Bombay High Court
Upl Limited vs Standard Chartered Bank on 8 June, 2021
Bench: N. J. Jamadar
SUIT4651-1999.DOC
Santosh
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
IN ITS COMMERCIAL DIVISION
COMM SUIT NO. 12 OF 1999
UPL Limited
A Company incorporated under
the Companies Act, 1956 and having
its registered offce at 11, GIDC,
Vapi, District Valsad, Gujrat.
And offce at Uniphos House, Madhu
Park, 11th Road, Khar (W),
Mumbai- 54. ...Plaintiff
Versus
1. Standard Chartered Bank
A Body corporate incorporated under
Royal Charter of England in 1853 and
having its Principal Offce at 1,
Aldermanbury Square, London,
EC2V TSB.
2. Standard Chartered Bank
A Body corporate incorporated under
Royal Charter of England in 1853 and
carrying on business in India, inter
alia, at 23-25, M.G. Road, Fort,
Mumbai- 400 001. ...Defendants
Mr. Shyam Mehta, Senior Advocate, a/w Mr. Sandeep
Parikh, Mr. Prakash Shah, Mr. Durgaprasad Poojari,
i/b PDS Legal, for the Plaintiff.
Mr. Aspi Chinoy, Senior Advocate, a/w Mr. Gautam Bhatikar
& Ms. Madhavi Doshi, i/b Phoenix Legal, for the
Defendants.
CORAM: N. J. JAMADAR, J.
RESERVED ON : 14th January, 2021.
PRONOUNCED ON: 8th June, 2021.
JUDGMENT :
1. This is a suit for damages for negligence in making
payment of money under the letter of credit and consequent loss
SUIT4651-1999.DOC
of business, and interest thereon.
2. The material averments in the plaint can be summarized,
in brief, as under:
(a) The plaintiff is a company incorporated under the
Companies Act, 1956. It deals in the business of manufacture of
pesticides. The plaintiff entered into a contract for purchase of
400 metric tonnes of Yellow Phosphorous for US$ 615200 with
Hunan Leader International Trade General Corporation,
Changsha, Peoples Republic of China (Hunan). Under the terms
of the contract the payment to Hunan was to be made through
irrevocable letter of credit.
(b) Defendant no.1 is a body corporate incorporated
under the Royal Charter of England, 1853. Defendant no.1
carries on the business of banking in India. On 6 th June, 1996,
the plaintiff applied to the Mumbai branch of defendant no.1
(defendant no.2) for issue of letter of credit in favour of Hunan
for US$ 615200 (the defendant - bank). On 10th June, 1996 the
defendant-bank opened a letter of credit, being L/C. NO.
529/960341 for US$ 615200.
(c) Under the terms of the letter of credit, the benefciary
was required to submit following documents:
(i) Five Commercial Invoices in quadruplicate
stating description, quantity and value of goods as per
plaintiff's purchase order No. BV 100343 dated 17 th May,
SUIT4651-1999.DOC
1996.
(ii) Complete set of not less than three original and
non-negotiable copies of clean on board ocean bills of
lading (issued by the Carrier or his agent) marked freight
paid to the order of the bank with the party to be notifed
being the plaintiff.
The letter of credit further stipulated that the goods
should be shipped by sea worthy vessels, which are not
more than 25 years old classifed 100 A1 by Lloyds or
equivalent classifcation society. A certifcate to that effect
from the shipping line or their agents was required to
accompany the documents.
The letter of credit was also subject to Uniform
Customs and Practice for Documentary Credit 1993
Revision (UCP 500).
(d) On 8th July, 1996 the bank advised the plaintiff that
they had received bills of exchange and related documents
purported to have been drawn under the said letter of credit.
The bank had not offered inspection of those documents to the
plaintiff. The plaintiff was, thus, constrained to rely upon the
statement of the bank in the advice that there were no
discrepancies in those documents. Under UCP 500, it was a
bounden duty of the bank to scrutinize the documents for any
discrepancy therein and inform the plaintiff thereof. The bank
was obligated not to accept the documents if they were found to
SUIT4651-1999.DOC
be not in conformity with the terms and conditions of the letter
of credit.
(e) The bank furnished documents to the plaintiff on or
about 19th July, 1996. Vide letter dated 23rd July, 1996, the
defendant bank advised the plaintiff that it had debited
accounts of the plaintiff to the tune of Rs. 2,22,54,460.66/-.
(f) While the plaintiff was making efforts to ascertain
whereabouts of the vessel, on which the cargo was being carried
to Mumbai, 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 certifcate. Eventually, the plaintiff came to know
that the Seller and its representatives had produced false
documents to Agricultural Bank of China and obtained payment
for the bills of exchange from them. The Agricultural Bank of
China obtained reimbursement of the amount paid by them to
the benefciary from the New York Branch of the defendant
bank, the reimbursement bank specifed in the letter of credit.
Defendant bank, thus, wrongly made and/or allowed payment
to be made under the letter of credit without scrutinizing the
documents.
(g) The plaintiff avers that the documents accepted by
SUIT4651-1999.DOC
the defendant bank had following serious discrepancies:
(i) The transport document was not an ocean bill of
lading.
The name of the vessel for the ocean voyage was missing.
(ii) The purported certifcate of seaworthiness of the
vessel was not a certifcate as required by L.C.
The said document merely repeated the letter of
credit conditions.
(h) The plaintiff pointed out the discrepancies to the
defendant and asserted that the defendant had negligently made
the payment of the money under the said letter of credit, vide
communications dated 8th August, 1996, 12th August, 1996 and
14th August, 1996.
(i) The defendant bank wrongfully refused to refund the
amount, wrongly debited to the account of the plaintiff towards
the payment wrongfully made by the defendant under the said
letter of credit. Hence the plaintiff was constrained to institute
the suit for recovery of the said amount of Rs. 2,22,54,460.66/-
wrongly debited to the account of the plaintiff, interest thereon
at the rate of 20.5% p.a with quarterly rests and damages,
aggregating to the sum of Rs. 5,40,60,117.60/-.
