N.S.I.C. Ltd. vs Shree Laxminarayanan Metal ...
1996 Latest Caselaw 118 Del

JUDGMENT

S.K. Mahajan, J.

(1) This order will dispose of the application of the plaintiff under Order 39 Rules 1 and 2 Civil Procedure Code for an injunction restraining defendant No. I from claiming or receiving any amount from defendant No.4 i.e. Punjab National Bank, under the irrevocable letter of credit No.71/95 dated 23rd June, 1995 for Rs.96,23,750.00 and also for restraining defendant No.4 from making any payment to defendant No.5 under the same letter of credit. This also disposes of the applications filed by defendant No. 1 and defendant No.5 under Order 39 Rules 4 for vacating the ex parte order of injunction passed on 29th September, 1995.

(2) The facts in short are that a letter of credit was opened at the instance of plaintiff by defendant No.4 bank for a sum not exceeding Rs.96,23,750.00 by payment on acceptance of beneficiary's drafts for 100% of the invoice value at site 90 days from the receipt of transport documents drawn on the bank. The beneficiary of the letter of credit was defendant No.l. The said defendant was to supply 500 Mt of Crca Sheets as performa invoice dated 18th May, 1995 and the documents to the bank were to be accompanied by signed commercial invoices for the gross cost and freight and certifying goods as per order/indent and evidencing shipment/dispatch of the said goods. One of the conditions of the letter of credit was that the motor transport receipts dated not later than 31st August, 1995 marked "Freight Paid" showing goods consigned to defendant No.4 and that the said motor transport receipts should have been issued by a transport operator on the approved list of the bank. It was also mentioned in the letter of credit that the bank engaged with the endorsees and/or bonafide holders that drafts drawn under a negotiated document in confirmity with the terms of letter of credit will be duly honoured on presentation and the credit was subject to Uniform Custom and Practice for Documentary Credits (1983 revision). International Chamber of Commerce publication No.5400.

(3) Under the raw material assistance scheme of the plaintiff, the raw material was procured by it from suppliers and the payment was made either directly to the supplier or letters of credit were established in favour of the concerned suppliers. The raw material was then released to concerned buyers from time to time on actual payment basis or on production of securities as prescribed under the raw material assistance scheme. Defendant No.2 is stated to have approached the plaintiff for procuring Crca sheets under the said scheme from defendant No.l who was the supplier of such material. In terms of the arrangements between the parties, initially a total quantity of 500 Mt of Crca sheets were to be procured by the plaintiff on behalf of defendant No.2 from defendant No.1 at the rate of Rs.19,500 p.m.t. The total value Of the goods supplied is Rs.96,23,750.00 and the goods were to be supplied on Cif basis from Bombay to Bangalore. It was in pursuant to this arrangement that the aforesaid irrevocable letter of credit was opened and one of the terms of the letter of credit was as under :- "RR/MTR dated not later than 31.8.1995 marked 'Freight Paid' showing goods consigned to Punjab National Bank, Okhla, bank notify APPLICANT. The transport documents should indicate the name and address of the applicant and ourselves. The Mtr should be issued by a transport operator on the approved list of the bank".

(4) Defendant No.1 is alleged to have handed over goods to defendant No.3, the transporter, and total 30 consignment notes (motor transport receipts) bearing Nos-1951 to 1980 were issued bearing the dates 24.6.1995, 25.6.1995 and 26.6.1995 for the entire consignment of 500 Mt of Crca sheets and the consignee mentioned in the receipts was Punjab National Bank, Okhla account NSIC/Khaleel Enterprises. In the invoice, drawn on the plaintiff for Rs.97,23,750.00 representing the total value of the consignment, the name of the transporter was given as Swarup Vahan, however, by letter dated 6th July, 1995 defendant No.l sought to rectify the said invoice saying that the name of Swarup Vahan had been mentioned by clerical mistake and requested the plaintiff to amend the bill accordingly as according to it the name of the carrier was Dayal Express Lines. The documents were presented by defendant No.l through defendant No.5,the negotiating bank, to defendant No.4 and the same were forwarded by defendant No.4 on 24th July, 1995 for acceptance. A letter dated 6th July, 1995 is stated to have been received by the plaintiff from defendant No.2 informing that the documents in question were acceptable to them. On receipt of the said letter from defendant No.2, the plaintiff accepted the bill of exchange and communicated the same to defendant No.4 on 7th July, 1995. It is the case of the plaintiff that as the documents were forwarded by defendant No.4 it was assumed by it that the same were in order and the same were in terms and conditions of letter of credit.

