  of India  addressed two  letters  dated  July 20,1978 to  the plaintiffs,  that  their  account  had  been credited with  Rs. 34,70,312  and Rs.  14,61,184  i.e.,  Rs. 49,31,496 representing  the value  of the  second lot  of 27 documents, ‘under reserve’.      From the  narration of  these  facts,  prima  facie  it appears that  the payment of Rs. 36,52,960 against the first lot of  20 documents  made by  the appellant  to the Bank of India, was  a payment  made ‘under  reserve’ and that of Rs. 49,31,496 was  also made  ‘under reserve’ as well as against the letter of guarantee or indemnity executed by it.      On August  2, 1978  the appellant  served a  letter  of demand on  the Bank  of India,  for refund  of Rs. 85,84,456 together with  interest thereon  at 15%  per annum  from the date of  payment by  it to  the date of refund, stating that the bills of exchange had not 313 been retired  by the  Bihar Corporation, that is the buyers, due to discrepancies. The letter reads :      Fex/exp/1110/78                        2nd August, 1978      Bank of India      70/80 M.G. Road, Bombay 400 023.             Attn: Mr. PUDVAL, Manager (Advance)      Dear Sirs,           Re: Your  Guarantee Re.  C/72/943 dated  18th July           1978 in our favour for Rs.86,00,000 Document drawn           by M/s  Godrej Soaps  Ltd., under our Frazer Road,           Patna Branch  L/C 1/78  dated 13.6.1978-negotiated           by us under reserve.           Please refer  to our  letter No.  646/78 dated 1st           August, 1978.           In this connection we are now advised by our Patna      Office that  the bills  have not  been accepted  by the      drawees, Bihar  State Food & Civil Supplies Corporation      Limited due  to the discrepancies. Our Patna Office is,      therefore, arranging  to return  the  documents  to  us      which we  hereby  undertake  to  forward  to  you  when      received.           In terms of your Guarantee No. 8/72/943 dated 18th      July 1978 for Rs. 86,00,000 and in terms of our letters      date 24.6.1978, 27.6.1978 and 28.6.1978 and two letters      of 19.7.1978,  under cover of which we had made payment      of the  bills to you, we hereby call upon you to refund      to us  the amount  of bills  viz. Rs. 85,84,456 (Rupees      Eighty five  lacs eighty four thousand four hundred and      fifty six)  together with  interest from  the  date  of

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 11 of 22  

    payment by us to you to the date of refund by you to us      @ 15% per annum.           In the  meantime, please  note that  the documents      are held  by us  at your  sole risk and responsibility.      You may,  if you  so  desire  protect  the  merchandise      including keeping insurance covernote valid.           .................................................           Please treat this as MOST URGENT.                                             sd.......Manager 314      The 47 Notary’s protest Certificates show that when the bills of exchange were re-presented for payment to the Bihar Corporation on  August 2,  1978 the  drawees dishonoured the bills of  exchange on August 3, 1978 for the reason that (1) the railway  receipts accompanying  the bills  were ‘stale’, (2) the  goods had  not been  supplied as  per the  terms of agreement, and (3) the chemical analysis showed that the oil required refinement before being fit for human use,      The Bank of India accordingly addressed a letter to the plaintiffs on  the next  day  i.e.  August  4,  1978  giving intimation that  the appellant by its letter dated August 2, 1978 had  made a  demand for  refund of  the amount  of  Rs. 85,84,456 paid  under reserve  and in terms of its letter of guarantee or  indemnity, seeking their ‘instructions’ in the matter. On August 6, 1978 which was a Sunday, the plaintiffs moved learned  Single Judge  at his  residence, alongwith an affidavit of  their Sales  Manager stating  that  unless  an injunction was  granted the  Bank of India, according to the banking practice,  would make  payment of Rs. 85,84,456/- to the appellant,  on the  commencement of the banking hours on August 7, 1978. The learned Single Judge granted an ex-parte ad  interim   injunction  restraining   the  appellant  from recalling or  receiving the  amount due  from  the  Bank  of India.      On  December   17,  1978,   the  learned  Single  Judge appointed the  Court receiver  to be the ad interim receiver with power  to sell  the goods in question either in one lot or separate  lots, on  ‘as is  where is  basis’, without any obligation or liability to purchasers thereof as to quality, quantity or  edibility of  the said goods. On March 27, 1979 the Court  receiver accepted  the offer of the plaintiffs to buy the  goods for  Rs. 18,53,000 and the sale was confirmed by the High Court on April 4, 1979.      The learned  Single Judge by his order dated August 24, 1979  made   the  temporary  injunction  absolute  till  the disposal of  the suit on the view that the appellant was not entitled under  the  terms  of  the  letter  of  credit,  to unilaterally impose the condition of payment ‘under reserve’ or refuse  to pay  against the  documents  tendered  by  the plaintiffs merely  because of the alleged discrepancies, nor was it  open to  it to reject the documents as stale, for in his view,  there were in-deed no stale documents. Upon these grounds, he  held that the plaintiffs had a prima facie case He, however,  added a  rider that  (1) the Bank of India was left free  to decide  whether  or  not  the  conditions  for payment under the letter of indemnity had been satisfied so 315 as to  justify the  making  of  payment  thereunder  to  the appellant, and  (2) the  appellant was  not restrained  from making a claim upon the Bank of India or from receiving from it the  amount payable  in terms  of the letter of indemnity nor was  the Bank  of India  restrained from  making payment thereunder.      The appellant  being aggrieved  by  the  order  of  the learned Single  Judge dated  August 24,  1979  preferred  an

