One of India's leading business dailies has highlighted instances where banks have lost court cases involving letter of credit (L/C) fraud.

The Business Standard points out that in several recent cases banks have lost court cases because they had suspected massive frauds but failed to act on those suspicions until it was too late.

Similar cases

One of the cases highlighted in the 7 June 2006 edition of the paper looks at the Indian Supreme Court's decision to overturn a judgement made by a lower court and find in favour of United Bank of Switzerland (UBS) in its dispute with State Bank of Patiala, which also involved Federal Bank Ltd and the United Western Bank.

In UBS versus State Bank of Patiala case the Indian bank issued an irrevocable L/C at the request of its client, Hamco Mining & Smelting Ltd to UBS. The L/C beneficiary was Frobevia SA. On production of the relevant documents UBS paid Frobevia.

Fraud emerges

Soon after UBS made the payment under the L/C the Indian banks wrote to the Swiss bank alleging that the two companies, along with other Hamco group companies, had perpetrated huge frauds on several banks in India.

Goods were not even shipped in certain cases said the Indian banks, which put the Swiss bank "on caution" and advised it not to negotiate export bills of these companies.

UCP500 invoked

The Supreme Court found in favour of UBS because the fraud was detected only after the L/C had been negotiated.

Under UCP500 the court said it was too late for the Indian banks to caution the Swiss bank to take or reverse any action contrary to those it had already correctly taken on the basis of the documents.

Ruling overturned

Therefore the Supreme Court decided that notifying UBS only after fraud was detected could not be set up "even as a plausible defence" by the Indian banks.

The Supreme Court ruling overturned an earlier one by the Bombay High Court, which found in favour of the Indian banks.

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