(5) When the goods did not reach destination for a considerable time, the plaintiff wrote a letter on 14th August, 1995 enquiring about the same. A letter Was also written to the transport company to disclose about the whereabouts of the goods as the same had not been received by the plaintiff at Bangalore. A letter dated 22nd August, 1995 was written by defendant No.l to the plaintiff slating that material worth Rs.l6,00,000.00 had been supplied to defendant No.2 directly who had been requested to deposit the sale proceeds with the plaintiff. It was further stated that delay in despatch of further material was regretted which was due to alleged unavoidable circumstances and it was confirmed by them that there will not be any further delay and the material will start moving not later than the end of the month. The contention of the plaintiff, therefore, is that the fact that goods were not despatched upto as late as 22nd August, 1995, though the goods receipts were dated 24/26th June, 1995, clearly established that the receipts were forged and fabricated at the instance of defendant No.l with a view to play fraud upon the plaintiff. Plaintiff, therefore, called upon defendant No.l by letter dated 30th August, 1995 to immediately supply the material failing which it was stated that the letter of credit will be cancelled. Defendant No.4 was also informed not to release payment under the said letter of credit. It is further alleged that on further enquiries made by the plaintiff, it came to its notice that defendant No.3 was not even an approved transporter in the list of the bank, though in terms of the letter of credit the goods were required to be transported through an approved transporter of the bank. It is stated that this was, therefore, a clear deviation from the letter of credit, which defendant No.4 ought to have noticed before accepting the documents for payment. It was in these circumstances that the plaintiff has filed this suit slating that by sending forged transport receipts issued by a transporter who was not on the approved list of the bank, defendant No.l has clearly tried to play fraud upon the plaintiff as well as upon the bank and as it was a fraud of the beneficiary under the letter of credit with a view to deceive the plaintiff, the plaintiff was entitled to an order of injunction restraining the bank from releasing any payment to defendant No.l or to any one to whom the same had been endorsed.

(6) By an ex parte order of injunction passed on 29th September, 1995 I had restrained defendant No.4 bank from making payment of any amount under the aforesaid irrevocable letter of credit. Defendant No.l has neither filed written statement nor reply to the application under Order 39 Rules 1 and 2 Civil Procedure Code and instead has filed an application under Order 39 Rule 4 Civil Procedure Code. Defendant No.l in its application has not denied the allegations made by the plaintiff in the plaint and the stand which has been taken by the said defendant in the application is that a sum of Rs.5,00,00.00 was paid by it to the plaintiff on 13th September, 1995 and another sum of Rs.2,50,000.00 was paid in July, 1995. It is also stated that goods of the value of Rs.l6,00,000.00 were directly supplied to M/s.Khaleel Enterprises, defendant No.2 and two rollers British make of the market value of Rs.19,00,000.00 , aluminum circles of value of Rs.3,60,000.00 , additional one roller Indian make of value of Rs.2,30,000.00 and rolling mill valued atRs.48,00,000.00 were delivered to the plaintiff on 30th September, 1995. According to the said defendant as it had paid a sum of Rs.96,50,000.00 mentioned above, there was no reason as to why the payments under the irrevocable letter of credit should not be made by the bank. In reply to the application, the stand of the plaintiff is that the amount of Rs.2,50,000.00 and Rs.5,00,000.00 paid by defendant No.l in July, 1995 and September, 1995 has nothing to do with the supply of material under the letter of credit and the transaction of payment of the said amount was entirely a separate transaction. It is also stated that the supply of material directly to defendant No.2 was also not the subject-matter of the letter of credit and the plaintiff had nothing to do with the said supply. It was some other transaction which defendant No.l had directly with defendant No.2. As far as delivery of rolling mill alleged to have been made by defendant No.l to the plaintiff was concerned, the stand of the plaintiff is that as defendant No.l has failed to supply the material under the subject letter of credit, it started giving fraudulent proposals to the plaintiff which were not acceptable to it as it was interested only in the supply of material which was to be delivered to defendant No.2.

