Letter of Credit

Suit filed by respondent / bank was decreed against appellants / customers to recover finance facility advanced in terms of Letter of Credit

Appellants / customers claimed that goods were damaged as a consequence of alleged transshipment

Validity

Goods in question were insured and there was a role and responsibility of Insurance company, in the facts and circumstances encountered

Such aspect was not considered by Banking Court

Respondent / bank alleged that credit facility upon payment was transformed into PAD (Payment Against Documents) facility and eventually converted into FIM (Finance Against Imported Merchandize) facility

Whether cause of action was rested on the Credit arrangement or FIM facility, which triggered another moot question that whether doctrine of novation was attracted and what was the cause and effect of novation, if it actually happened

High Court declined to examine judgment of Banking Court in the context of incomplete, bald and inconclusive adjudication

Judgment and decree passed by Banking Court did not constitute a valid, fair and proper adjudication of all-inclusive issues / questions, and the judgment dealt with the partial issues superficially

High Court declared judgment passed by Banking Court ineffective and illegal as the questions raised and left unattended had jettisoned its lawful existence

High Court remanded the matter to Banking Court for decision afresh

Appeal was allowed accordingly.

In contract between issuer Bank and beneficiary, the bank is obliged to pay the beneficiary if documents are presented for credit drawing, regardless of any dispute between the beneficiary and the applicant.

In contract between issuer Bank and beneficiary, the bank is obliged to pay the beneficiary if documents are presented for credit drawing, regardless of any dispute between the beneficiary and the applicant.

Meaning and scope.

Meaning and scope.

Plaintiff sought interim release of vehicles on grounds that same had been purchased prior to amendment in Import Policy and were only transported after amendment

Validity

Held, provisions of Para. 4 of Import Policy Order were applicable to such imports where Bill of Lading and Letter of Credit were established prior to issuance of amending order

Bill of Lading was subsequent in time to amendment in Import Policy, whereby, age limit of vehicle in question was restricted to five years and it was only on basis of Standby Letter of Credit that plaintiff sought relief

No protection was provided to any Standby Letter of Credit but only to Letters of Credit which were dealt with differently in banking industry

Matter of shipment was a private arrangement between plaintiff and supplier and once an amendment was in the knowledge, then there was no need to complete transaction

Supplier could have been requested not to make any shipment as there was enough time to withhold such shipments

No vested right existed as claimed by the plaintiff/importer

Bill of Lading in question did not involve banks in question which was normally a must in shipment affected on basis of irrevocable Letter of Credit

Goods Declaration in column of terms of payment stated that it was on collection of documents basis which was again contrary to terms of payment involved in imports through Letter of Credit

High Court declined to interfere in the matter as benefit of para 4 of Import Policy Order was not available to plaintiff

Application was dismissed in circumstances.

Letter of Credit was a transaction between two banks dependent on the documents and the words in the contract as well as Letter of Credit

If the documents were in order and as per the Letter of Credit, the corresponding Bank was obligated in law to honour the commitment and make payment to the beneficiary, notwithstanding the fact that any defective goods were shipped

Banks dealt with documents and not goods

In the present case, on the first date when suit was brought before the court, honouring of the Letter of Credit was not stopped or disturbed; rather as an ad-interim measure, the bank was directed to honour and encash the Letter of Credit; however instead of paying it to the defendant, it was directed to deposit the same with the Nazir of the Court and such order was complied with and thereafter the amount available with the Nazir was retained by him for the ultimate beneficiary

Objection of the defendant that the order passed by Court would be against international commitments was not valid inasmuch as the banking transaction had been completed and now the dispute was between the plaintiff and defendant i.e. two private contracting parties.

Plaintiff sought restraining order against the bank from honouring the Letter of Credit and releasing the amount in favour of defendant on the ground that the goods supplied by the defendant did not correspond with the description

Held; that the plaintiff had annexed photographs of supplied products and a cursory look supported the contention of plaintiff that at least the description mentioned on the import documents including Letter of Credit, pro forma invoice and bill of lading should have been mentioned on the goods or their outer packing

Goods in question were not what they were described in the Letter of Credit and the shipping documents

Plaintiff had made out a case for an injunctive relief and balance of convenience was also in its favour, whereas, if the injunction was refused, the plaintiff would suffer irreparable loss and injury as the defendant did not reside within the territorial jurisdiction of the Court and if the amount of Letter of Credit was released, then ultimately if the suit was decreed in favour of plaintiff, the execution would be an exercise in futility

Application for grant of interim injunction was allowed.

Law relating to letters of credit was founded on two principles: (i) autonomy of credit; and (ii) doctrine of strict performance

According to first principle, credit was separate and independent from underline contract of sale or other transaction; second principle was that Bank was entitled to reject documents which did not strictly conform with terms of credit

Only case in which Bank could refuse to pay under letter of credit was where it was proved to its satisfaction that documents were fraudulent and beneficiary/seller was involved in fraud

Bank issuing or confirming letter of credit was not concerned with underline contract between buyer and seller

Obligations of Bank under a letter of credit were created by document itself

Bank was subject to limitations which were given or imposed by provisions in letter of credit

High Court declined to interfere in order passed by Trial Court, as documents on record did not make a prima facie view that fraud was committed by respondent.

Such letter could not be manipulated for back-dated as a number of formalities had to be met before Bank would issue such letter.

Such transaction would attract Articles of International Chamber of Commerce Uniform Rules for Union Rules for Collections, 1995. Revision, ICC Publication No.522

Obligations of Bank in transaction under Irrevocable Letter of Credit stated.

S. 5?Letter of credit?Term, explained?[Words and phrases].

Australasia Bank Ltd. v. M. Abdullah and others P L D 196 Lah. 67 and Halsbury's Laws of England, 4th Edn., Vol. III, Art. 131 re

Letter of Credit Definition and types of Contract between issuing banker and paying or negotiating banker-Relationship partly that of principal and principal and partly of principal and agent-Contract between paying banker and beneficiary-Depends upon terms in which paying banker's promise to pay is couched.

Letter of Credit Bank to comply strictly with terms of agreement in regard to opening of Letters of Credit.