Holding

A bank issuing an irrevocable letter of credit is entitled to refuse payment and recall sums paid under reserve when the presented documents do not strictly comply, and courts should not grant injunctions restraining such banking functions.

Summary

The case involved a dispute over a letter of credit issued by United Commercial Bank (UCB) for the sale of mustard oil by Godrej Soaps Ltd. to the Bihar State Food & Civil Supplies Corporation. The seller presented documents that the bank deemed discrepant because the railway receipts described the oil as "unrefined" contrary to the credit terms, leading UCB to pay the amounts "under reserve" and later demand a refund. The seller obtained a temporary injunction restraining UCB from recalling the sums, which the High Court upheld. On appeal, the Supreme Court held that a bank issuing an irrevocable letter of credit may refuse payment and recall amounts paid under reserve when documents do not strictly comply, and that courts should not grant injunctions that interfere with such banking transactions. Consequently, the High Court's injunction was set aside and the appeal was allowed, directing the trial to proceed expeditiously.

Issues considered

Whether a court may grant an interim injunction restraining a paying bank from recalling amounts paid under reserve in a letter of credit transaction.
Whether the issuing bank is bound to honour documents that contain discrepancies and can unilaterally impose "payment under reserve".
Whether the bank must physically examine the goods or may rely solely on documentary compliance.
Whether the Supreme Court may interfere with interlocutory orders under Article 136 of the Constitution.
Whether the letter of guarantee/indemnity alters the bank's obligations under the letter of credit.

Legislation cited

Code of Civil Procedure, 1908s. Order 39 Rule 1, s. Order 39 Rule 2
Constitution of Indias. Article 136

Subjects

letter of creditpayment under reserveinterim injunctionbanking lawdocumentary creditArticle 136bank guaranteestrict compliancecommercial law

Judgment

A

300

UNITED COMMERCIAL BANK

B v.
BANK OF INDIA AND OTHERS
March 26, 1981

[A.C. GUPTA AND A.P. SEN, Jl]
c Banking law-Documents submitted by the seller of goods not in conformity
with instructions given in the letter of credit-Duties of the paying bank-Whether
bound to determine by physical examination or on expert advice if the goods
conformed to the contract-Nature and effect of letter of credit.

Practice-Payment made b.v the paying bank "under reserve" as a result of
discrepancies in the documents submitted by the seller-High Court, if could grant
D injunction restrai111i1g the paying bank from collecting the amount paid under
reserve.

Constitution of India-Article 136-Supreme Court, if would inte1fere with
interlocutory orders under Art. 136.

Words and Phrases-Payment "under reserve"-Meaning of.
E
Respondent No. 2 entered into"a contract to sell to respondent No. 3 one
thousand metric tonnes of "Sizola Brand Pure Mustard Oil" valued at approxi·
mately Rs. 86 lakhs pursuant to which the buyer opened a letter of credit with
the appellant bank. After despatching the goods to the various destinations to
which they were instructed to send, the seller presented 20 sets of documents in the
first lot and 27 sets of documents in the second, the aggregate value of which was
F equivalent to the amount of letter of credit. The appellant bank refused to make
payment "except under reserve" pointing to a discrepancy in the railway receipts
which stated "Sizola .Brand Pure Mustard Oil Unrefined" as against the descrip·.
ti on in the instructions of the letter of credit "Sizola Brand Pure Mustard Oil".
On instructions from the seller the respondent bank received the money in
respect of the first lot of 20 documents "under reserve" and credited the amount
G to their account with a specific notation that the amount was paid "under
reserve" as a result of discrepancies between the railway receipts and the instruc·
lions in the letter of credit.

In respe~t of the second lot, the appellant bank refused payment on the
ground of the discrepan~ies in the railway receipts as before as also on the ground
that some of the railway receipts were "stale".
H
In the meantime the appellant bank asked the respondent to refund the
amount paid in respect of the first lot of documents under- reserve because the
U. CO. BANK V. BANK OF INDlA 301

bills were acceptable to the buyer due to discrepancies. Some correspondence A
ensued between the parties and the banks; eventually on the faith -of an under-
taking given by the seller the appellant bank paid the remainder" 3.mount in
respect oft he 27 bills as well "under reserve 0 so that the value in respect of
both the sets of bills paid to the: sellers in two instalments was made uunder
reserve••.

The sellers filed a suit in the High Court. 8
A f:w days thereafter the appellant bank served a letter of demand on
the respondent bank for the refund of the entire amount paid to it in respect of
the two sets of bills together with inti!rest thereon because, according to it, the
bills of exchange had not been retired by the buyer for the reasons that the
railway receipts were state that the goods had not been supplied according to
the term1 of th~ agreem!nt and that chemical an1lysis of the oil showed that it
was not fit for human consumption.
c
The - respondent hank in tum wrote to the seller to refund the whole
amount \vhereupon the seller moved the High Court for the grant of an ex
parte Od interim injunction restraining the appellant bank _from recalling or
reci:iving the amount due from the respondent bank which was granted.
I D
The High Court appointed a Court receiver with power to sell the goods
without any obligation or liability to purchascrS as to their quality, quantity or
edibility. At the __ S3.Ie the seller himself bought the goods for Rs. 18 1akhs odd.
The sale was confirmed by the High Court.

The single Judge of the liigh cOurt thereupon made the temporary Injunc-
tion absolute till the disposal of the suit filed by 1he sellers on the view that the
appellant was not entitled under the termi of t..'13 letter of cr.!dit to unilaterally
E
impose a condition of the payment "under reserve'.' or refuse to pay against the
document<> tendered by the sellers merely because of the alleged discrepancies.

A Division Bench of the High Court summarily dismissed the appellant's
appeal with the result that the seller received the whole of the amount of the
~'-,.._,_Jetter of credit as welt as bought the whole lot of goods for Rs. 18.53 Iakhs.
F
' -
Oa the question whether the High Court should, in a transa~tion between
a banker and a banker, grant an injunction at the instance of the beneficiary of
an irrevocable letter of credit restrainin'g -the issuing bank from recalling the
amount paid under r""5erve from the negotiating bank acting on behalf of the
beneficiary against a document or guaranteefindemnity at the instance of the
beneficiary and (2) whether this Court could, in a matter like this, depart from
its normal practice and refuse to. interfere with an i_nterlocutory order under G
Article 136 of the Constitution.

Allowing the appeal,

HELD: J(a) The High Court was wrong in granting the temporary injunc~ •
tion restraining the appellant bank from recalling the amouD.t paid to the H
respondent bank. Courts usually refrain from granting injunction to restrain
the performance of the contractual obligations arising out of a letter of credit or a
302 SUPREME COURT REPORTS (1981) 3 S.C.R

A bank guarantee between one bank and another. If such temporary injunctions
were to be granted in a transaction between a banker and a banker, restraining a
bank from recalling the amount due when payment is made under reserve to
another bank or in terms of the letter of guarantee or credit executed by it, the
whole banking system in the country would fail. [329 F, 324B-C]

(b) In the instant case the appellant bank was under a duty to its constitu-
B ent to scrutinise the documents and could not be compelled to make payment
particularly when the description in the document did not tally with that in the
letter of credit. It was fully entitled to exercise its judgment for its own pro-
tection. Instead of asking the buyers to change the description of the goods in
the letter of credit the sellers sought to get over the irregularity by instructing the
bankers to execute a letter of guarantee or indemnity. [325 G-H]

c (c) The appellant bank knew little or nothing about the mustard oil. Its
ciuty was not to go out and determine by physical examination of the consign-
ments, or employment of experts, whether the goods actually conformed to the
contract between the buyer and the seller, nor even determine either from its own
or expert advice whether the documents called for the goods whic:1 the buyer
would be bound to accept. [326 C-D]

2(a) Bank issuing or confirming a letter of credit is not concerned with the
D underlying contract between the buyer and seller. The duties of a bank under a
letter of credit are created by the document itself; in any case it has the power and
is subject to the limitations which are given or imposed by it, in the absence of
the appropriate provisions in the letter of credit. [319 B-C]

(bJ The opening of a confirmed letter of credit constitutes a bargain between
the banker and the seller of the goods which imposes on the banker an absolute
obligation to pay. The banker is not bound or entitled to honour the bills of
exchange drawn by the seller unless they and such accompanying documents as
may be required thereunder, are in exact compliance with the terms of the credit.
Such documents must be scrutinised with meticulous care.' If the seller has
complied with the terms of the letter of credit, however, there is an absolute
obligation upon the banker to pay irrespective of any disputes between the buyer
and the seller whether the goods are upto the contract or not. [317 C-D]
F Tarapore and Co., Madras v. Tractors Export, Moscow and Anr. [1969] 2
S.C.R. 920 applied.