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 12 of 22  

appeal but  a Division  Bench of  the High  Court  summarily dismissed the appeal on October 17, 1979.      The result  of all  this has  been that  the plaintiffs have not  only received  Rs. 85,84,456  towards the price of 1000 metric  tonnes of  ‘Sizola Brand Pure Mustard Oil’, but also have  the mustard  oil in  question on  payment of  Rs. 18,53,000.      The  repercussions  arising  from  the  learned  Single Judge’s order  dated August  24, 1979  are reflected  in the correspondence that  ensued between the parties. There is no need  to  refer  to  all  the  letters  except  a  few.  The plaintiffs by  their solicitor’s  letter  dated  August  29, 1979, drew the attention of the Bank of India to the learned Single Judge’s  order granting  injunction, and ‘instructed’ it not to pay. It reads :           The said  interim order  makes it absolutely clear      that  our   clients  will  in  no  way  be  liable  and      responsible  to   return  the  amounts  received  under      reserve and  therefore our clients are in no way liable      to pay  any sum  to UCO Bank and therefore you are also      not liable  at present to pay any sum to UCO Bank under      the said  letter of indemnity. In the circumstances, it      will not  only be  improper but illegal for you to make      any payment to UCO Bank.           In the  circumstances, we  have been instructed by      our clients  to request  you which  we hereby do not to      make any  payment to  UCO Bank.  In spite  of  what  is      stated herein,  if any  payment is  made by  you to UCO      Bank, the  same will  not be binding on our clients and      you will  not be  entitled to  debit such amount to our      clients current  account with  you and our clients will      refuse to  reimburse you  any sum so wrongfully paid by      you. Please note that if any payment is made by you, it      will be entirely at your risk and peril. The appellant  by its letter dated August 31, 1979 addressed to the  Bank of  India made  a demand  for  payment  of  Rs. 85,84,456 in 316 terms of  the letter of guarantee or indemnity. But this was of not  avail since  the Bank  of India as instructed by the plaintiffs, sent  a letter  dated October  16, 1979  to  the appellant, by  which it  referred to the order passed by the learned Single  Judge, and  refused  to  make  any  payment, stating :           In its order dated 24th August, 1979 the Court has      stated that  there is  no provision regarding staleness      of the  Railway Receipts in the letter of Credit and it      is not  open to  Bihar Food  Corporation to  recall the      payments made  on that ground. Further, it is stated in      the said  order that  ‘the protests made upon dishonour      of the  bills by  these second  defendants show that no      discrepancy was made a ground of dishonour.           Having regard  to the observations in the order of      the Court,  it cannot  be  said  that  the  Bills  were      dishonoured on  the  presentation  on  account  of  the      discrepancies. Further, the bills do not appear to have      been duly presented.           We understand  that you  have not appealed against      this order.  In view  of the  aforesaid observations in      the said order dated 24th August, 1979 the terms of the      indemnity cannot  be said to have been complied with so      as to enable us to make payment to you. The Bank  of India  went on to say that in the circumstances set out  above, it  had been  advised that it was not proper for it  to make any payment under the letter of guarantee to

