Bombay High Court
Malayan Banking Berhad vs Indusind Bank Limited on 11 July, 2016
Bench: K.R. Sriram
37-sj-6-16.doc
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
SUMMONS FOR JUDGMENT NO. 6 OF 2016
IN
SUMMARY SUIT NO. 405 OF 2015
Malayan Banking Berhad ...Plaintiff
Vs.
Indusind Bank Limited ....Defendant
....
Mr. Rajesh Patil i/b Meghana Kadam for the Plaintiff.
Mr. Chetan Kapadia a/w Ms. Ambreen Saheed i/b MDP & Partners for
the Defendant.
...
ig CORAM : K. R. SHRIRAM, J.
DATE : 11 th JULY, 2016
JUDGMENT.:
1. The Plaintiff has filed the suit claiming a sum of Rs.
3,47,87,865.42 along with interest at 12% per annum from the
date of filing of the suit or such other rate as this Hon'ble Court
may deem fit and proper.
2. The Plaintiff is a bank situated in Malaysia. Sometime in
December, 2011 MMTC Ltd. ("Buyer"), a Government of India
organization placed an order for purchase of copper wire rod from
one M/s. Synergic Industrial Marketing Services SDN. BHD., a
company in Malaysia ("Seller"). At the instance of MMTC Ltd., the
Defendant issued an irrevocable Letter of Credit dated 2 nd
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December, 2011 for USD 544,500/- ( + / - 3%). The letter of
credit was available for negotiation with the Plaintiff and was
governed by UCP-600. The beneficiary viz., the seller submitted
the documents to the Plaintiff and since the documents were in
accordance with the requirements of the letter of credit, the
Plaintiff negotiated the documents and paid the amount to the
beneficiary. This negotiation took placed on 12th December, 2011
and the amount paid was USD 367,697.22 and USD 184,491.12.
The letter of credit which the Defendant issued to the Plaintiff
required certain documents to be submitted for receiving payment.
The payment to be made was 90 days usance from the date of Bill
of Lading. The Plaintiff forwarded the documents to the Defendant
and the Defendant relayed its message dated 6 th January, 2012,
confirming its acceptance of the documents and undertook to
reimburse the Plaintiff with the amount of letter of credit on the
maturity date, i.e., 5th March, 2012. The message copy whereof is
at Page 43 to the plaint reads as under :
"Documents accepted to mature on 05/March/2012.
We shall remit proceeds upon maturity as per
instructions according to LC terms".
3. Thereafter, on 1st February, 2012, almost a month later, the
Defendant sent a message to the Plaintiff that they have been
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informed by their applicant, i.e., MMTC Ltd., that some of the
documents submitted were forged and the matter was being
investigated. This was followed by a message dated 7th February,
2012, in which the Defendant made it clear that they will not be
making payment on the due date, i.e., 5th March, 2012, as the
documents mentioned stood refused. It is necessary to note that,
on 6th January, 2012 the Defendant had accepted the documents
as required under the LC terms and after almost one month, i.e.,
on 7th February, 2012, the Defendant states the documents are
refused.
4. While the Defendant took this stand, MMTC Ltd. filed a suit
in this court bearing Suit (Lodging) No. 446 of 2012 and on 2 nd
March, 2012 obtained an ad-interim order from restraining the
Defendant from paying the Plaintiff under the letter of credit
issued by the Defendant. This ad-interim order was confirmed by
an order dated 24th July, 2014. The Plaintiff herein carried the
matter in appeal. Before the appeal came to be heard and
disposed, the Plaintiff filed the present suit which came to be
lodged on 3rd March, 2015 (though incorrectly written as 3rd
February, 2015 by the Registry). The appeal was allowed by a
judgment pronounced on 7th October, 2015. In the judgment the
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appellate court has observed that while granting injunction against
honouring letter of credit by a bank, the court must be slow in
granting an order of injunction restraining the realization of a
letter of credit subject to the exception that it must be clearly
shown that fraud of a grievous nature has been committed and to
the notice of the bank. It is also observed that, it is not enough to
allege fraud but there must be clear evidence, both as to the fact of
fraud as well as to the bank's knowledge of such fraud. With this
legal proposition in mind, the Division Bench, has noted that there
were not even averments of fraud made in the suit let alone
averments being made against the Plaintiff of fraud. In fact, while
setting aside the order of the Single Judge, it was also observed
that the Single Judge also had noted that no averments have been
made about commission of fraud by the Plaintiff. It is necessary to
note that, even in the present case, except for a bald statement,
there are no averments anywhere in the affidavit in reply that the
Plaintiff was aware of the fraud, when it accepted the documents
from the beneficiary. It is not even the case of the Defendant that
the fraud was apparent on the face of the documents. In fact, even
the Defendant was not aware of any fraud and it had also accepted
the documents on 6th January, 2012.