Hamzeh Malas and Sons v. British Imex Industries Lid. [1958] 2 Q.B. 127
and Urguhart Lindsay and Co. Ltd. v. Eastern Bank Lid. [1922] 1 K.B. 318,
referred to.

G (c) The refusal of the bank to honour a bill of exchange drawn by the seller
on presentation of the proper documents constitutes a repudiation of the
contract as a whole and the sellers are entitled to damages arising from such a
breach. [317 El

(d) A letter of credit constitutes the sole contract with the banker, and the
H bank issuing the letter of credit has no concern with any question that may
arise between the seller and the purchaser of the goods, for the purchase price of
which the letter of credit was issued: [319 G]
U. CO. BANK V. BANK OF INDIA 303

(e) It is settled Jaw that in dealing with commercial letters of credit the A
documents tendered by the seller must comply with the terms of the letter of
credit, and the banker owes a duty to the bllyer to enmre. that his instructions
relative to the do;uments against which the letter of credit is to be honoured are
complied with. [322 DJ

(f) A payment under reserve is understood in banking transactions to mean B
that the recipient of money may not deem it as his own but mu5t be prepared to
return it. on demand. The balance of convenience clearly lies in allowing the
normal banking transactions to go forward. The sellers have failed to establish ·
that they would be put to an irreparable loss unless aJ> interim injunction was
granted. [329 B-C)

English ,Scottish and Australian Bank Ltd. v. Bank of South Africa [1922) 12
Ll.L. Rep. 21 st. 24, E1uitable Trust Co. of New York v. Dawson Partners Ltd.
c
[1927] 27 Ll.L. Rep. 49, Rayner v. Hambros Bank Ltd. [1943) 1 K.B. 37, Bank
Melli Iran v. Barclays Bank [1951] 2 Ll.L. Rep. 367, Lamborn v. Lake Shore
Banking Co. [1921] 196 App. Div, 504 at p. 507; 188 NYS 162 at p. 164 and
Laudisi v. American Exchange National Bank [1924] 239 NYS 234 ; 146 N.E. 347
at 348 referred to.
D
3(a) The powers of this Court under Article 136 of the Constitution though
untrammelled, are subject to self-ordainerd restrictions. The Court does not, as a
matter of rule, interfere with interlocutory orders, save under very exceptional
circumstances. [327 HJ

(b) In the instant case there was no justific1tion for the High Court to grant E
a temporary injunction under order 39 rules l and 2 of C.P.C. to the sellers, the
effect of whkh virtually was to restrain a transaction between a banker and a
banker. Courts view with disfavour the grant of such temporary injunction. The
High Court has prejudged the whole issue by holding that the appellant could not
unilaterally impose the conditions of payment 'under reserve' nor was it justified
in holding that the documents were 'clean'. [328 BJ
F
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 132 of 1980.

Appeal by Special Leave from the Judgment and Order dated
17.10.79 of the High Court of Bombay in Appeal No. 382 of 1979
in Suit No. 1028/78.
G
P.S. Narim::m, P.H. Parekh, K.R. Modi, R.A. Kapadia, Raian
Karnjawala and M.H. Shah for the Appellant.

K.K. Venugopal, Vinay Bhasin, Rakesh Sahani, Vineet Kumar,
G.E. Vahanvati and S.J. Thacker for Respondent No. 1. H
304 SUPREME COURT REPORTS [J 981] 3 S.C.R.

A Soli J. Sorabjee, E.J. Ba/sara, S. Ganes//, Narain and P.H. Amin
for Respondent No.2 .

Lal Narain Sinha, Attorney General of India, Ram Ba/c<k
Mahto and B.P. Singh for Respondent No. 3. "'(

B The Judgment of the Court was delivered by

SEN, J. This appeal by special leave is from an order of the
Bombay High Court dated August 24, 1979, granting a temporary
injunction restraining the appellant, the United Commercial Bank.
By this order the appellant has been restrained from making a recall
c of a sum of Rs. 85,84,456 paid by it under reserve against the
relative bills of exchange drawn against the letter of credit issued by
it, from respondent No. l, the Bank of India, and in terms of
the Jetter of guarantee or indemnity executed by that Bank, in a suit
based on a bankers' letter of credit.

D The facts are somewhat complicated, but it is necessary to
disentangle the facts to bring out the point of law involved.

The respondent No. 2, Messrs Godrej Soaps Limited, herein-
after referred to as 'the plaintiffs', by a contract dated February 2,
1978 agreed to supply to the respondent No. 3, the Biliar State Food
E and Civil Supplies Corporation Limited, hereinafter referred to
as 'the Bihar Corporation', one thousand metric tonnes of 'Sizola
Brand pure Mustard oil' the total value of which was apprpximately
Rs. 86 lacs, packed in brand new leakproof 62,040 tins of net 16
kg. each at the rate of Rs. 13 7 per tin. The contract provided
inter alia that the Bihar Corporation were to open a letter of credit
F with the appellant, the United Commercial Bank, for the said
amount, which the Bihar Corporation_ duly did. (

The letter of credit issued by the appellant was in the following
i
terms:

G United Commercial Bank
Nariman Point Branch
United Commercial Bank
Frazer Road, Patna Branch, 13th June, 1978.
Office :
H
Malbourne Road,
Calcutta-I.
u. co. BANK v. BANK OF INDIA (Sen, J.) 305

To
M/s Godrej Soaps Ltd., A
Eastern Express Highway,
y Vikhroli, Bombay 400 079.
Dear Sirs,
B
LETTER OF CREDIT No. 1/78

At the request of Bihar State Food & Civil Supplies
Corpn. Ltd., Patna, we hereby establish our confirmed
irrevocable Letter of Credit in favour of your good self for
account of Messrs Bihar State Food & Civil Supplies
Corpn. Ltd., East Boring Road, Patna, for any sum or c
sums not exceeding in all Rs. 86,00,000 (say Rupees
eighty six lakhs only) outstanding at anyone time available
by your drafts at sight drawn on Messrs Bihar State Food
& Civil Supplies Corpn. Ltd. without recourse to drawers
for full invoice value of merchandise to be described in the
invoice as : 62040 tins of Sizola Brand Pure Mustard Oil
D
packed in brand new leak proof tins of net 16 kgs. each@
Rs. · 137 (Rupees one hundred thirty seven only) per tin.
Despatched from Bombay accompanied by the following
documents:
E
(i) -Signed detailed invoices in duplicate.

(ii) Railway Receipts consigned to or endorsed in favour of
UNITED COMMERCIAL BANK marked 'FREIGHT/
TO PAY' evidencing despatch by Railway of the mer-
chandise as stated above.
F
Signed Delivery order on your godown at ......
fvg. United Commercial Bank covering the delivery of
the above-mentioned merchandise.

(iii) Insurance Policies or Certificate covering usual transit
risks and rail issued in duplicate and endorsed in G
blank by Transit Insurance at the cost of openers not
exceeding one per cent of value of goods to be effected
by beneficiary and to be included in the invoice.

Railway Receipt/Delivery order must be dated not later than H
13.7.1978.
306 SUPREME COURT REPORTS [1981] 3 S.C.R

A Bills of Exchange must be dated and negotiated not later than
20.7. 1978.

sd. Accountant sd. Manager.

The schedule annexed specified the various destinations to
B which the goods were to be despatched.