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 13 of 22  

the  appellant   unless  it   was  established   in   proper proceedings that  the terms of the mandate had been complied with so  as to  entitle it  to receive payment and to enable the Bank  of India  to make payment to it. This was contrary to its  earlier stand  taken in the affidavit filed in June, 1979, in  opposition to  the notice  of motion,  by which it denied  that   ‘it  was   trying  to   wriggle  out  of  its obligations’ under  the letter of guarantee or indemnity and by which  it said  that it  ‘submits to  the  order  of  the Court’.      The main  point in  controversy is:  Whether the  Court should in  a transaction between a banker and a banker grant an injunction,  at the  instance of  the beneficiary  of  an irrevocable letter  of credit,  restraining the issuing bank from recalling  the  amount  paid  under  reserve  from  the negotiating  bank,  acting  on  behalf  of  the  beneficiary against a document of guarantee/indemnity at the instance of the 317 beneficiary ? Another question also arises as to whether the Court should  not in  a matter  like this,  depart from  its normal  practice,   and  refuse   to   interfere   with   an interlocutory order under Art, 136 of the Constitution.      The nature  of the contractual obligations flowing from a  banker’s   letter  of   irrevocable   credit   and   more particularly, the  rights of  the seller  as the  accredited party or  beneficiary of the credit, against the issuing and drawee bank was dealt with by this Court in Tarapore and Co. Madras v.  Tractors Export, Moscow and Anr. It was 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. It was, however, pointed  out relying  on a  passage  in  "Chalmers’ Bills of  Exchange" that  it can  hardly be  over-emphasised that the banker is not bound or entitled to honour the bills of exchange  drawn by  the  seller  unless  they,  and  such accompanying documents as may be required thereunder, are in exact  compliance  with  the  terms  of  the  credit’.  Such documents must  be scrutinised  with meticulous care. If the seller has  complied with the terms of the letter of credit, however, there  is an absolute obligation upon the banker to pay irrespective  of any  disputes there  may be between the buyer and  the seller  as to  whether the  goods are  up  to contract or  not. The Court relied upon the two decisions in Hamzeh Malas  and Sons  v. British  Imex Industries Ltd. and Urguhart Lindsay  and Co.  Ltd. v.  Eastern  Bank  Ltd.  and observed at  p. 930  of the  Report, that the refusal of the bank to  honour the bills of exchange drawn by the seller on presentation  of   the  proper   documents   constituted   a repudiation of the contract as a whole, and the sellers were entitled to damages arising from such a breach.      In Stein  v.  Hambro’s  Bank  of  Northern  Commerce  a contract for  the sale  of hides  by an  English seller to a buyer from Venice, to be shipped from India, was financed by an irrevocable  letter of credit. The buyer, contending that a condition  had not been met, instructed the bank to cancel the credit  and to  refuse acceptance, which was accordingly done. In an action by the seller against the issuing bank it was held  that there  had been  a breach  of the  letter  of credit contract and that the seller could recover the amount of the bill of 318 exchange for  which acceptance  was refused.  The  case  was concerned chiefly  with  the  question  of  the  measure  of damages. The  right of the seller to maintain the action, if

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 14 of 22  

the conditions  had been  met, seems  to have  been  assumed without discussion.  The theory  underlying this  result  is that the  issuing bank  is  not  concerned  with  the  sales contract at all. Rowlatt J. said :           The obligation  of the  bank is  absolute, and  is      meant to  be absolute,  that  when  the  documents  are      presented they  have to  accept the  bill. That  is the      commercial meaning of it. The fulfilment  of the  terms of  the sales  contract  is  a matter for the seller and the buyer alone.      In Urguhart,  Lindsay and Co. Ltd. v. Eastern Bank Ltd. (supra) Rowlatt  J. held  that the  position of  the  banker under an  irrevocable credit is in law the same as that of a person  who  has  contracted  to  buy  a  shipping  document representing the  goods shipped, or to be shipped, under the contract between  the beneficiary  and the  person at  whose instance the credit has been issued. The credit in this case was opened  in pursuance  of a  contract  between  Urguhart, Linsday and Co. and Benjamin Jute Mills, by which the former were to  manufacture certain machinery and deliver it f.o.b. Glasgow, for  shipment to  Calcutta. Two  instalments of the machinery were manufactured and shipped and duly paid for by the bank.  A third  instalment  was  also  manufactured  and shipped, but  the bank  in this  case refused to take up the shipping documents  and honour  the draft on the ground that items for  extra cost of labour were included in the invoice price of  the goods and that the bank had been instructed by Benjamin   Jute   Mills   to   refuse   payment   in   those circumstances. Rowlatt  J. held  that in  such a  case,  the banker must accept and pay for the documents irrespective of any defence which there may be to a claim under the contract of sale  and that  such defence  is solely  a matter  to  be fought out between the buyer and the seller.      In Gutteridge  and Megrah’s  Law of Bankers’ Commercial Credits, Sixth  Edn. p.  21, the  nature of  the  obligation created  by  a  banker’s  commercial  credit  is  succinctly stated. A  seller of  goods relying  on such  an  instrument believes that  he has  ‘the direct obligation of the issuing bank running  in his favour, enforceable by him against that bank, that  it will  pay his  drafts if  drawn in compliance with the  terms of  the letter  of credit’.  Banks  are  not concerned with 319 the sales contract or the goods; if it were otherwise credit business would be impossible.      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  banker  issuing  or  confirming  an  irrevocable credit usually undertakes to honour drafts negotiated, or to reimburse in  respect of  drafts  paid,  by  the  paying  or negotiating intermediate  banker and  the credit  is thus in the hands of the beneficiary binding against the banker. The credit contract  is independent  of the  sales  contract  on which it  is based,  unless the  sales contract  is in  some measure incorporated.  Unless  documents  tendered  under  a credit are  in accordance  with those  for which  the credit calls and  which are  embodied in the terms of the paying or negotiating bank,  the beneficiary  cannot claim against the paying bank  and it  is the  paying bank’s  duty  to  refuse payment.      General Provision  (c) of  the Uniform  Customs  states