(7) Defendant No.5 has also filed an application for vacating the ex parte order of injunction. It has also filed the written statement. The stand of defendant No.5 is that the suit has been filed by the plaintiff in collusion with defendant No.4 bank and that the documentary credits being irrevocable, bank must pay when demand is made and that the letter of credit was subject to inland irrevocable documentary credit according to which the document must be honoured on presentation. The further stand of defendant No.5 is that it was on the confirmation of defendant No.4, that it will honour the irrevocable letter of credit, that defendant No.5 made payment against the letter of credit to defendant No.l and defendant No.4 cannot opt out of its commitment under the letter of credit, defendant No.5 being a holder in due course of the same. It is also the case of defendant No.5 that the plaintiff had not come to the Court with clean hands in as much as in the plaint it has been stated that no payment had been made by defendant No.5 - negotiating bank, whereas the factum of having made payment was within the knowledge of the plaintiff. According to the said defendant, therefore, ex parte order of injunction is liable to be vacated.

(8) Law as to the contractual obligations under the letter of credit is now well settled in a catena of cases decided by the Supreme Court of India. Before I deal with the facts of the present case, it will be proper to sum up the law on the subject.

(9) In U.P.Co-operative Federation Limited Vs. Singh Consultants and Engineers (P) Limited, , it was held by the Supreme Court that "Commitments of bank guarantee or irrevocable letter of credit cannot be interfered with except if a case of fraud or a case of irretrievable injustice has been made out". Supreme Court in that case had quoted with approval the following passage from Bolivinter Oil 3.A. Vs. Chase Manhattan Bank & Ors. (1984) 1 All Er 351,352:- "THE wholly exceptional case where an injunction may be granted is where it is proved that the bank knows that any demand, for payment already made or which may thereafter be made will clearly be fraudulent. But the evidence must be clear, both as to the fact of fraud and as to the bank's knowledge. It would certainly not normally be sufficient that this rests on the uncorroborated statement of the customer, for irreparable damage can be done to a bank's credit in the relatively brief time which must elapse between the granting of such an injunction and an application by the bank to have it discharged."

(10) The Supreme Court also referred to another decision of House of Lords in Ucm (Investments) Vs. Royal Bank of Canada (1982) 2 All Er 720. Lord Diplock, while dealing with the exception of fraud said: - "THE whole commercial purpose for which the system of confirmed irrevocable documentary credits has been developed in international trade is to give to the seller an assured right to be paid before he parts with control of the goods and that does not permit of any dispute with the buyer as to the performance of the contract of sale being used as a ground for non-payment or reduction of deferment of payment. To this general statement of principle as to the contractual obligations of the confirming bank to the seller, there is one established exception: that is, where the seller, for the purpose of drawing on the credit, fraudulently presents to the confirming bank documents that contain, expressly or by implication, material representations of fact that to his knowledge are untrue. Although there does not appear among the English authorities any case in which this exception has been applied, it is well established in the American cases, of which the leading or landmark' case is Sztein V. J.Henry Schroder Banking Corp. This judgment of the New York Court of Appeals was referred to with approval by the English Court of Appeal in Edward Owen Engineering Ltd. V. Barclays Bank International Ltd. though this was actually a case about a performance bond under which a bank assumes obligations to a buyer analogous to those assumed by a confirming bank to the seller under a documentary credit. The exception for fraud on the part of the beneficiary seeking to avail himself of the credit is a clear application of the maxim exturbi causa non oritur action or, if plain English is to be preferred, 'fraud unravels all'. The courts will not allow their process to be used by a dishonest person to carry out a fraud."