Between June 22, 1978 and June 26, 1978, the plaintiffs from
time to time despatched an aggregate of 24,400 tins of their mustard
oil by invoices bearing Nos. 4501 to 4520 of the aggregate value of
Rs. 36,52,960 to various destinations mentioned in the schedule an-
c nexed to the letter of credit. Between June 17 to July I, 1978 the
plaintiffs further despatched an aggregate of 23,080 tills of the said
goods covered by invoices Nos. 4521 to 4539 of the aggregate value
of Rs. 34,70,312 on July 7 and 8, 1978 the plaintiffs also despat-
ched an aggregate of 10,560 tins covered by invoices Nos. 4540 to
4547 of the aggregate value of Rs. 14,61,184.
D
The plaintiffs presented the documents for payment of
Rs. 85,84,456 in two lots. There were twenty sets of documents in
the first lot, the total value of which was Rs. 36,52,960, the second
lot in 27 sets of the total value of Rs. 49,31,496. The first lot con-
E sisted of four sets of the value of Rs. 7.30 lacs, seven sets of Rs.
12.78 lacs, five sets of Rs. 9.13 lacs and four sets worth Rs. 7.30
lacs, the second of 27 sets, consisting of 19 sets of Rs. 34.17 lacs
and 8 sets of Rs. 14.16 lacs. It is these two lots of documents which
are the subject matter of the suit.

F When the documents were presented by the plaintiffs for
payment of Rs. 36, 52,960 against the first lot of 20 sets, and
Rs. 49,31,496 against the second lot in 27 sets, the appellant, United
Commercial Bank refused to make payment 'except under reserve'
on the ground of 'discrepancies'. The main discrepancy was that
the goods were described in the railway receipts as "Sizola Brand
G Pure Mustard Oil 'Unrefined"'. The plaintiffs accordingly instructed
their bankers, the Bank of India, to accept payment of Rs. 36,52,960
against the first lot of documents 'under reserve'. The appellant
accordingly made an aggregate payment of Rs. 36,52,960 to
the Bank of India, that is, the negotiating bank, by three cheques
H of Rs. 7,30,502, Rs. 12, 78,636 and Rs. 16,43,832. It is significant
to note that Bank of India in their turn credited the account of the
plaintiffs, who were their constituents, alio 'under reserve', with a

•
u. co. BANK v. BANK OF INDIA (Sen, J.) 307

specific notation that 'it was paid under reserve on account of discre· A
pancies'.

As regards the second lot comprising of 27 sets of documents,
19 sets were presented by the plaintiffs on July 3, 1978, with sight
drafts of Rs. 1,82,648 each along with bills of exchange together B
with the relevant documents. On July 5, 1978 the appellant addres-
sed a letter to the plaintiffs refusing to make any payment under
the letter of credit due to 'discrepancies' as well as some of the
railway receipts being 'stale'. It was clearly stated by the appellant
"We are unable to negotiate the documents and are returning the
same to you. However, if you so desire, we shall send the documents c
on collection basis and shall remit the amount to you on receipt of
proceeds". Admittedly, the discrepancies remained till July 12,
1978 as the description of goods in the railway receipts still remain-
ed "Sizola Brand Pure Mustard Oil 'Unrefined"' till the plaintiffs
made a request to the Central Railways for the deletion of the word
'Unrefined'. D
On July 12, 1978 the appellant addressed a letter to the Bank
of India making a demand for the refund of the amount of
Rs.36,52,960 paid under reserve in respect of the first lot of documents
stating "In this connection we wish to state that we are now advised
by our Patna Office that the bills are not acceptable to the Corpora- E
tion due to discrepancies. We shall therefore, thank you if you kindly
remit the amount with interest at 5 per cent from the date of pay-
ment to you by us to the date of payment by you to us." On the
same day, the appellant addressed a letter to the plaintiffs in regard
to the second lot of 27 documents that the documents were not
acceptable due to discrepancies and, therefore, no payment could be F
made against them under the letter of credit. On the next day, i.e.,
July 13, 1978 the plaintiffs addressed a letter to the appellant in
respect of the first lot of 20 documents 'negotiated and paid by you
under reserve', stating that the word 'Unrefined' in the railway recei-
pts should not have been treated as a discrepancy, forwarding copies
of telegrams sent by the Central Railway to the various destinations G
deleting the word 'unrefined', with a request that the appellant may,
as regards the 27 documents of the second lot, 'negotiate the
documents and pay for the same forthwith'. On the same day, the
plaintiffs also addressed a letter to the Bihar Corporation stating
that the word 'Unrefined' had no relation to the quality but was
inserted for the purpose of paying a lower freight, and further that H
the railway authorit.ies had agreed to amend the railway receipts by
deleting the word 'Unrefined'.
308 SUPREME COURT REPORTS. [1981] 3 S.C.R.

A On July 13, 1978 the plaintiffs addressed the following letter to
their bankers, the Bank of India :

..' (
July 13, 1978.
Bank of India,
B Foreign Exchange Dept.,
Mahatma Gandhi Road,
Bombay 400 023.
Attn: MR. SJRUR

Dear Sirs.
c
19 documents for Rs. 1,92,648 each drawn under
L/C No. 1/78 dated 13.6.1978 of United Commercial
Bank Patna Office.

We are enclosing 19 documents as referred to above -
D and request you to forward the same to the United
Commercial Bank, Nariman Point, Bombay for negotiations
of payment.

We request you to collect these funds forthwith and
credit our Cash-Credit Account No.I with you.
E
We have complied with all the terms and conditions of
the Letter of Credit and feel that United Commercial Bank
would make the payment to you without reserve.
You may accept the payment under reserve if insisted upon
by them.
F
Asst.Financial Controller

The Bank of India accordingly wrote letter to the appellant
stating "we would accept payment under reserve". On July 14, 1978
the appellant addressed a letter to the Bank of India returning
G the 27 documents relating to the second Jot signifying their inability
to negotiate the documents due to discrepancies in the description
of goods in the railway receipts, stating that mere deletion of the
word 'Unrefined' could not make the railway receipts clean, and
furthermore, because some of the railway receipts were 'stale'. It also
H intimated the plaintiffs by their letter of even date that they could
lift the 'reserve' without obtaining prior permission of their
constituents i.e. the Bibar Corporation.
u. co. BANK v. BANK OF INDIA (Sen, J.) 309

The plaintiffs, being apprehensive that their bankers, the A
Bank of India, would be bound to refund Rs.36.52 lacs pursuant to
the notice of demand served by the appellant inasmuch as the
payment was made under reserve, kept a plaint ready on July 17,
1978 for grant of a perpetual injunction against the appellant, and
on the same day addressed a letter to the appellant asking for
payment of Rs.49,31,496 against the second lot of documents, B
enclosing a letter of guarantee or indemnity executed by their
bankers, which reads :

Date July 17,1978
United Commercial Bank,
Nariman Point,
Bombay 400021. c
Attn : Mr.P.K. Sharma

Dear Sirs,

Letter of Credit No. I /78 of your Patna Office
dated 13.6. 78-Two sets, each containing 19 & 8 D
,1egotiable documents.

We are in receipt of your )etters bearing No. Fex/Exp/78
dated 12.7.78 and 14.7.78 on the above subject.

We refer to our submission of 19 documents through our E
bankers, Bank of India and 8 documents submitted directly
by us to you for negotiation and payment. We learnt
from you that you have returned the set of 19 documents
to Bank of India pointing out certain discrepancies in
the documents to them. The set of 8 documents has been
\
returned to us by you stating certain discrepancies under F
l cover of your letter Fex/Exp/GSR/78 dated 12.7.78.

One of the discrepancies pointed out by you in both
the sets of documents ( 19 & 8 ) is regarding the appearance
of the word 'unrefined' in the railway receipts, as the same G
. word does not appear in the Letter of Credit along with the
words "Sizola Brand Pure Mustard Oil". Out of abundant
precaution, we then obtained and gave you copies of
telegrams issued by the Central Railway to the Station
Masters of the various destination stations, to which the H
goods were booked, to the effect that the word "unrefined"
is superfluous and, therefore, deleted. You have taken
310 SUPREME COURT REPORTS (1981] 3 S.C.R.

A the stand that by this action of the Central Railway also
the documents still does not continue to be in accordance
with the letter of credit.