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 15 of 22  

that :           (c)  Credits,   by  their   nature,  are  separate      transactions from the sales or other contracts on which      they may  be based  and banks  are in  no way concerned      with or bound by such contracts. and Article 8 emphasises this in providing that :           (a) In  documentary credit  operations all parties      concerned deal in documents and not in goods.      The authorities are uniform to the effect that a letter of credit constitutes the sole contract with the banker, and the bank  issuing the  letter of  credit has no concern with any question  that may  arise between  the  seller  and  the purchaser of  the goods, for the purchase price of which the letter of  credit was  issued. There  is  also  no  lack  of judicial authority  which lay  down the  necessity of strict compliance both  by the seller with the letter of credit and by the  banker with his customer’s instructions. In English, Scottish and  Australian Bank  Ltd. v.  Bank of South Africa Bailhache, J. said : 320           It is elementary to say that a person who ships in      reliance on  a letter  of credit  must do  so in  exact      compliance with its terms. It is also elementary to say      that a  bank is  not bound or indeed entitled to honour      drafts presented  to it under a letter of credit unless      those drafts  with the  accompanying documents  are  in      strict accord with the credit as opened.      As Lord  Sumner said in Equitable Trust Co. of New York v. Dawson  Partners Ltd.,  approving the dictum of Bailhache J.:           It is  both common ground and common sense that in      such a  transaction the  accepting bank  can only claim      indemnity if  the conditions  on which it is authorised      to  accept  are  in  the  matter  of  the  accompanying      documents strictly  observed.  There  is  no  room  for      documents which  are almost  the same, or which will do      just as  well. Business  could not  proceed securely on      any other lines.      In Rayner  v. Hambros  Bank Ltd.  the credit called for documents covering  a shipment  of ‘Coromandel  groundnuts’; the invoice  tendered was for Coromandel groundnuts, but the bill of  lading evidenced  a  shipment  of  ‘machine-shelled groundnut kernels’;  country of  origin : British India, and Hambros Bank refused to pay on the ground that the letter of credit called  for  an  invoice  and  bill  of  lading  both covering a  shipment of  ‘Coromandel groundnuts’ whereas the bill of  lading did  not describe  the goods in those terms, their attitude being upheld by the Court of Appeal.      Mackinnon,  L.J.   after  quoting   Bailhache,  J.,  in English, Scottish  and Australian Bank Ltd. v. Bank of South Africa (supra) and Lord Summer in Equtiable Trust Co. of New York v.  Dawson Partners  Ltd. (supra)  laying down  that  a person who  ships in  reliance on a letter of credit must do so in exact compliance with its terms, observed :           The defendant  bank  were  told  by  their  Danish      principals to issue a letter of credit under which they      were  to  accept  documents-an  invoice  and  bills  of      lading-covering "Coromandel  groundnuts in  bags". They      were offered  bills of lading covering "machine-shelled      groundnut "kernels".  The country  of origin was stated      to be British 321      India. The words in that bill of lading clearly are not      the same as those required by the letter of credit. The      whole case  of the  plaintiffs is, in the words of Lord

