The bank has the duty to scrutinize the documents to ensure that they are in conformity with the terms and condition of the Letter of Credit.

In the matter of UPL Limited vs. Standard Chartered Bank & Ors. (COMM SUIT NO. 12 OF 1999) decided by the Bombay High Court on 8th June 2021.

FACTS-
In the present suit, the Plaintiff (UPL Limited) is a company dealing in the business of manufacture of pesticide. The Defendant No. 1 (Standard Chartered Bank) carries the business of banking in India. The plaintiff applied to the Mumbai branch of Defendant No.1(Defendant no. 2) for issue of letter of credit in favor of Hunan (seller).
On 08th July, 1996, the defendant bank intimated the plaintiff that they have received the bills of exchange and other documents necessary under the Letter of Credit. Further it had debited accounts of the plaintiff of Rs. 2,22,54,460.66/- on 23rd July 1996. While the plaintiff was making efforts to confirm the whereabouts of the vessel, on which the cargo was being carried, by making enquiries with the Seller and the Carrier, the plaintiff noticed that there were serious discrepancies in the documents, especially the transport document and the sea worthiness certificate.
It was averred that the Defendant bank, wrongly made payment under the letter of credit without scrutinizing the documents. Hence, the plaintiff instituted a suit for recovery of the total amount debited with interest at 20.5% p.a. aggregating to the sum of Rs. 5,40,60,117.60/-.
During the pendency of the suit, the plaintiff-initiated Arbitration Proceedings against the Hunan (seller). The Arbitrator awarded a sum of US$ 857603.80 to the plaintiff. The plaintiff assigned the said award to the Shipper and received a sum of US$ 999000 (i.e. Rs. 4,36,25,893/-) from the Shipper by a Settlement Agreement. The plaintiff, therefore, amended the plaint of the suit filed against the defendant and sought a decree in the sum of Rs. 85,32,97,546.62/- including interest at the rate of 20.5% p.a.

ISSUE
Can the bank be held liable for not scrutinizing the documents correctly?

HELD-
The Bombay High Court observed that as per the UCP 500 if the documents on their face appear to be inconsistent with the conditions of credit the banker is under an obligation to refuse to take up the documents. Article 13 of the UCP 500 provides that Banks must examine all documents stipulated in the Credit with reasonable care, to ascertain whether they appear, on their face to be in compliance with the terms and conditions of the Credit.
The Court referring to United Commercial Bank vs. Bank of India and others [(1981)2 SCC766] said that it is the duty of the banker to ascertain whether the documents are in conformity with the with the terms and conditions of the letter of credit. The fact that Bank only deals with the documents does not mean that it is absolved of the obligation to satisfy itself that the documents tendered conform to the conditions and instructions.
In the present case, it was observed that the payment was made by the bank on 4th July, 1996 which is before the documents were even received the Defendant No.2. Therefore, the documents were not scrutinized by the bank before the payment was released.
The Court further held that even if it is assumed that the buyer became aware of the fact that goods were not shipped before it was addressed to him it does not absolve the Bank of its liability to scrutinize the documents so as ascertain whether they were in conformity with the conditions of the letter of credit.
While deciding the amount of interest, the Court seeing the nature of the transaction noted that the plaintiff is entitled to the principal sum of Rs. 2,22,54,460/- along with 12% interest p.a. from the date of debit till the institution of suit, which is designated as the ‘principal sum adjudged’. With respect to the pendente lite interest, from the date of institution of suit till the date plaintiff received the sum of Rs. 4,36,25,893/- from the shipper, the court awarded simple interest at the rate of 10% p.a. on the ‘principal sum adjudged’. The principal sum adjudged and the simple interest would constitute the ‘Total Amount’. Rs. 4,36,25,893/- deducted from ‘Total Amount’ would amount to ‘Balance Amount’. The plaintiff would be further entitled to interest over balance amount from 2nd Feb 2005 till realization at 8% p.a.
Therefore, the suit stands partly decreed with the Total cost to be paid by the defendant to the plaintiff.