· Out of abundant precaution, we are now submitting
herewith the railway receipt returned by you wherein the
B word "unrefined" has been physically deleted by the railway
authorities.

We are also enclosing a letter of undertaking which is
J letter of undertaking issued by our bankers, the Bank of
India, in your name indemnifying you against demurrage,
c wharfage and such other charges which you may have to
pay at various destinations, where the goods have been
consigned. This action of ours is without prejudice to any
of our rights and contentions.

We now request you to Pay for these documents
D forthwith.
Director.

The Bank of India executed a letter of indemnity or
guarantee to the effect :
Bank of India
E 70/80, M.G.Road
Bombay-400023.
United Commercial Bank, 18th July, I 978.
Mafatlal Centre,
Nariman Point Branch,
Bombay.
F
Dear Sirs, ,
In consideration of your having negotiated Documentary 1
Bills of Exchange drawn by Godrej Soaps Ltd., drawn on
Bihar State Food & Civil Supplies Corpn. dated (various
dates) under the commercial letter of credit. No. L/C 1/78
G dt.13. 6.78 issued by United Commercial Bank, Frazer Road
Branch for account of Bihar State Food and Civil Supplies
Corpn., We hereby 'unconditionally' agree to hold you
harmless and indemnified for all consequences of non-
acceptance and/or non/payment of t_his/these bill (s)
H exchange by reason of the following discrepancies claims
by you:
u. co. BANK v. BANK OF !NOIA (Sen, J.) 311

A
We have made arrangements for due payment of this/
these bill (s).

We further unconditionally agree that in the event of
the bills being dishonoured on due presentation on account
of the above discrepancies claimed by you to reimburse B
and on demand the equivalent of the above mentioned bill(s)
together with all other expenses, demurrage and all such
other charges incurred by you in connection with dishon-
oured bill (s).

Notwithstanding anything contained hereinbefore our
liability under this bond is restricted to Rs. 86,00,000
c
(Rupees Eighty Six lacs only) apart from charges enumerated
above and it will remain in force till 17.8.1978. Unless a
claim under the guarantee is made against us in writing
and received by us before that date all your rights under
the said guarantee shall be forfeited and we shall be relieved D
and discharged from all liability thereunder.

for BANK OF INDIA
sd. P. Accountant sd. P. Manager

It is significant to note that it was represented by the Bank of E
India acting on behalf of the plaintiffs,"We have made arrangements
for the payment of these bills", meaning thereby that the Bihar
Corporation had agreed to retire the bills of exchange.

On July 19, 1978 the representative of the plaintiffs, Messrs
Godrej Soaps Ltd. met the representatives of the appellant, the F
United Commercial Bank at Bombay. It was pointed out to him that
first set of 20 documents had not be~n accepted by the Bihar
Corporation due to discrepancies and that the appellant had,
therefore, by their letter dated July 12, 1978 made a demand for
refund of Rs. 36,52,960. As regards the second lot of 27 docu-
ments towards which the balance amount of Rs. 49,31,496 was G
payable to the Bank of India, in terms of the letter of indemnity
or guarantee executed by it, he was informed that the instructions
were awaited from the head office and was asked to come in the
evening on the same day. The plaintiffs on the same day, i. e., on
July 19, 1978, brought the suit in the Original Side of the Bombay H
High Court alongwith an application for the grant of a temporary
injunction to restrain the appellant from recalling the amount of
312 SUPREME COURT REPORTS (1981] 3 S.C.R.

A Rs. 36,52,960 but the learned Single Judge, Bharucha J.,
declined to grant an ex parte ad interim injunction, while
allowing liberty to the plaintiffs to take out notice of motion
returnable on August 4, 1978 but it appears that no such notice
was ever taken out.

B When the appellant came to know of the suit, the plaintiff's
representative made an endorsement at the foot of the letter dated
July 17, 1978:

As per Mr. Sharma's talk with Mr.K.R. Gokulam we
hereby undertake not to proceed with this suit.
c sd.R.V. Shekar
19.7 1978

On the faith of the undertaking the appellant made payment
of Rs.49,31,496 to the Bank of India in terms of the letter of
indemnity.
D
There is controversy between the parties as to what transpired "
before the payment of Rs.49,31,496 and as to the meaning of the
aforesaid endorsement. We refrain from making any observations
as they would tend to prejudice the rights of the parties. But one
thing is clear that R. V. Shekar, Assi~tant Financial Controller,
E Godrej Soaps was acting on behalf of the plaintiffs, and the word
'we' meant Messrs. Godrej Soaps Limited'. Further, that
payment was secured by making the endorsment.

The Bank of India addressed two letters dated July 20,1978
to the plaintiffs, that their account had been credited with
F Rs. 34,70,312 and Rs. 14,61,184 i.e., Rs. 49,31,496 representing the
value of the second lot of 27 documents, 'under reserve'.

From the narration of these facts, prima facie it appears that
the payment of Rs. 36,52,960 against the first lot of 20 documents
made by the appellant to the Bank of India, was a payment made
G 'under reserve' and that of Rs. 49, 31,496 was also made 'under
reserve' as well as against the letter of guarantee or indemnity
executed by it.

On August 2, 1978 the appellant served a letter of demand
on the Bank of India, for refund of Rs. 85,84,456 together with
H
interest thereon at 15% per annum from the date of payment by it
to th date of refund, stating that the bills of exchange had not
u. co. BANK v. BANK OF INDIA (Sen, J.) 313

been retired by the Bihar Corporation, that is the buyers, due to A
discrepancies. The letter reads :
y Fex/exp/ I 1I0/78 2nd August, 1978
Bank of India
70/80 M.G. Road, Bombay 400 023.
B
Attn: Mr. PUDV AL, Manager (Advance)

Dear Sirs,
Re: Your Guarantee Re. C/72/943 .dated 18th July 1978
in our favour for Rs.86.00,000 Document drawn by M/s
Godrej Soaps Ltd., under our Frazer Road, Patna Branch
L/C I /78 dated 13.6.1978-negotiated by us under reserve.
·~.
Please refer to our letter No. 646/78 dated !st August,
1978.
Jn this connection we are now advised by our Patna
Office that the bills have not been accepted by the drawees, D
Bihar State Food & Civil Supplies Corporation Limited due
to /he discrepancies. Our Patna Office is, therefore, arranging
to return the documents to us which we hereby undertake
to forward to you when received.

In terms of your Guarantee No. 8/72/943 dated 18th E
July 1978 tor Rs. 86,00,000 and in terms of our letters
date 24.6.1978, 27.6.1978 and 28.6.1978 and two letters
of 19.7.1978, under cover of which we had made payment
of the bills to you, we hereby call upon you to refund to
us the amount of bills viz. Rs. 85,84,456 (Rupees Eighty
five lacs eighty four thousand four hundred and fifty six) F
together with interest from the date of payment by us to
you to the date of refund by you to us@ 15%per annum.

In the meantime, please note that the documents are
held by us at your sole risk and responsibility. You may, if
G
you so desire protect the merchandise including keeping
insurance covernote valid.

Please treat this as MOST URGENT. H
sd ......... Manager
314 · SUPREME COURT REPORTS [1981] 3 s.c.R

A The 47 Notary's protest Certificates show that when the bills
of exchange were re-presented for payment to the Bihar Corporation
on August 2, 1978 the drawees dishonoured the bills of exchange
on August 3, 1978 for the reason that (1) the railway receipts
accompanying the bills were 'stale', (2) the goods had not been
supplied as per the terms of agreement, and (3) the chemical analysis
B showed that the oil required refinement before being fit for
human use,.

The Bank of India accordingly addressed a letter to the
plaintiffs on the next day i.e. August 4, 1978 giving intimation that
the appellant by its letter dated August 2, 1978 had made a demand
c for refund of the amount of Rs. 85,84,456 paid under reserve
and in terms of its letter of guarantee or indemnity, seeking their
b_'instructions' in the matter. On August 6, 1978 which was a Sunday,
-the plaintiffs moved learned Single Judge at his residence, alongwith
an affidavit of their Sales Manager stating that unless an injunction
was granted the Bank of India, according to the banking practice,
D would make payment of Rs. 85,84,456/- to the appellant, on the
-commencement of the banking hours on August 7, 1978. The
·learned · Single Judge granted an ex-parte ad interim injunction
restraining the appellant from recalling or receiving the amount
due from the Bank of India.