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 16 of 22  

    Sumner, that "they are almost the same, or they will do      just as  well". The  bank, if  they had  accepted  that      proposition, would  have done  so at  their own risk. I      think on  pure principle that the bank were entitled to      refuse to  accept this  sight draft  on the ground that      the  documents   tendered,  to   bill  of   lading   in      particular, did  not comply precisely with the terms of      the letter of credit which they had issued.      The  learned  Judge  dealing  with  that  part  of  the judgment of  Atkinson, J.,  in which he said that "a sale of Coromandel groundnuts is universally understood to be a sale of machine-shelled kernels", said:           When Atkinson,  J., says  that it  is "universally      under stood" he means that these gentlemen from Mincing      Lane have  told him:  "We dealers  in Mincing  Lane all      under  stand   these   things.   We   understand   that      ’Coromandel groundnuts’  are  machine-shelled  kernels,      and we  understand when  we  see  ’C.R.S.’  that  means      ’Coromandels’. I  think that  is a perfectly impossible      suggestion.. It  is quite  impossible to suggest that a      banker is  to be affected with knowledge of the customs      and customary  terms of  every one  of the thousands of      trades for  whose dealings  he  may  issue  letters  of      credit.      In Bank  Melli Iran  v.  Barclays  Bank  the  documents evidencing a  shipment of  ’100 new, good, Chevrolet trucks’ were held not to be a good tender under a credit calling for ’new’ trucks.  Mc  Nair  J.  held  that  all  the  documents tendered and  accepted by  the defendants were defective and consequently the  defendants were  not entitled to debit the plaintiff with  the amount  paid  against  these  documents, although the  defendants succeeded  on the  ground that  the plaintiffs had  by their  conduct ratified  the  defendant’s action in  accepting the  documents. The  dicta in  American cases are  to the  same effect.  In Lamborn  v.  Lake  Shore Banking Co. Smith J. said:           A party  who is  entitled to draw against a letter      of  credit   must  strictly   observe  the   terms  and      conditions under 322      which the  credit is  to become  available, and,  if he      does not,  and the bank refuses to honour his draft, he      has no cause of action against the bank.      Again, Hiscock,  C. J.  in Laudisi v. American Exchange National Bank said:           The  bank   has  the  power  and  subject  to  the      limitations  which   are  given  and  imposed  by  (the      customer’s) authority.  If it  keeps within  the powers      conferred it  is protected in the payment of the draft.      If it  transgresses those  limitations, it  pays at its      peril.      The relevant  authorities uniformly lay down in dealing with  commercial   letters  of  credit  that  the  documents tendered by  the seller  must comply  with the  terms of the letter of  credit, and  that the  banker owes  a duty to the buyer to  ensure that  the buyer’s  instructions relative to the documents  against which  the letter  of credit is to be honoured are  complied with.  The rights  of  a  banker  are described in  Halsbury’s Laws  of England,  4th Edn., vol.3, para 141 at p. 106 :           Unless documents  tendered under  a credit  are in      accordance with  those for  which the  credit calls and      which are  embodied in  the promise  of the  paying  or      negotiating  banker,   the  beneficiary   cannot  claim      against  the  paying  banker,  and  it  is  the  paying

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 17 of 22  

    banker’s duty  to refuse payment. The documents must be      those called  for, and  not documents  which are almost      the same  or which  will do just as well. The banker is      not called  upon to know or interpret trade customs and      terms. It has been held that where mandate is ambiguous      and a  paying  banker  acts  in  a  reasonable  way  in      pursuance of  it, he may be protected. But this general      rule cannot  be stretched so far as to protect a banker      who pays  against documents  describing goods  in terms      which are  similar to,  but not  exactly the  same  as,      those stipulated in the credit.      The description  of the  goods in  the relative bill of lading must  be the same as the description in the letter of credit, that  is, the  goods themselves must in each case be described  in   identical  terms,   even  though  the  goods differently described in the two documents are, in 323 fact, the  same. It  is the description of the goods that is all important.  The reason for this requirement is stated in Davis’ Law  Relating to  Commercial Letters  of Credit,  2nd Edn. p. 76:           It is  not only  the buyer  who faces  the risk of      dishonesty or sharp practice on the part of the seller.      For, in  many instances,  the banker looks to the goods      for reimbursement of the whole or part of the amount he      pays under  the letter  of credit. It is equally to his      interests to  ensure that such documents are called for      by the  letter of credit as will result in goods of the      contract description  being ultimately  delivered.  The      buyer is not compelled to enter into the sales contract      nor is  the banker  compelled to  issue the  letter  of      credit. If  either of  these contracts  is entered into      then it is for the buyer and the banker respectively to      safeguard themselves  by the  terms  of  the  contract.      Otherwise they  must be  prepared to  bear any  ensuing      loss.           But the  liability thus  imposed  on  the  issuing      banker carries  with it  a corresponding right that the      seller shall, on his part, comply with the terms of the      letter of credit and the seller’s obligations have been      construed as strictly as those of the banker.      We have  already referred  to the  statement of  law in Halsbury’s Laws  of England  which found  a place in Paget’s Law of  Banking, 8th  Edn. p.648,  and we may at the risk of repetition reproduce the same, to the effect:           Unless documents  tendered under  a credit  are in      accordance with  those for  which the  credit calls and      which are  embodied in  the promise of the intermediary      or issuing banker, the beneficiary cannot claim against      him; and it is the banker’s duty to refuse payment. The      documents must  be those  called for  and not documents      which are  almost the  same or which seem to do just as      well.      It the  light of  these principles,  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 seller.  Duties of  a bank  under a letter of credit are  created by  the document itself, but in any case it has the power and is subject to the limitations 324 which are  given or  imposed by  it, in  the absence  of the appropriate provisions in the letter of credit.      It is  somewhat unfortunate  that the High Court should have granted  a temporary injunction, as it has done in this case, to  restrain the appellant from making a recall of the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 18 of 22  

