I. GOVERNING LAW

1. UCP 600 - ICC Publication 600: Applies only if LC expressly incorporates it.

UCP 600 is a set of rules published by the International Chamber of Commerce. As per Article 1, it only applies to a Letter of Credit when the text of the credit expressly indicates that it is subject to these rules

1. Banking Regulation Act + Contract Act in India.
2. ISBP 821 - International Standard Banking Practice for document checking.

Courts have held:

The Courts have given primacy to the UCP norms over the underlying agreement as the letter of credit is governed by UCP norms

II. TYPES OF DISPUTES IN DOCUMENTARY CREDIT

1. Discrepancy Dispute - The Most Common (80% cases)

Issuing bank refuses payment saying documents are discrepant.

UCP 600 Article 14(d): Documents must not conflict, need not be identical but must not be inconsistent. Article 14(f): If address etc differs, not discrepant unless LC says.

Banks cannot refuse payment based on quality disputes; that is the applicant's risk. Payment under LC is independent of underlying contract disputes

Case Law:

Tata Motors Ltd. vs JSC VTB Bank, Bombay HC 31 March 2016:
LC subject to UCP 600. Bank claimed discrepancy in Bill of Lading description. Court held - Under UCP 600 Art 14(d) and (f), minor typographical difference not discrepancy. Plaintiff rightly argued old judgment under UCP 500 not applicable, UCP 600 has relaxed standard.

Plazma Technologies Pvt Ltd vs JSM Technologies - 2017 Bom:
Documents presented 2 days late. Negotiating bank gave certificate "all terms complied". Court held under UCP 600 sub-article 29(b), such statement cures late presentation objection. Issuing bank must pay.

2. Fraud Exception - The Only Ground to Stop Payment

General rule: Bank must pay even if buyer says goods are defective, seller breached contract.

Exception: Fraud must be of beneficiary, must be established, must be to knowledge of bank.

Leading Indian Case: United Commercial Bank vs Bank of India, AIR 1981 SC 1426 - Supreme Court of India - Constitution Bench

This is the locus classicus in India.

Ratio:

• LC is autonomous, independent of underlying contract.
• Bank's obligation is absolute.
• Court will not grant injunction to restrain bank from paying unless fraud is egregious, established, and beneficiary is party to fraud.
• Mere allegation of breach, quality defect is not fraud.

Followed in:

Union Bank of India vs Seppo Rally Oy, AIR 1999 SC 1059:

A letter of credit is independent of the main contract. The bank has no right to refuse payment merely because there are disputes between the buyer and seller. Unless fraud is alleged and proven, or there is documentary non-compliance, the bank must honour its commitment. The Court emphasised that allowing banks to backtrack on LCs would shake the very foundation of international trade, where these instruments are seen as trust-based

3. Wrongful Dishonor - Bank Fails to Pay on Compliant Documents

UCP 600 Art 16: If bank decides to refuse, must give single notice stating all discrepancies within 5 banking days, and must state it is holding documents at disposal.

If fails, preclusion rule - Bank deemed to have accepted.

Case: Standard Chartered Bank vs Dorchester - English HC 2010 (TA 810):

SCB rejected documents but notice did not comply with Art 16 of UCP 600. Held invalid rejection, bank deemed to accept and must pay. This principle applied in India in Himadri Chemicals Industries Ltd vs Coal Tar Refining Co - Supreme Court - Bank must examine within reasonable time, now 5 days.

4. Injunction Disputes - Buyer Asks Court to Stop Payment

Indian courts almost never grant.

Test Laid in Tarapore & Co. vs V/O Tractors Export, Moscow - Supreme Court - AIR 1970 SC 891:

Two exceptions only for injunction:

1. Fraud of egregious nature - which vitiates entire transaction - beneficiary acting fraudulently.
2. Irretrievable injustice - if LC paid, buyer cannot recover at all (e.g., beneficiary is shell, gone).

Mere breach, over-invoicing, poor quality is NOT fraud. Buyer must go to arbitration against seller, not stop bank.

Recent Case: Adani Enterprises vs Union Bank - Gujarat HC 2022:
Adani sought injunction against LC payment citing sanctions. Court refused - said sanctions risk is commercial risk of applicant, bank deals only in documents. LC must be honored.

III. 5 GOLDEN RULES FOR LC DISPUTES - SUMMARY BY COURTS

Rule 1 - Autonomy:

A bank's only obligation is to look into the correctness and appropriateness of the documents and if the same are found to be in order, the other consideration of the main underlying contract does not affect the encashment of the letter of credit

Rule 2 - Strict Compliance, but not pedantic:
UCP 600 Art 14(d) - International standard, not mirror image. Typo that does not change meaning is not discrepancy.

Rule 3 - Preclusion:
If issuing bank does not give proper Art 16 refusal notice within 5 banking days, it loses right to claim discrepancy.

Rule 4 - Fraud must be proved, not alleged:
Must be fraud of beneficiary, to knowledge of bank, with clear evidence. Supreme Court in UCB case.

Rule 5 - Governing Law:

where a letter of credit does not specify governing law - Court will apply law of place of issuing bank. Always put governing law clause - ICC Paris.

IV. HOW TO WIN AN LC CASE

If you are Beneficiary (Seller):
File summary suit under Order 37 CPC for wrongful dishonor. Cite UCP 600 Art 7 - Bank undertakes to honor. Cite UCB and Seppo Rally. Ask for interest @ LC rate + costs.

If you are Applicant (Buyer) wanting to stop payment:
Don't file injunction - you will lose. Instead:

1. Get proof of fraud - e.g., Bill of Lading forged, container empty - get surveyor report.
2. File fraud FIR + give copy to bank BEFORE payment.
3. File bank guarantee to indemnify issuing bank if it refuses.

If you are Bank:
Always send Art 16 notice listing ALL discrepancies in ONE notice, stating "We refuse and hold documents at your disposal". Don't send piecemeal objections.