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5. Against the said judgment of the Division Bench, MMTC had
preferred a Special Leave Petition (SLP) which came to be
dismissed summarily.
6. The entire basis of the suit is the irrevocable letter of credit
that the Defendant had issued to the plaintiff. The main contention
raised on behalf of the Plaintiff, since it had no knowledge of any
alleged fraud perpetrated by the supplier before accepting the
documents and making the payment, is that the Defendant bank
could not refuse to reimburse the Plaintiff of payments already
made by the Plaintiff under the letter of credit. It is also the case of
the Plaintiff that the Plaintiff had no knowledge of any alleged
fraud said to have been committed with regard to the underlying
transactions covered by the documents.
7. The counsel for the Plaintiff submitted that there was no
escape for the Defendant and the Defendant will have to pay under
the letter of credit. The counsel submitted that the letter of credit
issued by the Defendant was an irrevocable letter of credit which
required certain documents to be submitted to be entitled for
payment and those documents, admittedly, have been submitted.
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He also submitted that Defendant had also by its message dated 6 th
January, 2012 confirmed that the documents were in order and
that they would make payment on the due date and, therefore, the
amount was payable and the Defendant cannot renege on their
obligations under the letter of credit.
8. The Defendant in their affidavit in reply have not denied any
of these facts but according to the Defendant the supplier has
played a fraud and MMTC has filed a criminal complaint and that
is being investigated by the police and until the investigation is
completed no amount is payable.
They have also submitted that MMTC has also filed by a suit
namely Suit No. 786 / 2012 referred earlier and until that suit is
concluded no amount is payable.
It is also submitted that the Plaintiff made the payment to
the supplier before the required 90 days from the date of Bill of
Lading and the Defendant brought to the notice of the Plaintiff
about the fraud within the 90 days period and therefore no
amount is payable.
It is also baldly alleged, without any substance or basis, that
the supplier was in collusion with the Plaintiff right from inception
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with dishonest and ulterior motive to defraud the Defendant. This
last point has no substance or basis and requires to be rejected.
Simply, alleging fraud is not enough. There has to be some strong
prima facie or corroborative evidence of the fraud allegations. It is
also necessary to note that there is no communication from the
Defendant to the Plaintiff alleging that the Plaintiff was involved in
the fraud with the supplier and right from inception the Plaintiff
knew about this fraud.
9. As regards the submission of the Defendant that even after
accepting the documents and assuring payment they could still,
before the 90 days period was over, refuse to make payment, I am
afraid, it is not correct. Under Article 16(d) of UCP-600 rules,
which is applicable to the suit letter of credit, the Defendant if it
had decided to refuse to honour or negotiate, should have no later
than the close of the fifth banking day following the day of
presentation communicated its refusal. In this case the Defendant
by its message dated 6th January, 2012 has gone ahead and
accepted the documents and have also assured payment. In fact
the Defendant in its written statement filed in Suit No. 786 of
2012 has accused MMTC of not coming with clean hands and has
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alleged that MMTC has suppressed material facts from the court.