amount of  Rs. 85,84,456  from the Bank of India in terms of the letter  of guarantee  or indemnity  executed by  it. The courts usually  refrain from granting injunction to restrain the performance  of the  contractual obligations arising out of a  letter of  credit or a bank guarantee between one bank and another.  If  such  temporary  injunctions  were  to  be granted in  a transaction  between a  banker and  a  banker, restraining a  bank  from  recalling  the  amount  due  when payment is made under reserve to another bank or in terms of the letter  of guarantee or credit executed by it, the whole banking system in the country would fail.      In view of the banker’s obligation under an irrevocable letter of  credit to pay, his buyer-customer cannot instruct him not  to pay.  In Hamzeh Malas v. British Imex Industries Ltd.   the plaintiffs, the buyers, applied for an injunction restraining the  sellers, the defendants, from drawing under the credit  established by  the buyer’s  bankers.  This  was refused, Jenkins, L.J. stating, at p. 129, that:           ........ the  opening of  a  confirmed  letter  of      credit constitutes a bargain between the banker and the      vendor of  the goods  which imposes  on the  banker  an      absolute obligation to pay.... and that  ’this was  not a  case in which the Court ought to exercise its  discretion and grant the injunction’. The same considerations apply to a bank guarantee.      A letter of credit sometimes resembles and is analogous to a  contract of  guarantee. In Elian and Anr v. Matsas and Ors.  Lord   Denning,  M.R.,  while  refusing  to  grant  an injunction stated:      ...... a  bank guarantee  is very much like a letter of      credit. The  courts will  do their utmost to enforce it      according to  its terms.  They will not in the ordinary      course of  things, interfere  by way  of injunction  to      prevent its  due implementation.  Thus they  refused in      Malas v. British Imex Industries 325      Ltd. But  that is  not an  absolute rule. Circumstances      may  arise   such  as   to  warrant   interference   by      injunction.      A Bank  which gives a performance guarantee must honour that guarantee  according to  its terms.  In R.D.  Harbottle (Mercantile) Ltd.  v. National Westminster Bank Ltd.,  Kerr, J. considered  the position  in principle.  We would like to adopt a passage from his judgment at p. 761:           It is  only in  exceptional cases  that the courts      will  interfere   with  the  machinery  of  irrevocable      obligations assumed  by banks.  They are the life-blood      of  international   commerce.  Such   obligations   are      regarded as  collateral to  the underlying  rights  and      obligations between  the merchants at either end of the      banking chain.  Except possibly in clear cases of fraud      of which  the banks  have notice, the courts will leave      the  merchants  to  settle  their  disputes  under  the      contracts by  litigation or arbitration as available to      them or stipulated in the contracts. The courts are not      concerned  with  their  difficulties  to  enforce  such      claims; these  are risks which these merchants take. In      this  case   the  plaintiffs   took  the  risk  of  the      unconditional wording  of the guarantees. The machinery      and commitments of banks are on a different level. They      must be  allowed to be honoured, free from interference      by  the   courts.  Otherwise,  trust  in  international      commerce could be irreparably damaged.      (Emphasis supplied.) The observations  of Kerr,  J. have been cited with approval