(j) During the pendency of the suit, the plaintiff
initiated Arbitration Proceedings against the Hunan. By an
award dated 14th January, 2000, the Arbitral Tribunal awarded
SUIT4651-1999.DOC
aggregate sum of US$ 857603.80 along with interest thereon to
the plaintiff. The plaintiff assigned the said award to the
Shipper and did receive the sum of US$ 999000 from the
Shipper, in consideration of the assignment of the said award,
under the terms of the settlement agreement dated 10 th
December, 2004 between the plaintiff and the Shipper. The
plaintiff, thus, amended the plaint and sought a decree in the
sum of Rs. 85,32,97,546.62/- comprising of the components of
legal costs, economic loss and interest at the rate of 20.5% p.a.,
with further interest thereon.
3. The defendant appeared in response to the suit summons
and resisted the claim by fling the written statement. The suit
was stated to be barred by law of limitation as the institution of
the suit on 4th August, 1999 was clearly beyond the period of
three years from the date of accrual of cause of action i.e. 22 nd
July, 1996 on which the documents were delivered by the bank
to the plaintiff. The tenability of the suit was also assailed on
the ground that the plaintiff was estopped from laying any claim
against the defendant as the plaintiff had executed Master
Counter Indemnities dated 30th December, 1996 and 10th July,
1997, whereby the plaintiff agreed to indemnify the defendant
once the account of the plaintiff was debited by the
SUIT4651-1999.DOC
defendant-bank.
4. The defendant denied that there was any negligence on the
part of the defendant in the scrutiny of the documents and in
making payment under the letter of credit. The defendant
contended that under the cover letter dated 28 th June, 1996 the
Agricultural Bank of China forwarded the documents under the
letter of credit to the defendant at Mumbai and also sent a
reimbursement claim directly to the defendant, at the Newyork
Branch, requesting reimbursement as per the terms of the letter
of credit. The defendant's New York Branch approached the
defendant's Mumbai Branch by telex dated 3 rd July, 1996 and
thereupon defendant's Mumbai Branch vide telex dated 4 th July,
1996 confrmed that the claim under dis-restricted letter of
credit could be honoured and accordingly funds were remitted
to the account of the Agricultural Bank of China. The defendant
contends that the documents were received by its Mumbai
Branch on 8th July, 1996. Those documents were thoroughly
checked and found to be in order and in clear conformity with
the letter of credit. The defendant was satisfed that the
documents were prima facie in conformity with the terms of the
letter of credit and, thus, the defendant bank accepted those
documents.
SUIT4651-1999.DOC
5. The claim of the plaintiff that the documents were
discrepant is countered by the defendant bank by asserting that
after more than seventeen days of release of the documents to
the plaintiff, i.e. on 8th August, 1996, the plaintiff, for the frst
time, raised a grievance that there were discrepancies in the
documents negotiated under the letter of credit. The defendant
contended that the plaintiff raised the said grievance only after
realizing diffculties in getting delivery of the goods. The
defendant bank is not concerned with the underlying contract
between the plaintiff and the seller. In fact, under UCP 500, the
defendant bank was under obligation to perform its part of the
contract.
6. It was denied that there was any negligence in performing
its duty as a banker qua the plaintiff. The defendant
contested the claim of the plaintiff that there were apparent
discrepancies in the bills of lading. It was asserted that the bills
of lading recorded that the goods were shipped on board with
clean on board notation and, hence, on the face of it, they were
required to be construed as ocean bill of lading. Moreover, the
name of the vessel was mentioned as "YUE HUA 523". Under
UCP 500 the bank was required to verify whether the
documents were in conformity with the terms and conditions
SUIT4651-1999.DOC
of the letter of credit. It was not expected to investigate as to
whether the named vessel was not an ocean going vessel or had
the sea worthiness, which was apparently certifed.
7. By way of additional written statement, the defendant
contended that the plaintiff's claim of additional damages, costs
and interest, despite receipt of the amount under the Arbitration
Award, was wholly untenable. The plaintiff's claim stood fully
satisfed. On that count alone, the suit deserved to be
dismissed. It was further contended that the composition of the
matter by the plaintiff with the Shipper has caused irretrievable
prejudice to the defendant. The prosecution of the instant suit,
after receiving an amount of US$ 999000 from the Shipper, was
stated to be an exercise in unjust enrichment. The amended suit
claim and the particulars thereof were specifcally denied and
contested by the defendant.
8. In the backdrop of the aforesaid rival pleadings, following
issues were settled by my learned Predecessor. I have recorded
my fndings against each of them for the reasons to follow.
ISSUES FINDINGS
1. Whether the plaintiff proves that the In the affrmative.
suit is fled within limitation?
SUIT4651-1999.DOC
2. Whether the plaintiff proves that it was
the defendant/s duty to scrutinize the
documents to ensure that the
documents submitted were in In the affrmative.
conformity with the conditions and
requirements of the Letter of Credit as
stated in paragraphs 4, 5 and 11 of the
plaint?
3. Whether the plaintiff proves that there
were discrepancies in the documents
received by the defendants as stated In the affrmative.
inter alia in paragraph 9 of the plaint?
4. Whether the plaintiff proves that the
defendants acted negligently in debiting
the plaintiff's account under the Letter In the affrmative.
of Credit and wrongly debited the same,
as stated inter alia in paragraphs 8 to
12 of the plaint?
5. Whether the plaintiff proves that the
defendant wrongly accepted the
documents despite clear discrepancies In the affrmative.
and that therefore the defendant has
wrongly deprived the plaintiff of its
funds to the extent of the debit, as
stated in para 11 of the plaint?
6. Whether the defendant proves that the
plaintiff has no valid cause of action In the negative.
against the defendant, as stated in para
2 of the written statement?
7. Whether the defendant proves that the
documents were thoroughly checked In the negative.
and were in clear conformity with the
Letter of Credit, as stated in para 2(h) of
the written statement?