E On December 17, 1978, the learned Single Judge appointed the
Court receiver to be the ad interim receiver with power to sell the
goods in question eithet in one lot or separate lots, on 'as is where is
basis', without any obligation or liability to purchasers thereof as to
quality, quantity or edibility of the said goods. On March 27, 1979
the Court receiver accepted the offer of the plaintiffs to ouy the goods
F for Rs. 18,53,000 and the sale was confirmed by the High Court
on April 4, 1979.

The learned Single Judge by his order dated August 24, 1979
made the temporary injunction absolute till the disposal of the suit on
the view that the appellant was not entitled under the terms of the
G letter of credit, to unilaterally impose the condition of payment 'under
reserve' or refuse to pay against the documents tendered by the
plaintiffs merely because of the alleged discrepancies, nor was it open
to it to reject the documents as stale, for in his view, there were in-
deed no stale documents. Upon these grounds, he held that the
H plaintiffs had aprimafacie case. He, however, added a rider that (1)
the- Bank of India was left free to decide whether or not the condi-
tions for payment under the letter of indemnity had been satisfied so
u. co. BANK v. BANK OF INDIA (Sen, J.) 315

as to justify the making of payment thereunder to the appellant, and A
(2) the appellant was not restrained from making a claim upon the
Bank of India or from receiving from it the amount payable in terms
of the letter of indemnity nor was the Bank of India restrained from
making payment thereunder.
The appellant being aggrieved by the order of the learned Single B
Judge dated August 24, 1979 preferred an appeal but a Division
Bench of the High Court summarily dismissed the appeal on October
17, 1979.
The result of all this has been that the plaintiffs have not only
received Rs. 85,84,456 towards the price of 1000 metric tonnes of
'Sizola Brand Pure Mustard Oil', but also have the mustard oil in c
question on payment of Rs. 18,53,000.
The repercussions arising from the learned Single Judge's order
dated August 24, 1979 are reflected in the correspondence that ensued
between the parties. There is no need to refer to all the letters
except a few. The plaintiffs by their solicitor's letter dated August D
29, 1979, drew the attention of the Bank of India to the learned
Single Judge's order granting injunction, and 'instructed' it not to
pay. It reads :
The said interim order makes it absolutely clear that
our clients will in no way be liable and responsible to return
the amounts received under reserve and therefore our E
clients are in no way liable to pay any sum to UCO Bank
and therefore you are also not liable ~at present to pay
any sum to UCO Bank under the said letter of indemnity.
In the circumstances, it will not only be improper but
illegal for you to make any payment to UCO Bank.
F
In the circumstances, we have been instructed by our
clients to request you which we hereby do not to make
any payment to UCO Bank. In spite of what is stated
herein, if any payment is made by you to UCO B~nk, the
same will not be binding on our clients and you will not be G
entitled to debit such amount to our clients current
account with you and our clients will refuse to reimburse
you any sum so wrongfully paid by you. Please note that
if any payment is made by you, it will be entirely at your
risk and peril.
H
The appellant by its letter dated August 31, 1979 addressed to the
Bank of India made a demand for payment of Rs. 85,84,456 in
316 SUPREME COURT REPORTS [1981] 3 S.C.R.

A terms of the letter of guarantee or indemnity. But this was of not
avail since the Bank of India as instructed by the plaintiffs, sent a
letter dated October 16, 1979 to the appellant, by which it referred
to the order passed by the learned Single Judge, and refused to make
any payment, stating :

B In its order dated 24th August, 1979 the Court has
stated that there is no provision regarding staleness of the
Railway Receipts in the letter of Credit and it is not open
to Bihar Food Corporation to recall the payments made on
that ground. Further, it is stated in the said order that
'the protests made upon dishonour of the bills b)' these
c second defendants show that no discrepancy was made a
ground of dishonour.

Having regard to the observatio.ns in the order of the
Court, it cannot be said that the Bills were dishonoured on
the presentation on account of the discrepancies. Further,
D the bills do not appear to have been duly presented.

We understand that you have not appealed against
this order. In view of the aforesaid observations in the
said order dated 24th August, 1979 the terms of the
indemnity cannot be said to have been complied with so as
E to enable us to make payment to you.

The Bank of India went on to say that in the circumstances set out
above, it had been advised that it was not proper for it to make any
payment under the letter of guarantee to the appellant unless it was
established in proper proceedings that the terms of the mandate had
F been complied with so as to entitle it to receive payment and to
enable the Bank of India to make payment to it. This was contrary --(
to its earlier stand taken in the affidavit filed in June, 1979, in
opposition to the notice of motion, by whk:h it denied that 'it was
trying to wriggle out of its obligations' under the letter of guarantee
or indemnity and by which it said that it 'submits to the order of
G the Court'.
The main point in controvery is: Whether the Court should
in a transaction between a banker and a banker grant an injunction,
at the instance of the beneficiary of an irrevocable letter of credit, re-
H straining the issuing bank from recalling the amount paid under
reserve from the negotiating bank, acting on behalf of the beneficiary
against a docwmeot of i:uarantee/indemnity at the instance of the
u. co. BANK v. BANK OF INDIA (Sen, J) 317

beneficiary ? Another question also arises as to whether the Court A
should not in a matter like this, depart from its normal practice, and
refuse to interfere with an interlocutory order under Art. 136 of the
Y Constitution.

The nature of the contractual obligations flowing from a
banker's letter of irrevocable credit and more particularly, the B
rights of the seller as the accredited party or beneficiary of the credit,
against the is>uing and drawee bank was dealt with by this Court in
Tarapore and Co. Madras v. Tractors Export, Moscow and Anr.(1)
It was held that the opening of a confirmed letter of credit consti-
tutes a bargain between the banker and the seller of the goods which
imposes on the banker an absolute obligation to pay. It was. how- c
ever, pointed out relying on a passage in "Chalmers' Bills of
Exchange" that it can hardly be over-emphasised that the banker is
not bound or entitled to honour the bills of exchange drawn by the
seller unless they, and such accompanying documents as may be
required thereunder, are in exact compliance with the terms of the
credit'. Such documents must be scrutinised with meticulous care. D
If the seller has complied with the terms of the letter of credit,
however, there is an absolute obligation upon the banker to pay irres-
pective of any disputes there may be between the buyer and the seller
as to whether the goods are up to contract or not. The Court relied
upon the two decisions in Hamzeh Malas and Sons v. British Imex
Industries Ltd.(2 ) and Urguhart Dnds:iy and Co. Ltd. v. E:istern E
Bank Ltd.( 3) and observed at p. 930 of the Report, that the refusal
of the bank to honour the bills of exchange drawn by the seller on
presentation of the proper documents constituted a repudiation of
the contract as a whole, and the sellers were entitled to damages
arising from such a breach.
F
In Stein v. Hambro' s Bank of Northern Commerce( 4 ) a contract for
the sale of hides by an English seller to a buyer from Venice, to be
shipped from India, was financed by an irrevocable letter of credit.
The buyer, contending that a condition had not been met, instructed
the bank to cancel the credit and to refuse acceptance, which was
accordingly done. In an action by the seller against the issuing G
bank it was held that there had been a breach of the letter of credit
contract and that the seller could recover the amount of the bill of

(1) [1969] 2 S.C.R. 920.
(2) [1958] 2 Q.B. 127. H
(3) [ l922] I K.B. 318.
(4) [1921] 9 Ll.L. 433, rev. [1922] 10 Ll.L. Rep. 529 (CA).
318 SUPREME COURT REPORTS [1981] 3 S.C.R.

A exchange for which acceptance was refused. The case was concerned
chiefly with the question of the measure of damages. The right of
the seller to maintain the action, if the conditions had been met,
seems to have been assumed without discussion. The theory under-
lying this result is that the issuing bank is not concerned with the
sales contract at all. Rowlatt J. said :
B
The obligation of the bank is absolute, and is meant to
be absolute, that when the documents are presented they
have to accept the bill. That Lis the commercial meaning
ofit.

c The fulfilment of the terms of the sales contract is a matter for the
seller and the buyer alone.