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 19 of 22  

by Lord  Denning, M.  R. in  Edward Owen Engineering Ltd. v. Barclays Bank International Ltd.      The appellant  was under a duty to its constituent, the Bihar Corporation,  to scrutinize  the documents,  and could not be  compelled to  make  payment  particularly  when  the description in  the documents did not tally with that in the letter of  credit. It  was fully  entitled to  exercise  its judgment for  its own protection. When the appellant against the first lot of 20 documents refused to make payment except ’under reserve’  and against  the second lot of 27 documents even ’under  reserve’ the  remedy of  the plaintiffs  was to approach the ’openers’, i.e., Bihar Corporation, to instruct the appellant to effect 326 a change  in the description of the goods from ’Sizola Brand Pure  Mustard   Oil’  to   Sizola  Brand  Pure  Mustard  Oil "Unrefined" in  the letter  of credit.  Instead of  adopting that  course,   the  irregularity   in  the  description  in documents tendered  for payment was sought to be got over by the plaintiffs  by instructing  their bankers,  the Bank  of India, to  execute a  letter of guarantee or indemnity. When the bills of exchange tendered to the Bihar Corporation were dishonoured when  presented on  August 3,  1978,  the  legal consequences must  follow as  between the  appellant and the Bank of  India. There  was the  inevitable chain  of  events which could not be prevented by the grant of an injunction.      The appellant  presumably knew  little or nothing about mustard oil.  Bankers are not dealers in mustard oil in such a case as this, but dealers in documents only. The appellant as the  issuing bank  was presented with documents and asked to pay  a very  large sum of money in exchange for them. Its duty  was  not  to  go  out  and  -  determine  by  physical examination of  the consignments,  or employment of experts, whether  the  goods  actually  conformed  to  the  contracts between the  buyer and the seller, nor even determine either from its  own or  expert advice whether the documents called for the  goods which the buyer would be bound to accept. The banker knows  only the  letter of  credit which  is the only authority to  act, and  the documents  which  are  presented under it.  If these  documents  conform  to  the  letter  of credit, he  is bound to pay. If not, he is equally not bound to pay.  The letter  of credit called for ’Sizola Brand Pure Mustard  Oil’   while  the   railway  receipts  carried  the description "Siloza Brand Pure Mustard Oil ’Unrefined’ " and it was  not within the province of the appellant to say that the latter  description meant  identically the same thing as the former.      In an  action against a purchaser for reimbursement, it is only  necessary to prove that the goods tendered were the goods  purchased,   no  matter   how  described,  i.e.,  the purchaser was  offered that  which he  had  contracted  for, while  in  such  a  case  as  this,  in  an  action  by  the beneficiary against the issuing bank, it makes no difference whether the  goods tendered  were in  fact identical  to the goods purchased,  the only question being: Did the documents conform to the letter of credit ?      It is clear from the letters addressed by the appellant to the  Bank of  India on  June 23, 27 and 28, 1978 that the payment of  Rs. 36,52,960  by three cheques for Rs. 7,29,872 Rs. 12,78,536  and Rs.  16,43,833 were  payments made  under reserve Admittedly 327 when these amounts were paid by the appellant to the Bank of India, the  railway receipts  were not  clean  because  they contained the  description "Sizola  Brand Pure Mustard Oil "

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 20 of 22  

Unrefined". The appellant had taken the precaution of saying "Please note that the payment is made to you ’under reserve’ owing to the following discrepancies". There was a foot-note added: "Please note that this payment is made to you subject to repayment  on demand  of the bill amount, without loss of exchange  to  ourselves  plus  interest  and  other  charges incurred by  us, and  or by our principals, if the documents are not  acceptable to  the openers or buyers in view of the discrepancies whatsoever".  It was  also added: "Please also note that this ’reserve’ will remain in force until released by us  in writing".  Acceptance of these amounts by the Bank of India  on behalf  of the plaintiffs was upon these terms. The Bank  of India  and the plaintiffs were thus fully aware that the  appellant was  not prepared  to pay  except ’under reserve’. The  plaintiffs in  their letters addressed to the appellant dated  June 22  and 23,  1978 had added in ink the post-script: "In  case of discrepancies, pay to our bankers, Bank of  India". These  letters were in respect of 11 out of 20 documents;  it is  not suggested  that others  stand on a different  footing.   The  letters  conveyed  a  request  to "negotiate the  sight drafts for payment". Thus, the payment of Rs.  36,52,960 against  the first lot of 20 documents was ’under reserve’  and was  also  covered  by  the  letter  of guarantee or indemnity.      As regards  the second lot of 27 documents, the payment of Rs.  49,31,496 the appellant was not prepared to pay even ’under reserve  because the Bihar Corporation had refused to accept  the   consignment  on   the  ground   not  only   of discrepancies but  also because  the mustard oil was not fit for  human   consumption.  There  was  no  question  of  the appellant paying  this large sum of money except against the letter of  guarantee or  indemnity executed  by the  Bank of India. It  was represented  by the Bank of India that it had made arrangements  for due payment of the bills of exchange. When  the  bills  of  exchange  were  dishonoured  on  being presented on  August 3,  1978 the  amount of  Rs.  49,31,496 became immediately repayable on demand.      There still  remains the  question  whether  the  court should interfere  with an  order of this nature. The Court’s powers under  Art. 136 of Constitution are untrammelled, but they are  subject to  self-ordained restrictions.  The Court does not,  as a matter of rule, interfere with interlocutory orders, save under very exceptional circumstances. 328      The grant  of a  temporary injunction by the High Court under O.  39 rr.  1 and  2 appears to be wholly unwarranted. For reasons  already stated,  the appellant  was within  its rights in  making a  recall of  the amount  of Rs. 85,84,456 paid ’under  reserve’ and/or  in  terms  of  the  letter  of guarantee  or   indemnity.  We   fail  to   appreciate   any justification for  grant of  a temporary  injunction to  the plaintiffs, the  effect of  which virtually is to restrain a transaction between  a banker  and a banker. The courts view with disfavour the grant of such temporary injunction.      In the  instant case,  the High  Court has assumed that the plaintiff  has a  prima facie  case. It  has not touched upon the  question where the balance of convenience lay, nor has it dealt with the question whether or not the plaintiffs would be  put to irreparable loss if there was no injunction granted. In  dealing with  the prima  facie case,  the  High Court assumes  that the appellant was in breach. There is no basis for  this assumption  at all.  The High  Court in this case has  pre-judged the  whole issue  by holding  that  the appellant could  not unilaterally  impose the  condition  of payment ’under  reserve’, nor  was it  justified in  holding