The Defendant has also stated in its written statement in the said
suit that the Defendant will have no objection and will submit to
the orders of the Court with regard to honouring of letter of credit,
i.e., this suit letter of credit. The Appellate Bench of this court
refused to grant any injunction restraining the Defendant from
making the payment under this suit letter of credit to the Plaintiff
and the Supreme Court refused to interfere. In effect the Appellate
Court has confirmed that Defendant had to make the Payment to
the Plaintiff. The Defendant has also not made out any case of
fraud against the Plaintiff beyond bald allegations. Letters of
credit, also called documentary credits are the most common
method of payment for goods in the export trade and have been
described by many courts as " the life blood of international
commerce". Thrombosis will occur if, unless fraud is involved, the
courts intervene and thereby disturb the mercantile practice of
treating rights thereunder as being equivalent to cash in hand.
The law relating to letters of credit is founded on two principles:
(a) the autonomy of the credit; and
(b) the doctrine of strict compliance.
The credit is separate from and independent of the underlying
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contract of sale or other transaction. A bank which operates a
credit is concerned only with whether the documents tendered
correspond to those specified in the instructions. The letter of
credit transaction is thus a paper transaction. The only case in
which - exceptionally - the bank should refuse to pay under the
credit occurs if it is proved to its satisfaction that the documents,
though apparently in order on their face, are fraudulent and that
the beneficiary or the other bank was involved in the fraud. This is
usually referred as the "fraud exception".
10. I find support in the judgment relied upon by the counsel for
the Plaintiff, UBS AG Vs. State Bank of Patiala1 in which
paragraph 22 and 35 read as under:
22. 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.
35. The facts of these three appeals are clear and simple.
The letters of credit were issued by the issuing bank to the
1. (2006) 5 SCC 416
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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.
11. The counsel for the Defendant relied upon State Bank of
Hyderabad Vs. Rabo Bank2; Bankay Bihari G. Agrawal and
Ors. Vs. M/s. Bhagwanji Meghji & Ors.3; a judgment of the
Court of appeal in England in the matter of Montrod Ltd. Vs.
Grundkotter Fleischvertriebs GmbH4; and a judgment of the
privy council in Alternative Power Solution Ltd. Vs. Central
Electricity Board and Another5.
12. As regard State Bank of Hyderabad (Supra) in the said
judgment, the Apex Court has only set out the factors to be kept in
mind while hearing an application for summary decree.
2. 2015 (10) SCC 521
3. 2001 (1) Mh.L.J. 345
4. 2002 (1) WLR 1975
5. 2015 (1) WLR 697
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13. As regards Bankay Bihari G. Agrawal (Supra) the counsel for
the Defendant submitted that the summons for judgment was
taken out after almost 13 months of filing the suit. In my view, it is
not such an inordinate delay or a factor to be considered to
warrant granting unconditional leave to defend it. In any event the
delay in taking out summons for judgment beyond the period of 6
months prescribed by Rule 227 does not automatically entitle
Defendant to unconditional leave to defend.
14. Coming to Montrod Limited (Supra), the counsel submitted
that if the documents are forged and the same are nullity, they
cannot be accepted and hence no payment was due and payable.
In fact, in Montrod Limited, the Court of appeal held that a
beneficiary who had presented documents in good faith was
entitled to payment even if the documents had no commercial
value and were 'nullities'. In this case Montrod, who were the
applicants in the credit, made a claim against Grundkotter, seeking
a declaration from the Court that no valid certificates of inspection
had been issued which were capable of satisfying the letter of
credit's requirement. Grundkotter had presented documents which
on their face complied with the terms of the credit and there was
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no proof of fraud on their part. The Court concluded that the so-
called 'nullity' exception, argued for by Montrod, was not an
exception recognized by English law as entitling the bank to refuse
payment under the letter of credit in the face of a conforming
presentation. The nullity of the documents tendered did not
therefore provide an independent ground for refusal of payment
and an exception to the principle of the autonomy of the credit.
15.
