UNITED COMMERCIAL BANK v. BANK OF INDIA AND OTHERS

Citation: [1981] 3 S.C.R. 300

Court: Supreme Court of India

Bench: A.C. GUPTA, A.P. SEN

Case summary

85,84,456 paid under reserve and in terms of its letter of guarantee or indemnity, seeking their b_'instructions' in the matter. Upon these grounds, he held that the plaintiffs had aprimafacie case.

Judgment text

300 UNITED COMMERCIAL BANK v. BANK OF INDIA AND OTHERS March 26, 1981 [A. C. GUPTA AND A. P. SEN, Jl] Banking law-Documents submitted by the seller of goods not in conformity with instructions given in the letter ofcredit-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 ofletter 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 injunction restrai111i1g the paying bank from collecting the amount paid under reserve. Constitution ofIndia-Article 136-Supreme Court, if would inte1fere with interlocutory orders under Art. 136. Words and Phrases-Payment "under reserve"-Meaning of. 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 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·. tion 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 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". 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 ensued between the parties and the banks; eventually on the faith -of an undertaking given by the seller the appellant bank paid the remainder" 3. mount in 0 respect ofthe 27 bills as well "under reserve 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. 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 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 Injunction 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 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.

' - 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 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 respondent bank. Courts usually refrain from granting injunction to restrain the performance of the contractual obligations arising out of a letter of credit or 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 constituent 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 protection. 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) 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 consignments, 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 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] 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.

(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 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 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 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. [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.

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 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 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. 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. 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 uing and drawee bank was dealt with by this Court in 1 Tarapore and Co. Madras v. Tractors Export, Moscow and Anr. ( ) It was held that 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. It was.

however, 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. 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 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 2 Industries Ltd. ( ) and Urguhart Dnds:iy and Co. Ltd. v. E:istern 3 Bank Ltd. ( ) 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. 4 In Stein v. Hambro' s Bank of Northern Commerce( ) 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 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. (3) [ l922] I K. B. 318. (4) [1921] 9 Ll. L. 433, rev. [1922] 10 Ll. L. Rep. 529 (CA). 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 underlying this result is that the issuing bank is not concerned with the sales contract at all. Rowlatt J. said : 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. 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 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 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 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.

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 obligation of the issuing bank running in his favour, enforceable by him 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 the sales contract or the goods ; if it were otherwise credit business 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 to all documentary credit and binding upon all parties thereto unless expressly agreed".

A banker issuing or confirming an irrevocable credit usually undertakes to honour drafts negotiated, or to reimburse in respect of drafts paid, by the paying or negotiating intermediate banker and the credit is thus in the hands of the beneficiary binding against the banker. The credit contract is 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. 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 based and banks are in no way concerned with or bound by such contracts.

and Article 8 emphasises this in providing that : (a) In documenta:ry credit operations all parties concerned 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 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 ( ) Bailhache, J. said: (! ) (1922] 13 Ll. L. Rep. 21 st. 24. 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 credit as opened. As Lord Sumner said in Equitable Trust Co. of New York v. 1 Dawson Partners Ltd. ,( ) approving the dictum of Bailhache J. : It is both common ground and common sense that in such a transaction the accepting bank can only claim indemnity 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. 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 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 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 principals 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 (1) [1927] 27 Ll. L. Rep. 49. (2) [1943] 1 K. B. 37. India. The words in that bill of lading clearly are not the 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 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 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 have told him : "We dealers in Mincing Lane all understand 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 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' 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 cases are to the' same effect. In Lamborn v. Lake Shore Banking 2 Co. ( ) Smith J. said : A party who is entitled to draw against a letter of credit must strictly observe the terms and conditions under (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. (1981] 3 S. C. R. 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 : 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. 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 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 are embodied 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 customs and terms. It has been held that where mandate r is ambiguous and a paying banker acts in a reasonable way ! 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 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 though the goods differently described in the two documents are, in (I) [1924] 239 N. Y. 234: 146 N. E. 347 at 348. fact, the same. It is the description of the goods that is all important. 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 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 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. 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. 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 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. 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 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 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 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 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 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 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 : ...... 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 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 : ...... 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 implementation. Thus they refused in Malas v. British lmex Industries (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 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) 1 Ltd. v. National Westminster Bank Ltd. , ( ) Kerr, J. considered the position in principle. We would like to adopt a passage from his 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 the underlying rights and obligations between the merchants 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 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 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) The appellant was under a duty to its constituent, the Bihar Corporation, to scrutinize the documents, and could not be compelled 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 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 (l) [[Q77] 3 W. L. R. 752. (2) [1977] 3 W. L. R. 764. 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 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. 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 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 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. 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 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 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 when these amounts were paid by the appellant to the Bank 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 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 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 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. 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 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.

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 selfordained restrictions. The Court does not, as a matter of rule, interfere with interlocutory orders, save under very exceptional circumstances. 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 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 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 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 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 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 Bank of India, the High Court would not have granted any injunction 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. 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 amount of Rs. 85,84,456. The fact remains that the payment of Rs. 36,52,960 against the first lot of 20 documents made by the y 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 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 convenience 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.

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 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 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 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, 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.