SUIT4651-1999.DOC
8. Whether the defendant proves that the
plaintiff is estopped from raising the
pleas raised in the plaint, as stated in In the negative.
paras 2(1) and 14 of the written
statement?
9. Whether the plaintiff proves that the Partly in the
plaintiff is entitled to recover the sum of affrmative to the
Rs.5,40,60,117.60 along with further extent indicted in
interest at 20.5% p.a. from the the fnal order.
defendant, as per the particulars of
claim annexed at Ex.1 to the plaint?
:REASONS:
In order to substantiate the averments in the plaint, Mr.
Arun Chandrasen Ashar (PW-1), the Director (Finance) of the
plaintiff has sworn an affdavit in lieu of examination-in-chief. A
number of documents were also tendered on behalf of the
plaintiff in support of its claim. The defendant has also
tendered certain documents in the rebuttal. The defendant
has, however, not examined any witness to bolster up its
defence.
9. In the very nature of the transaction, the fate of the suit
hinges upon construction of the documents, especially, the
Letter of Credit (Exhibit-P2) dated 10 th June, 1996, the Bill of
Lading (Exhibit-P8) dated 27th June, 1996, the certifcate
issued by the China Merchant Shipping and
Enterprises Company Limited (Exhibit-P9) and the
SUIT4651-1999.DOC
correspondence exchanged between the parties prior to and in
the wake of the controversy. Reference to the relevant
documents would be made at appropriate places.
10. To start with, it may be apposite to note the
uncontroverted facts. The jural relationship between the
plaintiff and the defendant is not much in dispute. Nor the
nature of the transaction is in contest. Indisputably, the
plaintiff entered into a sales contract for purchase of 400 MT of
yellow phosphorus 99.9% with Hunan for the price of US$
615200 as evidenced by the sales contract (Exhibit-P1). In
accordance with the said contract, the price was to be paid by
an irrevocable letter of credit in sellers favour at sight. It is
incontestible that the plaintiff applied to the defendant Bank to
issue a Letter of Credit and the defendant issued the Letter of
Credit (Exhibit-P2) on 10th June, 1996. There is not much
controversy over the terms and conditions incorporated in the
said letter of credit. Indisputably, apart from the special terms
and conditions incorporated in the said letter of credit, it was
subject to Uniform Customs and Practice for Documentary
Credits, 1993 Revision (UCP 500). The parties are not at issue
over the fact that defendant no.2 received the bill of exchange
and requisite documents under the aforesaid Letter of Credit on
SUIT4651-1999.DOC
8th July, 1996 including the combined transport Bill of Lading
(Exhibit-P8) and the shippers certifcate (Exhibit-P9).
The defendant Bank, indisputably, sent the advice
(Exhibit-P3) to the plaintiff on 8th July, 1996 about the receipt of
the aforesaid bills raised by the benefciary. Though there is a
controversy over the exact date on which the said documents
were furnished to the plaintiff, yet, the customer advise dated
18th July, 1996 evidences the fact that the documents were
enclosed thereunder and an import loan was created against the
plaintiff's account. The account of the plaintiff was debited by
two advises dated 23rd July, 1996 with the loan of
Rs.11,087,179.79 and interest thereon of Rs.40,050.54/-at the
rate of 26.37% from 18th July, 1996 to 23rd July, 1996, each.
11. Indubitably, the controversy arose with the
communication dated 8th August, 1996 (Exhibit-P4) addressed
by the plaintiff to the defendant Bank alleging that there were
serious discrepancies in the original documents negotiated
under the letter of credit and the payments were unjustifably
made thereunder to the benefciary. Two more communications
dated 12th August, 1996 (Exhibit-P5) and 14 th August, 1996
(Exhibit-P6) followed. There is not much controversy over the
fact that on 13th August, 1996 Hunan, the seller, addressed a
SUIT4651-1999.DOC
communication (Exhibit-D2-2), wherein the circumstances in
which the goods could not be shipped and yet the original
documents were tendered for payment thereunder were sought
to be explained. Thereupon the plaintiff addressed the letter
dated 22nd August, 1996 (Exhibit-D2-1) holding the Bank
accountable for the loss caused to the plaintiff on account of the
alleged negligence in scrutinizing the documents and the Bank
was called upon to refund the sum of Rs.2,22,54,460.66 along
with interest at the rate of 22% p.a.
12. It is incontrovertible that the plaintiff had instituted the
proceedings against the Shipper before the High Court of
Hongkong Special Administrative Region for damages and
arbitration proceedings against Hunan, the seller. Eventually
on 14th January, 2000 an award was passed in favour of the
plaintiff in the said arbitration proceedings and the plaintiff was
awarded a sum of US$ 651200, the payment debited to the
account of the plaintiff, US$192403.80 towards interest thereon
and US$ 50,000, towards legal cost. The plaintiff entered into a
Settlement Agreement (Exhibit-P11) with the Shipper
whereunder the award passed in the aforesaid arbitration
proceedings was assigned in favour of the Shipper against
receipt of the sum of US$ 9,99,000. Evidently, the claim of the
SUIT4651-1999.DOC
plaintiff against the defendant subsists for the amount, to which
the plaintiff claims to be entitled to, after adjusting the aforesaid
sum of US$ 999000 received from the Shipper.
13. In the backdrop of the aforesaid admitted facts, the
controversy revolves around the question as to whether the
defendant Bank has honoured its contract with the seller under
the letter of credit by discharging its duty as a banker in a
reasonable manner. Did the defendant Bank exercise the care
expected of it in honouring the documents negotiated by the
seller, is at the hub of the controversy. Before adverting to deal
with this contentious issue, it may be appropriate to deal with
the issue of limitation.