The essence of the letter of credit transaction lies in its
documentary character, i.e., where the goods are represented by a
bill of leading, this document of title is used as a means of
financing the transaction. The underlying requirement in the
contract as evidenced in a letter of credit is that payment has to be
made against the documents submitted unless it can be shown that
the day when the Plaintiff accepted the documents, the Plaintiff
was aware about the fraud or that the documents were forged. The
bank must determine on the basis of the documents alone whether
or not they comply with the mandate. According to the doctrine of
strict compliance the bank is within its rights when refusing
documents tendered, which do not contain all documents or
particulars specified in the Credit. Beyond this the bank is not
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obliged to go and should not go. If the Defendant wanted to refuse
the documents, it should have brought to the notice of the Plaintiff
about the fraud and should have refused the documents within the
close of the fifth banking day following the presentation, which the
Defendant did not. On the contrary the Defendant has admitted
and accepted the documents. Moreover, in the affidavit in reply
the Defendant has in para 9 (iv) has stated as under :
"(iv) On 3rd January 2012, MMTC Ltd., vide their letter
Ref. No. MMTC/ F & A/CWR/VIII/2011-12 dated 3 rd
January, 2012, communicated their acceptance of Bills
drawn under the Letters of Credit and to make payment of
both the bills on the respective due dates and accordingly,
as per standard banking practice, the acceptance of bills
and due dates for payment i.e. 5 th March, 2012, was
communicated to the presenting bank i.e. Plaintiff,
through electronic medium (SWIFT), on 6th January,
2012".
Therefore, not only the Defendant but even its constituent
MMTC has accepted that the documents were in accordance with
the letter of credit. Hence, the amounts were payable to the
Plaintiff by the Defendant under the letter of credit.
16. As regards Alternative Power Solutions Limited (Supra),
considering the same, in my view this judgment also confirms the
proposition that the banks engaged in a letter of credit transaction
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are, in principle, not involved in any dispute arising between the
parties to the underlying contract of sale subject to one exception
to this rule; the fraud exception. Therefore, the bank is bound to
pay unless the demand of the Plaintiff was clearly fraudulent.
In other words, if the Plaintiff, for the purpose of drawing on
the credit, fraudulently presents to the Defendant documents that
contain, expressly or by implication material representations of
fact that to his knowledge are untrue only then payment can be
refused. The emphasis here is 'to the Plaintiff knowledge' that the
documents presented were expressly or by implication fraudulent.
In this case, it is not even the case of the Defendant that the
Plaintiff was aware of any fraud.
17. As regards the defence that the Plaintiff should not have paid
within the 90 days period provided in the letter of credit, the same
also cannot be accepted. The 90 days period in the credit only
means that once the documents are accepted, the Defendant has
90 days to pay. Its liability to pay is crystallized but date of
payment is deferred.
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18. The defendant also took a stand, that the claim is time
barred. The submission of the Defendant is incorrect because the
moment, the Defendant accepted the documents the liability to
pay has got triggered. The 90 days time to pay, i.e., the maturity
date, was 5th March, 2012 and the suit was lodged on 3 rd March,
2015. The date on which the Defendant refused to pay cannot be
the date of reckoning as the plaintiff in my view, is entitled to wait
till the maturity date and consider that date as the date the cause
of action arose.
19. In the circumstances the Defendant has not raised any triable
issues. The Defendant has no defence, and the defence setup is
only illusory, sham and moonshine. The letter of credit is not
denied. The fact that the letter of 6 th January, 2012 was written by
Defendant accepting the documents and agreeing to remit the
proceeds is not denied. The appeal court in the suit filed by
MMTC, refused to injunct the Defendant from remitting the
payment to the Plaintiff and this would in a way, amount to
endorsing the factual and legal position, that the amount was
payable by the Defendant to the Plaintiff. That facts then
prevailing are the same set of facts even now prevailing. I see no
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reason why the Defendant should not pay. I would add that the
Defendant should have paid soon after the Apex Court dismissed
the SLP of MMTC. Therefore, this is a fit case where the Plaintiff
should be granted summary decree. The summons for judgment is
disposed accordingly and the suit also is decreed in favour of the
Plaintiff. The Plaintiff is also entitled to cost in the sum of Rs.
2,00,000/- (Two lakhs).
20.
The decree be drawn up accordingly.
21. At the request of the counsel for the Defendant, this order
stayed for a period of four weeks.
(K. R. SHRIRAM, J.)
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