08 Jun 2121

Bank has the duty to scrutinize the documents about discrepancies and check whether they are in conformity the terms & conditions of letter of credit - Bombay High Court

Case : UPL Limited v. Standard Chartered Bank & Ors. COMM Suit No. 12 of 1999

Court : Bombay High Court

Bench : Justice N. J. Jamadar

Decided on : 08 Jun 2121

Relevant Statutes


Brief Facts & Procedural History

1. Plaintiff (UPL Limited) is a company that deals in the manufacture of pesticides incorporated under the Companies Act they entered into a contract 400 metric tons of yellow phosphorus with the Hunan Leader International Trade General Corporation and under the terms of the contract payment were to be made through irrevocable letter of the contract. Plaintiff applied to defendant 1 (Standard Chartered Bank, Mumbai Branch) for the issue of a letter of credit in favour of Hunan for the said amount of 6 Lac 15,200 U.S. dollars.

2. After receiving the bill of exchange, the bank didn't offer the inspection to the plaintiff and the plaintiff had to rely upon the statement of the bank. And on 23rd July 1996 bank advice the plaintiff that it had diverted accounts of the plaintiff of Rupees 2,22,54,460.66/-.

3. Plaintiff alleged that there were some serious discrepancies in the document. The document had the following discrepancies:

a. Transport document was no an ocean bill of lading.

b. The certificate of seaworthiness of vessel was not a certificate as required by L.C.

c. End the defendant had negligently made payment of money without any inspection.

4. Plaintive initiated arbitration proceedings against Hunan and the arbitral tribunal awarded a sum of US $ 857603.80 with interest, and the plaintiff assigned the said award to the shipper according to the terms of the agreement. Plaintiff amended the plaint and sought a decree of rupees 85, 32, 97, 546.62/- which includes legal cost, economic cost and interest at the rate of 20.5% per annum.

5. All the claims of the plaintiff are denied by the defendant in Toto.

Issue of the Case

Whether the bank is liable for not scrutinizing the documents properly regarding the discrepancies?

The Observations of the Court

1. The main issues are the discrepancies whether the documents are

a. That the bill of lading was not clean on the board ocean bill of lading

b. There was no certificate of the shipper to the effect that gods worshipped on a seaworthy vessel of the specified class

2. The Honourable Bombay High Court elaborated upon the concept of an irrevocable letter of credit and referred to the judgment of M/S Tarapur & Co., Madras v. M/S V. O. Tractor Exports Moscow and Another, 1969(1) SCC 233, and United Commercial Bank v. Bank of India and others, 1981 (2) SCC 766, in which court emphasized on the point that in a letter of credit, parties, especially the bank, deals with the document and not with the goods in question and therefore the question of liability arises in the light of the standard of care in scrutinizing the documents.

3. The Honourable Bombay High Court further refer to various articles of UCP 500 and observe that conjoint reading of these articles makes it clear that in the case of an irrevocable letter of credit the bank is under an obligation to honour its commitment to pay and also there is a contractual duty on the buyer to satisfy that the seller has standard the stipulated documents and those documents are in conformity with the terms and conditions of the credit and also if the documents on their face appear to be discrepant or inconsistent with the conditions of credit than the banker is under and obligation to refuse to take up the documents.

4. The Honourable Bombay High Court noted down that just because the bank only deals with the document that does not mean that the bank is absolved of the obligation to satisfy itself that the document standard is in conformity with the conditions and also the bank is neither expected nor equipped to investigate the genuineness of the document but when the document on the face of it does not satisfy the conditions, then, in that case, the bank is under an obligation not to make payment.

5. The Honourable Bombay High Court noted down that there was an omission on the part of the plaintiff to inquire about the absence of investigation as regards the vessel on which the goods were boarded and even if it is assumed that plaintiff was aware of the fact that goods were not shipped, it will not absolve the bank with its liability to scrutinize the documents and similarly, a delay of a fortnight in addressing the communication to the banker regarding the discrepancy of the document cannot be considered in order to disentitle plaintiff from their claim.

6. The Honourable Bombay High Court referred to Article 23 and Article 26 of UCP 500 and noted down that in case of multi modal transport document it is sufficient if the document indicates that the goods have been dispatched, taken in charge or loaded on board whereas in case of ocean billing of lading the documents should indicate that goods have been loaded on board or shipped on named vessel. In the present case, the letter of credit provides that the seller should furnish a complete set of not less than three original non-negotiable copies of clean on board ocean bills of lading and it can be easily construed that the combined transport bill of lading. It can be construed that the goods were not shipped on an ocean vessel which was very much evident on the face of the combined transport bill of lading.

7. With regard to the claim of the plaintiff, the Honourable Bombay High Court referred to its previous judgment in the case of State of Rajasthan v. Ferro Concrete Construction Private Limited, 2009 (12) SCC 1, in which the court noted down that there was no condition mentioned in the contract between the parties that in case of wrongful payment the bank would be liable to pay interest to the buyer but the transaction also implies that person who is wrongfully debited and also deprived of money then he has to be compensated and the Honourable Bombay High Court came to the conclusion that plaintiff is entitled to pre-suit interest and in addition to which the principal amount which was debited to the account of the plaint and post suit interest will be counted on the balance amount from 2nd February 2005.

The Decision Held by the Court

Defendant has to pay the plaintiff balance amount with simple interest of 8% per annum till realization from 2nd February 2005.

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