In Urguhart, Lindsay and Co. Ltd. v. Eastern Bank Ltd. (supra)
Rowlatt J. held that the position of the banker under an irrevocable
credit is in law the same as that of a person who has contracted to
D buy a shipping document representing the goods shipped, or to
be shipped, under the contract between the beneficiary and the
person at whose instance the credit has been issued. The credit in
this case was opened in pursuance of a contract between Urguhart,
Linsday and Co. and Benjamin Jute Mills, by which the former were
to manufacture certain machinery and deliver it f.o.b. Glasgow, for
E shipment to Calcutta. Two instalments of the machinery were
manufactured and shipped and duly paid for by the bank. A third
instalment was also manufactured and shipped, but the bank in this
case refused to take up the shipping documents and honour the draft
on the ground that items for extra cost of labour were included in
the invoice price of the goods and that the bank had been instructed
F by Benjamin Jute Mills to refuse payment in those circumstances.
Rowlatt J. held that in such a case, the banker must accept and pay
for the documents irrespective of any defence which there may be to
a claim under the contract of sale and that such defence is solely a
matter to be fought out between the buyer and the seller.
G
In Gutteridge and Megrah's Law of Bankers' Commercial
Credits, Sixth Edn. p. 21, the nature of the obligation created by a
banker's commercial credit is succinctly stated. A seller of goods
relying on such an instrument believes that he has 'the direct obliga-
tion of the issuing bank running in his favour, enforceable by him
H against that bank, that it will pay his drafts if drawn in compliance
with the terms of the letter of credit'. Banks are not concerned with
u. co. BANK v. BANK OF INDIA (Sen, J.) 319

the sales contract or the goods ; if it were otherwise credit business A
would be impossible.
y
Banker's commercial credits are almost without exception
everywhere made subject to the code entitled the 'Uniform Customs
and Prnctices for Documentary Credits', by which the General
Provisions and Definitions and the Articles following are to "apply B
to all documentary credit and binding upon all parties thereto
unless expressly agreed". A banker issuing or confirming an irrevo-
cable credit usually undertakes to honour drafts negotiated,
or to reimburse in respect of drafts paid, by the paying or negotiat-
ing intermediate banker and the credit is thus in the hands of the
beneficiary binding against the banker. The credit contract is c
independent of the sales contract on which it is based, unless the
sales contract is in some measure incorporated. Unless documents
tendered under a credit are · in accordance with those for which
the credit calls and which are embodied in the terms of the paying
or negotiating bank, the beneficiary cannot claim against the paying
. bank and it is the paying bank's duty to refuse payment. D

General Provision (c) of the Uniform Customs states that :

(c) Credits, by their nature; are separate transactions
from the sales or other contracts on which they may be E
based and banks are in no way concerned with or bound by
such contracts.

and Article 8 emphasises this in providing that :
F
(a) In documenta:ry credit operations all parties con-
cerned deal in documents and not in goods.

The authorities are uniform to the effect that a letter of credit
constitutes the sole contract with the banker, and the bank issuing
the letter of credit has no concern with any question that may arise G
between the seller and the purchaser of the goods• for the purchase
price of which the letter of credit was issued. There is also no lack
of judicial authority which lay down the neceesity of strict compliance
both by the seller with the letter of credit and by the banker with
his customer's instructions. In English, Scottish and Australian
Bank Ltd. v. Bank of South Africa (1) Bailhache, J. said: H
(!) (1922] 13 Ll.L. Rep. 21 st. 24.
320 SUPREME COURT REPORTS (198 Jj 3 S.C.R.

A It is elementary to say that a person who ships in
reliance on a Jetter of credit must do so in exact compliance
with its terms. It is also elementary to say that a bank is
not bound or indeed entitled to honour drafrs presented to
it under a letter of credit unless those drafts with the
accompanying documents are in strict accord. with the
B credit as opened.

As Lord Sumner said in Equitable Trust Co. of New York v.
Dawson Partners Ltd.,(1) approving the dictum of Bailhache J. :

c It is both common ground and common sense that in
such a transaction the accepting bank can only claim indem-
nity if the conditions on which it is authorised to accept
are in the matter of the accompanying documents strictly
observed. There is no room for documents which are
almost the same, or which will do just as well. Business
could not proceed securely on any other lines.
D
In Rayner v. Hambros Bank Ltd.(2) the credit called for
documents covering a shipment of 'Coromandel groundnuts' ; the
invoice tendered was for Coromandel groundnuts, but the bill of
lading evidenced a shipment of 'machine-shelled groundnut kernels';
country of origin : British India, and Hambros Bank refused to pay
E on the ground that the letter of credit called for an invoice and bill
of lading both covering a shipment of 'Coromandel groundnuts'
whereas the bill of lading did not describe the goods in those terms,
their attitude being upheld by the Court of Appeal.

Mackinnon, L.J. after quoting Bailhache, J., in English, Scottish
F and Australian Bank Ltd. v. Bank o,f South Africa (supra) and Lord
Sumner in Equtiable Trust Co. of New York v. Dawson Partners Ltd.
(supra) laying down that a person who ships in reliance on 11; letter
of credit must do so in exact compliance with its terms, observed :

The defendant bank were told by their Danish princi-
G pals to issu~a letter of credit under which they were to
accept documents-an invoice and bills of lading-covering
''Coromandel groundnuts in bags" .. They were offered
bills of lading covering "machine-shelled groundnut
"kernels". The country of origin was stated to be British
H
(1) [1927] 27 Ll.L. Rep. 49.
(2) [1943] 1 K.B. 37.
u. co. BANK v. BANK OF INDIA (Sen, J.) 321

India. The words in that bill of lading clearly are not the A
same as those required by the letter of credit. The whole
case of the plaintiffs is, in the words of Lord Sumner, that
"they are almost the same, or they will do just as well".
The bank, if they had accepted that proposition, would
have done so at their own risk. I think on pure principle B
that the bank were entitled to refuse to accept this sight
draft on the ground that the documents tendered, to bill
of lading in particular, did not comply precisely with the
terms of the letter of credit which they had issued.

The learned Judge dealing with that part of the judgment of c
Atkinson, J., in which he said that "a sale of Coromandel ground·
nuts is universally understood to be a sale of machine-shelled
kernels", said :

When Atkinson, J., says that it is "universally under·
stood" he means that these gentlemen from Mincing Lane D
have told him : "We dealers in Mincing Lane all under-
stand these things. We understand that 'Coromandel
groundnuts' are machine-shelled kernels, and we understand
·when we see 'C.R.S.' that that means 'Coromandels'. I
think that is a perfectly impossible suggestion . . It is quite
impossible to suggest that a banker is to be affected with E
knowledge of the customs and customary terms of every
one of the thousands of trades for whose dealings he may
issue letters of credit.

In Bank Melli Iran v. Barclays Bank(1) the documents
evidencing a shipment of '100 new, good, Chevrolet trucks' were
held not to be a good tender under a credit calling for 'new'
F
trucks. Mc Nair J. held that all the documents tendered and
accepted by the defendants were defective and consequently the
defendants were not entiled to debit the plaintiff with the amount
paid against these documents, although the defendants succeeded
on the ground that the plaintiffs had by their conduct ratified the
defendant's action in accepting the documents. The dicta in American G
cases are to the' same effect. In Lamborn v. Lake Shore Banking
Co. (2) Smith J. said :

A party who is entitled to draw against a letter of
credit must strictly observe the terms and conditions under
H
(I) [l 951] 2 Ll.L. Rep. 367.
(2) (1921] 196 Appl. Div. 504 at p. 507; 188 N.Y.S. 162 at p. 164.
322 SUPREME COURT REPORTS (1981] 3 S.C.R.

A which the credit is to become available, and, if he does not,
and the bank refuses to honour his draft, he has no cause
of action against the bank.