(11) In view of the settled law on the subject, a bank can be prevented from making payment under irrevocable law of credit only on two grounds, namely, i) that there has been a case of fraud by the beneficiary and ii) that the documents have not been presented in accordance with the letter of credit and as such the payment cannot be made.

(12) In the present case, the beneficiary of letter of credit is defendant No. 1. In case, a fraud has been played by defendant No.l or the documents have not been presented inaccordance with the terms of letter of credit, in my opinion, defendant No.5 cannot claim any amount on the ground that it is a holder in due course and is not liable for any fraud which might have been played by defendant No.l.

(13) In terms of the letter of credit the goods were to be sent by a transporter who was on the approved list of the bank. Specific allegation has been made by the plaintiff that the transport operator, who has issued the motor transport receipts, is not on the approved list of the bank and there is no denial about the same by any of the defendants. In fact, defendant No.l has not filed its written statement nor reply to the application. It can, therefore, be safely concluded that the goods receipts have not been issued by an approved transporter approved on the list of the bank. This in itself is a clear violation of the terms of the irrevocable letter of credit and may in itself be sufficient to restrain the bank from making any payment under the letter of credit to any person.

(14) Though in its application under Order 39 Rule 4 Civil Procedure Code, defendant No.l has stated that goods of the value of Rs.l6,00,000.00 had been directly delivered to defendant No.2 and another payment of Rs.7,50,000.00 was made to the plaintiff in July and September, 1995, however, that in itself may not be a sufficient compliance of the letter of credit. In terms of the letter of credit, the documents had to be routed through the bank and in case any part of the goods have been delivered directly to defendant No.2, they cannot be said to be a part of the goods which were required to be delivered under the letter of credit. By letter dated 22nd August, 1995 defendant No.l has clearly admitted that the goods had not been despatched. In case, the goods had not been despatched and the goods receipts were not forged, there was no occasion for defendant No.l to offer to sell its rolling mill to the plaintiff. In my opinion, therefore, by sending forged receipts issued by a transport company, which was not even on the approved list of the bank, and without despatching the goods, defendant No.l has clearly tried to play a fraud upon the plaintiff as well as upon the bank. Defendant No.1 has tried to obtain benefit without despatching the goods and by forging the receipts. Contention of defendant No.1 as well as defendant No.5 that it is not a case of fraud is wholly fallacious.

(15) Next contention of defendant No.5 is that even if a fraud has been played by defendant No.l, the defendant No.5 cannot be held to be bound by the same. In my opinion, the contention is without any basis. Defendant No.5 cannot have a better right to receive the payment than defendant No.l. In case, fraud has been played by defendant No.1, endorsee of the document is equal bound by the result which may follow due to the said fraud.

(16) In the words of Lord Diplock, "where the sellers for the purpose of drawing on the credit, fraudulently presents to the confirming bank documents that contain, expressly or by implication, material representations of fact that to his knowledge are untrue", he is not entitled to be paid under the aforesaid letter of credit. The Courts will not allow their process to be used by a dishonest person to carry out a fraud. In my opinion, if it is not a case of fraud, there cannot be any other case of fraud committed by the beneficiary under the letter of credit. By trying to obtain payment of a specific sum of money without despatching the goods and by forging receipts, defendant No.1 had clearly tried to cheat the plaintiff and has thus played a fraud. In my opinion, as it is a fraud of the beneficiary, the Court will be justified in issuing an injunction restraining the bank from making payment under the letter of credit. In my opinion, there cannot be any other conclusion of the above discussions.

(17) I, therefore, allow the application of the plaintiff under Order 39 Rules 1 and 2 Cpc and dismiss the applications of the defendants I and 5 under Order 39 Rule 4 Cpc and confirm the ex parte order passed on 29th September, 1995 till the disposal of the suit.

(18) Any observation made in this order will not affect the merits of the case.