Supreme Court Observations & Finding in matters of Letter of Credit, Revocation, Fraud:

CASE: B.S. Aujla Company Pvt. Ltd. vs Kaluram Mahadeo Prosad And Ors. on 10 September, 1981

The Supreme Court observed that in the case of Tarapore and Co., Madras v. Tractoroexport, Moscow, reiterated there that it was held that the opening of a confirmed letter of credit constituted bargain between the banker and the seller of the goods which imposed on the banker an absolute obligation to pay.

It was, however. pointed out relying on a passage in Chalmers Bill of Exchange that the banker was bound or entitled to honour the bills of exchange drawn by the seller unless these and such accompanying documents as might be required therein were in exact compliance with the terms of credit and such documents should be scrutinised with meticulous care. If the seller had complied with the terms of the letter of credit, however, there was an absolute obligation upon the banker to pay irrespective of any dispute there might be between the buyer and the seller as to whether the goods were up to the contract or not

It is true that in this case the Supreme Court was dealing with a confirmed or irrevocable letter of credit. Tt has to be emphasised and it has to be borne in mind that irrevocable letter of credit unless and until it is properly revoked is a binding contract between the issuing bank and the seller and provided the seller conforms to the conditions stipulated to the letters of credit, in our opinion, laid down the letter of credit until, and unless it is properly revoked before negotiation, stands on the same footing as irrevocable and confirmed letter of credit.

To say a contract or a document is void is not the same thing that the contract has been revoked. Anything which is void and voidable cannot be revoked because a thing which is void or voidable one does not exist. No question of revocation of such obligation arises.

The question arises whether the letter of credit was revoked before it was presented and if so was it revoked by a party who was competent or entitled to do so. If this was not so it stands on the same footing even it was revocable and in judging the respective contentions between the buyer and the seller the same principle would apply as would be applicable to "the irrevocable or confirmed letter of credit, in respect of granting any injunction in this matter. In this connection our attention was drawn to the observations of R. D. Harbottle v. National Westminster Bank Ltd., (1977) 2 All ER 862. This is a decision which was duly considered in the aforesaid Supreme Court decision which we have just now referred. In that case the plaintiffs were the merchants and they had extensive dealings with the buyer. The plaintiffs contracted with the Egyptian buyers for the sale of a certain quantity of goods under three separate contracts.

As emphasized by the learned Judge there the principle is that once a letter of credit is established there is a contract between the issuing bank and the seller. The buyer has no right to intervene. If the bank pays in violation of the letter of credit, then the buyer can always sue the bank for any damages or breach of his contract, If, on the other hand, there are certain other claims of the buyers against the seller then the buyers can file a suit for recovery of such damages and money from the seller. But as between the seller and the issuing bank the injunction should not be granted. That is the principle that was reiterated by the learned Judge. Though that principle in that case was invoked in case of an irrevocable letter of credit, in this case the came principle would apply even though it was an irrevocable letter of credit and as until today nobody has yet revoked the letter of credit.

It is for the bank to de-cide whether the letters tendered were strictly in compliance with the requirement of letter of credit. The plaintiff or the respondent No 1 as such has not say in this matter. After the letter at credit was opened and though not irrevocable one, it has not been revoked, the bank must, honour if otherwise satisfied. The other aspect of the matter that was emphasised was that in this case certain allegations of fraud were there. In the petition or in the plant there is no Allegation of fraud. In case of fraud, exception has been engrafted by the English Courts and that has been recognised in the Indian Courts. To avoid obligation of the letter of credit, there must be a dear case of fraud and to the knowledge of the bank.

It has been emphasised by the Judicial Committee in the case of Narayanan Chettyar v. Official Assignee, High Court, Rangoon, AIR 1941 PC 93 fraud like any other change of a criminal offence whether made in civil or criminal proceedings must be established beyond reasonable doubt. A finding as to fraud cannot be based on suspicion and conjecture.

Equity, is in favour of defendant No. 1. This, however, does not disentitle the buyer or the respondent No. 1 from instituting any appropriate proceeding against either the bank if the Bank acts in deviation and not strictly in compliance with the letter of credit in making the payment or ever from instituting any suit for any wrongful or illegal or mala fide conduct or for any damages if they are otherwise entitled to. In view of well settled principle of balance of convenience; in our opinion, in such a case in the absence of clear case of fraud to the knowledge of the bank, the Court should not grant injunction restraining payment in form of the letter of credit, as though in this case the letter of credit was irrevocable one; it has not yet been revoked.

The author can also be reached at drgubbilegal@gmail.com