14. Issue no.1:
The defendant contended that the suit was barred by
limitation as it was instituted beyond three years of the delivery
of the documents in question to the plaintiff. Since the
documents were delivered on 22nd July, 1996 the institution of
the suit on 4th August, 1999 was stated to be clearly barred by
law of limitation. The challenge does not seems to be well
grounded in facts. The contention of the defendant that the suit
was instituted on 4th August, 1999 is factually incorrect. As is
evident from the endorsements on the plaint, the suit was
SUIT4651-1999.DOC
instituted on 21st July 1999. As indicated above, the account of
the plaintiff was debited by the defendant Bank vide customer
advice dated 23rd July, 1996. The institution of the suit on 21 st
July, 1999, is, thus, within the period of limitation from the date
of the accrual of the cause of action. Issue no.1 is thus
answered in the affrmative.
15. Issue nos.2 to 7:
All these issues revolve around the pivotal question as to
whether the defendant Bank had exercised reasonable care in
scrutinizing the documents tendered by the benefciary of the
letter of credit and was justifed in making the payment
thereunder. It may not be possible to determine these issues in
watertight compartments and, therefore, it would be expedient
to decide all these issues by a common reasoning, with distinct
observations wherever warranted.
16. In the light of the nature of the transaction, the line of
enquiry would be: what were the terms of contract between the
plaintiff and the defendant, as evidenced by the letter of credit?
What is the nature of duty of a banker in a contract of this
nature and, especially, the standard of care in the scrutiny of
documents? What is the duty cast on a Banker under UCP
500, to which the letter of credit was made expressly subject to?
SUIT4651-1999.DOC
Lastly, whether, in the facts of the case at hand, the defendant
Bank had scrutinized the documents tendered for payment with
the amount of care and caution excepted of it, in the
circumstances of the case.
17. It would be advantageous to immediately notice the
material terms of the letter of credit (Exhibit-P2). It was an
irrevocable of letter of credit. By amendment dated 15 th June,
1996, it was made unconfrmed and unrestricted for negotiation
instead of negotiation to be restricted to the Standard Chartered
Bank, Shanghai Branch. The documents required were:
(i) Signed commercial invoice in quadruplicate stating
description, quantity and value of the goods as per
applicant's purchaser order no. BV100343, dated 17 th
May 1996.
(ii) Compete set of not less than 3 original non-
negotiable copies of clean on board ocean bills of lading
(issued by the carrier or their agent) to the order of
Standard Chartered Bank.
(iii) Goods to be shipped by sea worthy vessels which are
not more than 25 years old classed 100 A1 by Lloyds or
equivalent classifcation society. A certifcate to that
SUIT4651-1999.DOC
effect from shipping line or their agents must accompany
documents.
The letter of credit was subject to Uniform Customs and Practice
(1993 Revision) ICC, Publication No.500, except so far as
otherwise expressly stated.
18. It would be contextually relevant to note, at this stage
itself, the discrepancies, as alleged by the plaintiff in the
documents tendered by the benefciary. The combined
transport bill of lading (Exhibit-P8), on the one hand, indicated
that the goods were shipped on board, YUE HUA 523,
designated as pre-carrier, and, on the other hand, the ocean
vessel was not named. It further indicated that the goods were
shipped on port at HUANGPU, the port of loading and Bombay
Port was designated as the port of discharge. The certifcate of
the shipper (Exhibit-P9), was apparently undated. It was
unsigned as well. The material part of the certifcate read as
under:
"This is to certify:
Goods to be shipped by sea worthy vessels which are not
more than 25 years old classed 100 A1 by Lloyds or
equivalent classifcation society"
SUIT4651-1999.DOC
19. The challenge to the documents is two fold. One, the bill of
lading (Exhibit-P8) was not a clean on board ocean bill of lading.
Two, there was no certifcate of the shipper to the effect that the
goods were shipped on seaworthy vessel of specifed class.
Conjointly, these discrepancies implied that the goods were not
at all shipped and thus the defendant Bank committed gross
negligence in making payment on the strength of the aforesaid
documents.
20. In the aforesaid context, I have heard Mr. Shyam Mehta,
the learned Senior Counsel for the petitioner and Mr. Aspi
Chinoy, the learned Senior Counsel for the defendant at
considerable length.
21. Mr. Mehta, the learned Senior Counsel would urge that
the undisputed facts lead to an inference that the defendant
Bank made payment on 4th July, 1996 through its New York
Branch, much before the original documents were received by
the Mumbai Branch of the defendant Bank. Premised on this
foundation, Mr. Mehta would urge that the claim of the
defendant Bank that it had scrutinized the documents and
found them in conformity with the conditions stipulated under
the letter of credit is wholly unsustainable.
SUIT4651-1999.DOC
22. Taking the Court through the UCP 500, especially Articles
13 and 14 thereof, which, inter alia, prescribed the standard for
examination of the documents and the duty in case of
discrepant documents, respectively, Mr. Mehta urged, with a
degree of vehemence, that the defendant Bank, in the case at
hand, miserably failed in its duty to ascertain whether the
documents tendered by the benefciary, on their face, appeared
to be in compliance with the terms and conditions of the credit.
Amplifying the submission, Mr. Mehta would urge that the
absence of reasonable care which the Bank was obligated to
exercise while scrutinizing the documents in question is
explicitly evident from the bare perusal of the documents. By
no stretch of imagination, according to Mr. Mehta, the Bill of
Lading (Exhibit-P8) can be said to be a clean on board ocean bill
of lading. The omission to name the ocean vessel must have
rang alarm bells. To add to this, the endorsement "goods to be
shipped by sea worthy vessels which are not more than 25 years
old classifed 100 A1 by Lloyds or equivalent classifcation
society", did not satisfy the elementary requirement of
certifcation.
23. Thus, according to Mr. Mehta, the defendant Bank having
released the payment, even before the receipt of the documents,
SUIT4651-1999.DOC
can not be heard to say that it complied with the obligation
under the letter of credit and UCP 500. Even otherwise, the
bare perusal of the documents; bill of lading (Exhibit-P8) and
the certifcate (Exhibit-P9) would lead to no other inference than
that of the defendant Bank not having discharged its obligation
scrupulously and carefully.