Again, Hiscock, C. J. in L:iudisi v. American Exchange
Nationc! Bank (1) said :
B
The bank has the power and subject to the limitations
which are given and imposed by (the customer's) authority.
If it keeps within the powers conferred it is protected in the
payment of the draft. If it transgresses those limitations,
it pays at its peril.
c
The relevant authorities uniformly lay down in dealing with
commercial letters of credit that the docume:lts tendered by the
seller must comply with the terms of the letter of credit, and that
the banker owes a duty to the buyer to ensure that the buyer's
instructions relative to the documents against which the letter of
D credit is to be lron0ured are complied with. The rights of a banker
are described in Halsbury's Laws of E1gland, 4th Edn., vol.3, para
141 at p. 106 :

Unless documents tendered under a credit are in
accordance with those for which the credit calls and which
E are em bodied in the promise of the paying or negotiating
banker, the beneficiary cannot claim against the paying
banker, and it is the paying banker's duty to refuse payment.
The documents must be those called for, and not documents
which are almost the same or which will do just as well.
The banker is not called upon to know or interpret trade
F customs and terms. It has been held that where mandate
is ambiguous and a paying banker acts in a reasonable way r
in pursuance of it, he may be protected. But this general
!
rule cannot be stertched so far as to protect a banker who
pays against docliments describing goods in terms which are
similar to, but not exactly the same as, those stipulated in
G the credit.

The description of the goods in the relative bill of lading must
be the same as the description in the letter of credit, that is, the goods
themselves must in each case be described in identical terms, even
H though the goods differently described in the two documents are, in

(I) [1924] 239 N.Y. 234: 146 N.E. 347 at 348.
u. co. BANK v. BANK OF INDIA (Sen, J.) 323

fact, the same. It is the description of the goods that is all important. A
The reason for this requirement is stated in Davis' Law Relating to
Commercial Letters of Credit, 2nd Edn. p. 76 :
y
It is not only the buyer who faces the risk of dishonesty
or sharp practice on the part of the seller. For, in many
instances, the banker looks to the goods for reimbursment B
of the whole or part of the amount he pays under the letter
of credit. It is equally to his interests to ensure that
such documents are called for by the letter of credit as
will result in goods of the contract descripton being
ultimately delivered. The buyer is not compelled to enter
into the sales contract nor ,is the banker compelled to issue
the letter of credit. If either of these contracts is
c
entered into then it is for the buyer and the banker
respectively to safeguard themselves by the terms of the
contract. Otherwise they must be prepared to bear any
ensuing loss.
D
But the liability thus imposed on the issuing banker
carries with it a corresponding right that the seller shall, on
his part, comply with the terms of the letter of credit
and the seller's obligations have been construed as strictly
as those of the banker.
E
We have already referred to the statement of law in Halsbury's
Laws of England w:1ich found a place in Paget's L1w of Banking,
8th Edn. p.648, and we may at the risk of repetiton reproduce the
same, to the effect :

Unless documents tendered under a credit are in
'1·· accordance with those for which the credit calls and which
F
are embodied in the promise of the intermediary or issuing
banker, the beneficiary cannot claim against him; and it is
the banker's duty to refuse payment. The documents must
be those called for and not documents which are almost
the same or which seem to do just as well.
G

It the light of these principles, the rule is well established that
a bank issuing or confirming a letter of credit is not concerned with
the underlying contract between the buyer and seller. Duties of a H
bank under a Jetter of er.edit are created by the document itself,
but in any case it has the power and is subject to the limitations
324 SUPREME COURT REPORTS [1981] 3 s.c.R.

A which are given or imposed by it, in the absence of the appropriate
provisions in the letter of credit.

It is somewhat unfortunate that the High Court should have
granted a temporary injunction, as it has done in this case, to
restrain the appellant from making a recall of the amount of
B Rs. 85,84,456 from the Bank of India in terms of the letter of
guarantee or indemnity executed by it. The courts usually refrain from
granting injunction to re~train the performance of the contractual
obligations arising out of a letter of credit or a bank guarantee bet-
ween one bank and another. If such temporary injunctions were to be
granted in a transaction between a banker and a banker, restraining
c a bank from recall'ing the amount due when payment is made under
reserve to another bank or in terms of the letter of guarantee or
credit executed by it, the whole banking system in the country
would fail.

In view of the banker's obligation under an irrevocable letter
D of credit to pay, his buyer-customer cannot instruct him not to pay.
In Hamzeh Malas v. British lmex Industries Ltd. (1) the plaintiffs,
the buyers, applied for an injunction restraining the sellers, the
defendants, from drawing under the credit established by the buyer's
bankers. This was refused, Jenkins, LJ. stating, at p. 129, that :

E ...... the
opening of a confirmed letter of credit
constitutes a bargain between the banker and the vendor
of the goods which imposes on the banker an absolute
obligation to pay ...

and that 'this was not a case in which the Court ought to
F exercise its discretion and grant the injunction'. The same
considerations apply to a bank guarantee.
I
A letter of credit sometimes resembles and is analogous to a
contract of guarantee. In Elian and Anr v. Matsas and Ors. (')
Lord Denning, M.R., while refusing to grant an injunction stated :
G ...... a bank guarantee is very much like a letter of credit.
The courts will do their utmost to enforce it according to its
terms. They will not in the ordinary course of things,
interfere by way of injunction to prevent its due implementa-
tion. Thus they refused in Malas v. British lmex Industries
H
(I) [1958] 2 Q.B. 127.
(2) [1966] 2 LI. Rep. 495.
u. co. BONK v. BANK OF INDIA (Sen, J.) 325

Ltd. But that is not an absolute rule. Circumstances may A
arise such as to warrant interference by injunction.

A Bank which gives a peformance guarantee must honour that
guarantee according to its terms. In R.D. Harbottle (Mercantile)
Ltd. v. National Westminster Bank Ltd., (1) Kerr, J. considered the
position in principle. We would like to adopt a passage from his B
judgment at p. 761 :

It is only in exceptional cases that the courts will
interfere with the machinery of irrevocable obligations
assumed by b:1.nks. They are the life-Nood of international
-~:

commerce. Such obligations are regarded as collateral to c
the underlying rights and obligations between the mer-
chants at either end of the banking chain. Except possibly
in clear cases of fraud of which the banks have notice, the
courts will leave the merchants to settle their disputes
under the contracts by litigation or arbitration as available
to them or stipulated in the contracts. The courts are not D
concerned with their difficulties to enforce such claims; these
are risks which these merchants take. In this case the
plaintiffs took the risk of the unconditional wording of the
guarantees. The machinery and commitments of banks
are on a different level. They must be allowed to be honoured,
free from in?erference by the courts. Otherwise, trust in E
international commerce could be irreparably damaged.
(Emphasis supplied.)

The observations of Kerr, J. have been cited with approval by Lord
Denning, M. R. in Edward Owen Engineering Ltd. v. Barclays Bank
International Ltd.(2) F
The appellant was under a duty to its constituent, the Bihar
Corporation, to scrutinize the documents, and could not be com-
pelled to make payment particularly w:1e11 the description in the
documents did not tally with that in the letter of credit. It was fully
entitled to exercise its judgment for its own protection. When the G
appellant againsMhe first lot of 20 documents refused to make payment
except 'under reserve' and against the second· lot of 27 documents
even 'under reserve' the remdy of the plaintiffs was to approach the
'openers', i.e., Bihar Corporation, to instruct the appellant to effect
H
(l) [[Q77] 3 W.L.R. 752.
(2) [1977] 3 W.L.R. 764.
326 SUPREME COURT REPORTS [1981] 3 S.C.R.