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 21 of 22  

that the  documents were  ’clean’. The  question whether the appellant was in breach is an issue to be tried in the suit. The question whether the documents were ’clean’ or ’unclean’ is a  vexed question  on which no opinion could be expressed at this  stage. It is also premature at this stage to assume that there  was  no  ’due  presentation’  of  the  bills  of exchange and their refusal.      No injunction could be granted under O. 39, rr. 1 and 2 of the  Code unless the plaintiffs establish that they had a prima facie case, meaning thereby that there was a bona fide contention between  the parties  or a serious question to be tried. The  question that  must necessarily arise is whether in the facts and circumstances of the case, there is a prima facie case and, if so as between whom ? in view of the legal principles applicable,  it is difficult for us to say on the material on  record that  the plaintiffs  have a prima facie case. It  cannot be  disputed that  if the  suit were  to be brought by  the Bank of India, the High Court would not have granted any  injunction as  it was bound by the terms of the contract. What could not be done directly cannot be achieved indirectly in a suit brought by the plaintiffs.      Even if  there was  a serious question to be tried, the High Court  had to  consider the  balance of convenience. We have no doubt 329 that there  is no  reason  to  prevent  the  appellant  from recalling the amount of Rs. 85,84,456. The fact remains that the payment  of Rs.  36,52,960 against  the first  lot of 20 documents made  by the  appellant to the Bank of India was a payment under  reserve while  that of Rs. 49,31,496 was also made  under  reserve  as  well  as  against  the  letter  of guarantee or  indemnity executed  by it.  A  payment  ’under reserve’ is  understood in banking transactions to mean that the recipient  of money  may not deem it as his own but must be  prepared   to  return  it  on  demand.  The  balance  of convenience clearly  lies in  allowing  the  normal  banking transactions to go forward. Furthermore, the plaintiffs have failed to establish that they would be put to an irreparable loss unless an interim injunction was granted.      It was, however, tried to be impressed upon us that the balance of  convenience lay in granting the injunction since the appellant  would not  be put  to any loss because it had furnished the  letter of  guarantee  against  100  per  cent margin, i.e.  on deposit being made by the Bihar Corporation of Rs.  85,84,456 for  meeting the  payment to be made under the credit. It was also said that the effect of recalling of Rs. 85,84,456  from the  Bank of  India will  result in  the plaintiffs facing  a serious  credit-freeze, as  the Bank of India  will,  on  its  turn,  recall  the  amount  from  the plaintiffs.  We  are  afraid,  these  considerations  cannot prevail. For  all these  reasons, we are constrained to hold that there  was no justification for the High Court to grant a temporary  injunction under  o. 39 rr. 1 and 2 of the Code of Civil Procedure, 1908.      It the  result, the appeal succeeds and is allowed with costs. The  order passed  by the High Court dated August 24, 1979  granting   a  temporary   injunction  restraining  the appellant, the  United Commercial  Bank, from  recalling Rs. 85,84,456 from the Respondent No 1, the Bank of India is set aside, and  the application filed by the plaintiffs, Messrs. Godrej Soaps  Ltd. for  the grant  of a temporary injunction under O. 39, rr.1 and 2 of the Code of Civil Procedure, 1908 is rejected  with a  direction that the High Court shall try to dispose  of the suit as expeditiously as possible, and in any event,  within six  months from  today. The costs of the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 22 of 22  

appellant shall  be borne  by the  Respondents Nos.  1 and 2 equally. P B.R.                                       Appeal allowed. 330