24. Per contra, Mr. Chinoy, the learned Senior Counsel stoutly
submitted that the very institution of the suit is tainted with
malafde. The plaintiff is guilty of suppression of facts. The
plaintiff has not approached the Court with clean hands. In the
circumstances, the plaintiff is not entitled to any relief. Taking
the Court through the cross-examination of Mr. Ashar (PW-1),
especially the point of time at which the plaintiff became aware
of the fact that the goods were not shipped, it was urged that
the plaintiff has made an endeavour to allege that the
documents were discrepant only after realising that the goods
were not shipped. The delay of about 17 days in making the
claim, after receipt of the original documents, in the
circumstances of the case, was stated to be fatal to the
plaintiff's claim. Mr. Chinoy canvassed a submission that the
defendant Bank was not concerned with, much less responsible
for, the non-receipt of the goods contracted for by the plaintiff.
SUIT4651-1999.DOC
It was not at all concerned with the underlying transaction
between the plaintiff and the seller. The Bank would be justifed
in making the payment if it was satisfed that the documents,
on their face, appeared to be in accordance with the terms and
conditions of the credit. On this touchstone, according to Mr.
Chinoy, in the facts of the instant case, the defendant Bank was
fully justifed in releasing the payment as the documents in
question satisfed the conditions stipulated in the letter of
credit.
25. Before adverting to deal with the aforesaid submissions, it
may be appropriate to keep in view the nature of the transaction
and the jural relationship created by a letter of credit. A letter of
credit is a device introduced in a mercantile contract to ensure
that payment for goods, services or performance is secured.
Invariably, the Banker, on the instructions of the buyer, issues
the letter of credit and undertakes to pay the seller on
satisfaction that the seller has discharged the obligation as set
out in the conditions incorporated in the letter of credit. It
subsumes two contracts. First, between the banker and the
buyer. And second, between the banker and the seller. The
latter contract is separate from an independent of the
underlying contract between the buyer and the seller. It is thus
SUIT4651-1999.DOC
expressed that in honouring the letter of credit the Bank deals
with the documents and not the underlying contract between
the buyer and the seller.
26. In the case of M/s. Tarapore & Co., Madras vs. M/s. V. O.
Tractors Export Moscow and another1, on which reliance was
placed on behalf of the plaintiff, the concept of an irrevocable
letter of credit was explained with reference to Halsbury's Laws
of England and Chalmers, in the following words:
"12. The scope of an irrevocable letter of credit is explained
thus in Halsbury's Laws of England (Vol. 34 paragraph 319 at
p. 185):
"It is often made a condition of a mercantile contract
that the buyer shall pay for the goods by means of a
confrmed credit, and it is then the duty of the buyer to
procure his bank, known as the issuing or originating
bank, to issue an irrevocable credit in favour of the
seller by which the bank undertakes to the seller, either
directly or through another bank in the seller's country
known as the correspondent or negotiating bank, to
accept drafts drawn upon it for the price of the goods,
against tender by the seller of the shipping documents.
The contractual relationship between the issuing bank
and the buyer is defned by the terms of the agreement
between them under which the letter opening the credit
is issued; and as between the seller and the bank, the
issue of the credit duly notifed to the seller creates a
new contractual nexus and renders the bank directly
liable to the seller to pay the purchase price or to
accept the bills of exchange upon tender of the
documents. The contract thus created between the
seller and the bank is separate from, although ancillary
to, the original contract between the buyer and the
seller, by reason of the bank's undertaking to the seller,
which is absolute. Thus the bank is not entitled to rely
upon terms of the contract between the buyer and the
seller which might permit the buyer to reject the goods
and to refuse payment therefor; and, conversely, the
buyer is not entitled to an injunction restraining the
1 1969(1) Supreme Court Cases 233.
SUIT4651-1999.DOC
seller from dealing with the letter of credit if the goods
are defective."
13. Chalmers on "Bills of Exchange" explains the legal
position in these words:
"The modern commercial credit serves to interpose
between a buyer and seller a third person of
unquestioned solvency, almost invariably a banker of
international repute; the banker on the instructions of
the buyer issues the letter of credit and thereby
undertakes to act as paymaster upon the seller
performing the conditions set out in it. A letter of credit
may be in any one of a number of specifed forms and
contains the undertaking of the banker to honour all
bills of exchange drawn thereunder. It can hardly be
over-emphasised that the banker is not bound or
entitled to honour such bills of exchange 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, the maxim de minimis non cural lex
cannot be invoked where payment is made by letter of
credit. 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."
14. Similar are the views expressed in "Practice and Law of
Banking" by H.P. Sheldon; "the Law of Banker's Commercial
Credits" by H.C. Gutteridge; "the Law Relating to Commercial
Letters of Credit" by A.G. Davis: "the Law Relating to Bankers'
Letters of Credit" by B.C. Mitra and in several other text-
books read to us by Mr. Mohan Kumaramangalam, learned
Counsel for the Russian Firm. The legal position as set out
above was not controverted by Mr. M. C. Setalvad, learned
Counsel for the Indian Firm. So far as the Bank of India is
concerned it admitted its liability to honour the letter of
credit and expressed its willingness to abide by its terms. It
took the same position before the High Court."
(emphasis supplied)
27. The aforesaid pronouncement was followed by the
Supreme Court in the case of United Commercial Bank vs.
Bank of India and others2, wherein the following observations
were made.
2 (1981)2 Supreme Court Cases 766.
SUIT4651-1999.DOC
"28. The nature of the contractual obligations fowing from
a banker's letter of irrevocable credit and more particularly,
the rights of the seller as the accredited party or benefciary
of the credit, against the issuing and drawee bank was dealt
with by this Court in Tarapore and Co. Madras v. Tractors
Export, Moscow and Anr. (1969)1 SCC 233). It was held that
the opening of a confrmed 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
overemphasised 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 & Sons v. British Imex
Industries Ltd. (1958) QB 127 and Urguhart Lindsay & Co.
Ltd. v. Eastern Bank Ltd. (1922) 1 KB 318 and observed at
page 930 of the Report (SCC p.241), 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."