A a change in the description of the goods from 'Sizola Brand Pure
Mustard Oil' to Sizola Brand Pure Mustard Oil "Unreii.1ed" in the
letter of credit. Instead of adopting that course, the irregularity
in the description in documents tendered for payment was sought to
be got over by the plaintiffs by instructing their bankers, the Bank of
India, to execute a letter of guarantee or indemnity. When the bills
B of exchange tendered to the Bihar Corporation were dishonoured
when presented on August 3, 1978, the legal consequences must
follow as between the appellant and the Bank of India. There was
the inevitable chain of events which could not be prevented by the
grant of an injunction.

c The appellant presumably knew little or nothing about mustard
oil. Bankers are not dealers in mustard oil in such a case as this,
but dealers in documents only. The appellant as the issuing bank
was presented with documents and asked to pay a very large sum of
money in exchange for them. Its duty was not to go out and
determine by physical examination of the consignments, or
D employment of experts, whether the goods actually conformed to the
contracts between the buyer and the seller, nor even determine either
from its own or expert advice whether the documents called for the
goods which the buyer would ~e bound to accept. The banker
knows only the letter of credit which is the only authority to act,
and the documents which are presented under it. If these
E documents conform to the letter of credit, he is bouncl to pay. If
not, he is equally not bound to pay. The letter of credit called for
'Sizola Brand Pure Mustard Oil' while the railway receipts carried
the description "Siloza Brand Pure Mutsard Oil 'Unrefined' " and
it was not within the province of the appellant to say that the
latter description meant identicaily the same thing as the former.
F
In an action against a purchaser for reimburseme'lt, it is only
necessary to prove that the goods tendered were the g.)ods purchased,
no matter how described, i.e., the purchaser was offered that which
he had contracted for, while in such a case as this, in an actiorr by
the beneficiary against the issuing bank, it makes no difference
G whether the goods tendered were in fact identical to the goods
purchased, the only question being : Did the documents conform to
the letter of credit ?

It is clear from the letters addressed by the appellant to the
Bank of India on June 23, 27 and 28, 1978 that the payment of
H
Rs. 36,52,960 by three cheques for Rs. 7,29,872 Rs. 12,78,536
and Rs. 16,43,833 were ·payments made under reserve. Admittedly
u. co. BANK v. BANK OF INDIA (Sen, J.) 327

when these amounts were paid by the appellant to the Bank A
of India, the railway receipts were not clean because they
contained the description "Sizola Brand Pure Mustard Oil
" Unrefined". The appellant had taken the precaution of saying
"Please note that the payment is made to you 'under reserve'
owing to the following discrepancies". There was a foot-note added:
"Please note that this payment 1s made to you subject to repayment B
on demand of the bill amount, without loss of exchange to ourselves
plus interest and other charges incurred by us, and or by our principals,
if the documents are not acceptable to the openers or buyers in view
of the discrepancies whatsoever". It was also added : "Please also
note that this 'reserve' will remain in force until released by us in
. writing". Acceptance of these amounts by the Bank of India on c
behalf of the plaintiffs was upon these terms. The Bank of India
and the plaintiffs were thus fully aware that the appellant was not
prepared to pay except 'under reserve'. The plaintiffs in their letters
addressed to the appellant dated June 22 and 23, 1978 had added
in ink the post-script : "In case of discrepancies, pay to our bankers,
Bank of India". These letters were in respect of 11 out of 20 D
documents ; it is not suggested that others stand on a different
footing. The letters conveyed a request to "negotiate the sight
drafts for payment". Thus, the payment of Rs. 36,52,96'.l
against the first lot of 20 documents was 'under reserve' and was also
covered by the letter of guarantee or indemnity.
E
As regards the second lot of 27 documents, the payment of
Rs. 49,31,496 the appellant was not prepared to pay even 'under
reserve' because the Bihar Corporation had refused to accept the
consignment on the ground int only of discrepa11cies but also
because the mustard oil was not fit for human consumption. There
was no question of th~ appellant paying this large sum of money F
except against the letter of guarantee or indemnity executed by
the Bank of India. It was represented by the Bank of India that it
had made arrangements for due payment of the bills of exchange.
When the bills of exchange were dishonoured on being presented on
August 3, 1978 the amount of Rs. 49,31,496 became immediately
-",..- repayble on demand. G
There still remains the question whether the court should
interfere with an order of this nature. The Court's powers under
ArtJ36 of Constitution are untrammelled, but they are subject to self-
ordained restrictions. The Court does not, as a matter of rule, H
interfere with interlocutory orders, save under very exceptional
circumstances.
328 SUPREME COURT REPORTS [1981] 3 S.C.R.

A The grant of a temporary injunction by the High Court under
0. 39 rr. 1 and 2 appears to be wholly unwarranted. For reasons
already stated, the appellant was within its rights in making a recall
of the amount of Rs. 85,84,456 paid 'under reserve' and/or in terms
of the letter of guarantee or indemnity. We fail to appreciate any
justification for grant of a temporary injunction to the plaintiffs, the
B effect of which virtually is to restrain a transaction between a banker
and a banker. The courts view with disfavour the grant of such
temporary injunction.
I

In the instant case, the High Court has assumed that the
plaintiff has a prima facie case. It has not touched upon the
c question where the balance of convenience lay, nor has it dealt
with the question whether or not the plaintiffs would be put to
irreparable loss if there was no injunction granted. In dealing
with the prima facie case, the High Court assumes that the appellant
was in breach. There is no basis for this assumption at all. The
High Court in this case has pre-judged the whole issue by holding
D that the appellant could not unilaterally impose the condition of
payment 'under reserve', nor was it justified in holding that the
documents were 'clean'. The question whether the appellant was in
breach is an issue to be tried in the suit. The question whether the
documents were 'clean' or 'unclean' is a vexed question on which no
opinion could be expressed at this stage. It is also premature at this
E stage to assume that there was no 'due presentation' of the bills of
exchange and their refusal.

No injunction could be granted under 0.39, rr. 1 and 2 of the
Code unless the plaintiffs establish that they had a prima facie case,
meaning thereby that there was a bona fide contention between the
F parties or a serious question to be tried. The question that must
necessarily arise is whether in the facts and circumstances of
the case, there is a prima .facie case and, if so as between whom ?
in view of the legal principles applicable, it is difficult for us to say
on the material on re1;ord that the plaintiffs have a prima facie case.
It cannot be disputed that if the suit were to be brought by the
G Bank of India, the High Court would not have granted any injunc-
tion as it. was bound by the terms of the contract. What could not
be done directly cannot be achieved indirectly in a suit brought by
the plaintiffs.
H
Even if there was a serious question to be tried, the High Court
liad to consider the: balance of convenience. We have no doubt
U •• CO. BANK V. BANK OF INDIA (Sm, J.) 329

that there is no reason to prevent the appellant from recalling the A
amount of Rs. 85,84,456. The fact remains that the payment of
y Rs. 36,52,960 against the first lot of 20 documents made by the
appellant to the Bank of India was a payment under reseve while
that of Rs. 49,31,496 was also made under reserve as well as
against the letter of guarantee or indemnity executed by it. A
payment 'under reserve' is understood in banking transactions to B
mean that the recipient of money may not deem it as his own but
must be prepared to return it on demand. The balance of con-
venience clearly lies in allowing the normal ban king transactions
to go forward. Furthermore, the plaintiffs have failed to establish
that they would be put to an irreparable loss unless an interim
injunction was granted. c
It was, however, tried to be impressed upon us that the balance
of convenience lay in granting the injunction since the appellant
would not be put to any loss because it had furnished the letter
of guarantee against 100 per cent margin, i.e. on deposit being made
by the Bihar Corporation of Rs. 85,84,456 for meeting the payment D
to be. made under the credit. It was also said that the effect of
recalling of Rs. 85,84,456 from the Bank of India will result in the
plaintiffs facing a serious credit-freeze, as the Bank of India will,
on its turn, recall the amount from the plaintiffs. We are afraid,
these considerations cannot prevail. For all these reasons, we are
constrained to hold that there was no justification for the High E
Court to grant a temporary injunction under 0. 39 rr. 1 and 2 of the
Code of Civil Procedure, 1908.

It the result, the appeal succeeds and is allowed with costs.
The order passed by the High Court dated August 24, 1979 granting
a temporary injunction restraining the appellant, tbe United F
Commercial Bank, from recalling Rs. 85,84,456 from the Respondent
Nol , the Bank of India is set aside, and the application filed by the
plaintiffs, Messrs. Godrej Soaps Ltd. for the grant of a temporary
injunction under 0.39, rr.1 and 2 of the Code of Civil Procedure,
1908 is rejected with a direction that the High Court shall try to
dispose of the suit as expeditiously as possible, and in any event, G
within six months from today. The costs of the appellant shall be
borne by the Respondents Nos. I and 2 equally.

P.B.R.
Appeal allowed.
H