(emphasis supplied)
28. There is no qualm over the proposition that in mercantile
credit transactions, the parties, especially, the Banks deal with
the documents and not the goods or services to which the
documents relate. The question of liability invariably turns
upon the standard of care in the scrutiny of the documents
which the Bank is expected to exhibit before the payment is
released.
29. Mr. Chinoy would urge that the Banker is expected to
examine the documents as they appear on their face. It is no
SUIT4651-1999.DOC
part of the duty of the Banker to embark upon an enquiry as to
whether the documents tendered represent the true state of
affairs. Neither the Banker is competent nor equipped to
investigate as to whether the goods were, in fact, shipped. If on
the face of the documents, it appears that, they are in
conformity with the terms and conditions, which the parties
had agreed to, the Banker can be said to have discharged its
obligation. In opposition to this, Mr. Mehta joined the issue by
asserting that the Banker owes a duty to scrutinize the
documents carefully and is obligated to take reasonable care in
ascertaining that the documents tendered satisfy the
stipulations under the letter of credit.
30. To appreciate aforesaid submissions and since the letter of
credit in question is expressly made subject to UCP 500, it may
be advantageous to note that UCP 500 are binding on all parties
thereto unless otherwise expressly stipulated in the Credit.
Article 4 provides that in credit operations all parties concerned
deal with documents, and not in goods, services and/or other
performances to which the documents may relate. Article 9
incorporates liability of issuing and confrming banks to the
effect that an irrevocable credit constitutes a defnite
undertaking of the issuing bank, provided that the stipulated
SUIT4651-1999.DOC
documents are presented to the nominated bank or to the
issuing bank and and the terms and conditions of the credit are
complied with. Article 13 prescribes standard for examination
of documents. It provides that Banks must examine all
documents stipulated in the Credit with reasonable care, to
ascertain whether or not they appear, on their face to be in
compliance with the terms and conditions of the Credit.
Compliance of the stipulated documents, on their face with the
tems and conditions of the Credit shall be determined by
international standard banking practice as refected in those
Articles. Documents which appear on their face to be
inconsistent with one another will be considered as not
appearing on their face to be in compliance with the terms and
conditions of the Credit. Article 14(b), in terms, provides that
upon receipt of the documents the Issuing Bank and or
Confrming Bank if any, or a Nominated Bank acting on their
behalf, must determine on the basis of the documents alone
whether or not they appear on their face to be in compliance
with the terms and conditions of the Credit. If the documents
appear on their face not to be in compliance with the terms and
conditions of the Credit such Banks may refuse to take up the
documents. Clause (c) of Article 14 further mandates that if the
SUIT4651-1999.DOC
Issuing Bank determines that the documents appear on their
face not to be in compliance with the terms and conditions of
the Credit, it may in its sole judgment approach the applicant
for a waiver of the discrepancy(ies).
31. Lastly Article 15 incorporates, "Disclaimer on Effectiveness
of Documents." It thus provides that Banks assume no liability
or responsibility for the form, suffciency, accuracy,
genuineness, falsifcation or legal effect of any document(s), or
for the general and/or particular conditions stipulated in the
documents(s) or superimposed thereon.
32. From a conjoint reading of the aforesaid Articles it
becomes abundantly clear that while dealing with the
documentary Credit, the focal point of attention is the document
and not the underlying contract. On one hand, in case of
irrevocable letter of credit, the Bank is under an obligation to
honour its commitment to pay. On the other hand, there is a
duty, contractual in nature, qua the buyer to satisfy itself that
the seller has tendered the stipulated documents and those
documents are in conformity with the terms and conditions of
credit. And a duty under the UCP 500 to make the scrutiny of
such documents with reasonable care. There can be no duality
of opinion that the Bank has to determine the issue on the basis
SUIT4651-1999.DOC
of documents alone. It has no means to embark upon an
enquiry to ascertain the truthfulness of the facts borne out by
the documents. However, there is an equally compelling duty to
ascertain with reasonable care that the documents tendered do
satisfy the requirements stipulated under the letter of credit.
The fact that the Articles in UCP 500 refer to such examination
of documents on their face does not dispense with meticulous
examination of the documents to satisfy that they are in order.
The UCP 500 thus expressly provides that if the documents on
their face appear to be discrepant or inconsistent with the
conditions of credit the banker is under obligation to refuse to
take up the documents.
33. The liability thus hinges upon the nature of the duty and
the standard of care of the banker in the matter of the
examination of the documents. Mr. Chinoy, the learned Counsel
for the defendant would urge that if the documents, on their
face, were found to be in order, the banker cannot be fastened
with any liability for the ultimate failure of consideration.
34. A strong reliance was placed on a judgment of the
Supreme Court in the case of Federal Bank Ltd. vs. V. M. Jog
Engineering Ltd. and others3. In the said case, the Supreme
3 (2001)1 Supreme Court Cases 663.
SUIT4651-1999.DOC
Court, in the context of the allegations that the documents
tendered on behalf of the benefciary were not genuine, after
adverting to the UCPDC (1983) and judicial pronouncements
holding the feld, inter alia, observed as under:
"40. ............ It is, therefore, clear that under Article 11 (d),
it is suffcient if the negotiating bank is satisfed that the
documents which appear on their face to be in accordance
with the terms and conditions of the credit. If the negotiating
bank then pays, the Issuing Bank is bound to reimburse the
negotiating bank.
41. We have to refer to another important Article, i.e.
Article 15, which concerns the "reasonable care" with which
documents have to be examined. This Article has relevance on
the question of' "fraud". It refers to the safeguards to be taken
by the Bank. It states :
"15: Bank must examine all documents with
reasonable care to ascertain that they appear on
their face to be in accordance with the terms and
conditions of the credit. Documents which appear on
their face to be inconsistent With one another will be
considered as riot appearing on their face to be in
accordance with the terms and conditions of the
credit".
Once the Bank takes such reasonable care as above stated,
Article 16 states that the Bank will have to be reimbursed by
the party giving such authority. Clause (b) of Article 16 states
that refusal by the Issuing Bank to pay must be "on the
documents alone" as appear on their face to be inconsistent
with the terms and conditions of the credit.
42. At common law, the position is no different. The
principle of reasonable care has been applied by Lord Dipiock
in Gian Singh & Co, Ltd. v. Banqae de L' lndochine, (1974) 1
WLR 1234, The Bank has to examine with reasonable care to
ascertain if they appear on their face to be in accordance with
the terms arid letters of credit. In that case, the reference was
made to Article 7 of the UCP (1962). It was observed that the
said Article did no more than restate the duty of the bank at
common law. It was further held that in the ordinary course,
visual inspection of the actual documents presented is all
that is called for, (p, 1252). In Basse and Selve v.Bank of
Australia, (1904) 20 TLR431 the defendant bank was
instructed to negotiate the drafts of a shipper in Sydney
against a certifcate of Dr. Helms for 100 tons of cobalt-ore
SUIT4651-1999.DOC
analysis not less than 5% pretoxide. The shipper shipped
worthless ore which was described in the bill of loading as
"P.M. 2680 bags containing 100 tons of Cobalt ore". The
sample initially submitted did not refer to the bill of lading
goods. But later, the shipper marked the sample in the same
way as the goods were described in the Bill of lading quantity
and obtained a second, certifcate showing [satisfactory tests
of "a sample of Cobalt ore marked P.M. 2680 bags
representing 100 tons". The Bank this time accepted the
shipper's drafts and was held to be entitled to recover from
the plaintiffs. The Certifcate on its face was regular and came
within the meaning of the mandate. Bigham, J. said:
"Once they were in touch with the right man, the
defendants' only remaining duty was to see that the
documents which be brought purported on their face
to be documents described In the mandate. It was no
part of their duty to verify the genuineness of the
documents".
All that is therefore necessary is to examine with reasonable if
the documents on their face conformed to the terms and
conditions of the L/C.
43. One other important Article that is important on the
question of "reasonable care" of the Bank in examining the
documents is Article 17. It reads :
"17 : Banks assume no liability or responsibility for
the form, suffciency, accuracy, genuineness,
falsifcation or legal effect of any document, or for the
general and/or particular conditions stipulated in the
documents or superimposed thereon; nor do they
assume any liability or responsibility for the
description, quantity, weight, quality, condition
packing, delivery, value or existence of the goods
represented by any document, or for the good faith or
acts and/or omissions, solvency, performance or
standing of the consignor, the carriers, or the insurers
of the goods or any other person whomsoever".
This shows that the Bank does not if it is not clear from the
face of the documents - owe any liability or responsibility for
the falsity of the documents. (However, we shall presently deal
with, question of fraud separately)."
(emphasis supplied)
35. Reliance was also placed on a judgment of the Privy
Council in the case of Commercial Banking Co. of Sydney Ltd.
SUIT4651-1999.DOC
vs. Jalsard PTY. Ltd.4 In the said case, the respondent (the
buyer) had contracted to purchase a quantity of battery-
operated Chirstmas lights from a seller in Taiwan, to be shipped
to Sydney in two consignments. The buyer requested the
appellant (the bank) to issue a letter of credit to authorize the
seller to draw upon the bank's correspondent in Taiwan for a
sum to cover invoice costs f.o.b. of the two shipments. Post
amendment a condition was added that the document should
be accompanied by a Certifcate of Inspection.
36. Accordingly, the certifcates of inspection in relation to the
two shipments were issued by two frms of surveyors in Taiwan.
It was certifed that the surveyors had supervised the packing of
the boxes for checking the quantity and condition of the
contents. On arrival in Sydney the goods were found to be of
defective quality and substantially unsaleable. The defects were
not discoverable by visual inspection but only by physical
testing.
37. In the backdrop of the aforesaid facts, in an action against
the Bank the buyer claimed damages for breach of contract in
accepting documents tendered by the seller which did not
comply with the terms of the letter of credit, contending that
4 (1972)3 WLR 566.
SUIT4651-1999.DOC
"Certifcate of Inspection" meant a document certifying the
condition and quality of the goods inspected, i.e. that the goods
were of acceptable standard and conformed to the requirements
of the contract under which they were sold. The Supreme Court
held that the documents did not comply with the requirements
of the credit and awarded damages to the buyer. On appeal by
the bank to the Judicial Committee, the appeal was allowed.
The Judicial Committee held as under:
"Certifcate of Inspection" is a term capable of
converting documents which contain a wide variety of
information as to the nature and the results of the inspection
which had been undertaken. The minimum requirement
implicit in the ordinary meaning of the words is that the
goods the subject matter of the inspection have been
inspected, at any rate visually, by the person issuing the
certifcate. If it is intended that a particular method of
inspection should be adopted or that particular information
as to the result of the inspection should be recorded, this, in
their Lordships' view, would not be implicit in the words,
"Certifcate of Inspection" by themselves, but would need to
be expressly stated.
It is a well-established principle in relation to
commercial credits that if the instructions given by the
customer to the issuing banker as to the documents to be
tendered by the benefciary are ambiguous or are capable of
covering more than one kind of document, the banker is not
in default if he acts upon a reasonable meaning of the
ambiguous expression or accepts any kind of document
which fairly falls within the wide description used: see
Midland Bank Ltd. vs. Seymour [1955] 2 Lloyd's Rep.147.
There is good reason for this. By issuing the credit, the
banker does not only enter into a contractual obligation to
his own customer, the buyer, to honour the seller's drafts if
they are accompanied by the specifed documents. By
confrming the credit to the seller through his corespondent
at the place of shipment he assumes a contractual obligation
to the seller that his drafts on the correspondent bank will be
accepted if accompanied by the specifed documents, and a
contractual obligation to reimburse it for accepting the
seller's drafts. The banker is not concerned as to whether the
SUIT4651-1999.DOC
documents for which the buyer has stipulated serve any
useful commercial purpose or as to why the customer called
for tender of a document of a particular description. Both the
issuing banker and his corespondent bank have to make
quick decisions as to whether a document which has been
tendered by the seller to one or other of the parties to the
transaction if the decision is wrong. Delay in deciding may in
itself result in a breach of his contractual obligations to the
buyer or to the seller. This is the reason for the rule that
where the banker's instructions from his customer are
ambiguous or unclear he commits no breach of his contract
with the buyer if he has construed them in a reasonable
sense, even though upon the closer consideration which can
be given to questions of construction in an action in a court
of law, it is possible to say that some other meaning is to be
preferred.
Their Lordships are of opinion that the documents
tendered by the two surveyors in the instant case clearly fall
within the generic description "Certifcate of Inspection."
They record that the goods themselves, as well as the
packages, were inspected. This, in the Board's view, would
itself be suffcient to comply with the requirements of the
credit. In addition, they contain an express statement as to
the condition of the cases and an implied statement that the
goods contained in the cases were in apparent good condition
so far as could be seen in the course of supervising the
packing of them."
38. Mr. Mehta, the learned Counsel for the plaintiff, in
contrast, placed reliance on the judgment of the Supreme Court
in the case of United Commercial Bank (supra) wherein the
Supreme Court extensively dealt with the nature of the duty
cast on the Bank in honouring the documents. After adverting
to a number of judgments, the Supreme Court, culled out the
legal position to the effect that in the mater of commercial
letters of credit the documents 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
SUIT4651-1999.DOC
instructions relative to the documents against which the letter
of credit is to be honoured are complied with.
39. It may be advantageous to reproduce the observations in
paragraph nos.32 to 40, which are instructive.
"32. Banker's commercial credits are almost without
exception everywhere made subject to the code entitled the
`Uniform Customs and Practices for Documentary Credits',
by which the General Provisions and Defnitions and the
Articles following are to "apply to all documentary credit and
binding upon all parties thereto unless expressly agreed". A
banker issuing or confrming 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 benefciary 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 benefciary cannot claim against the paying bank
and it is the paying bank's duty to refuse payment.
33. 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 documentary credit operations all parties
concerned deal in documents and not in goods.
34. 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 necessity 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 :
SUIT4651-1999.DOC
It is elementary to say that a person who ships in
reliance on a letter 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
drafts presented to it under a letter of credit unless
those drafts with the accompanying documents are in
strict accord with the credit as opened.
35. As Lord Sumner said in Equitable Trust Co. of New
York v. 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.
36. In Rayner v. Hambros Bank Ltd. 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.
37. Mackinnon, L.J. after quoting Bailhache, J., in
English, Scottish and Australian Bank Ltd. v. Bank of South
Africa (supra) and Lord Summer in Equtiable Trust Co. of
New York v. Dawson Partners Ltd. (supra) laying down that a
person who ships in reliance on a letter of credit must do so
in exact compliance with its terms, observed :
The defendant bank were told by their Danish
principals to issue 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 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
SUIT4651-1999.DOC
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
groundnuts 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 under stand these things. We understand that
'Coromandel groundnuts' are machine-shelled kernels,
and we understand when we see 'C.R.S.' 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.
38. In Bank Melli Iran v. Barclays Bank 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 entitled 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 ratifed the defendant's action
in accepting the documents. The dicta in American cases are
to the same effect. In Lamborn v. Lake Shore Banking Co.
Smith J. said:
A party who is entitled to draw against a letter of
credit must strictly observe the terms and conditions
under 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 Laudisi v. American Exchange
National Bank 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.
39. The relevant authorities uniformly lay down in dealing
with commercial letters of credit that the documents
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
honoured are complied with. The rights of a banker are
SUIT4651-1999.DOC
described in Halsbury's Laws of England, 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 benefciary 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 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 stretched so
far as to protect a banker who pays against documents
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 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:
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 reimbursement 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 description 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 which found a place in Paget's
Law of Banking, 8th Edn. p.648, and we may at the risk of
repetition reproduce the same, to the effect:
SUIT4651-1999.DOC
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 intermediary
or issuing banker, the benefciary 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.
40. It the light of these principles, the rule is well
established that a bank issuing or confrming a letter of
credit is not concerned with the underlying contract between
the buyer and seller. Duties of a bank under a letter of credit
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.
(emphasis supplied)
40. The aforesaid exposition of law would indicate that the
Bankers duty to examine the documents tendered so as to
ascertain whether they are in conformity with the instructions
of the buyer and in accordance with the terms and conditions of
the letter of credit is contractual yet solemn. The fact that the
Bank only deals with the documents does not imply that it is
absolved of the obligation to satisfy itself that the documents
tendered conform to the conditions and instructions. In fact,
this satisfaction alone provides it the legitimacy to part with the
payment. It is true that the Bank is neither expected nor
equipped to assume the role of an investigator in ascertaining
the genuineness of the documents and truthfulness thereof.
However, where on the face of the documents, it becomes
abundantly clear that the documents do not satisfy the
SUIT4651-1999.DOC
stipulations, the Bank is under an obligation not to make
payment.
41. Reverting to the facts of the case, on the aforesaid
touchstone, the submission on behalf of the plaintiff that in the
case at hand, the Bank had parted with money even before the
documents were received, cannot be said to be unfounded.
From the perusal of the contentions in the written statement it
becomes explicitly clear that on 3rd July, 1996 itself, the
defendant's New York Branch approached its Mumbai Branch
and sought instructions as to whether the former could honour
the claim for reimbursement received from Agricultural Bank of
China. On 4th July, 1996, the defendant's Mumbai Branch
informed by telex that claim under the dis-restricted letter of
credit could be honoured and, accordingly, funds were remitted
to the account of Agricultural Bank of China. It is further
contended that the Mumbai Branch of the defendant received
the documents, vide covering letter dated 28 th June, 1996, from
Agricultural Bank of China, on 8th July, 1996 (Para 2(g) and (h)
of the written statement). An inference thus becomes
inescapable that the payment under letter of credit was
sanctioned and released on 4th July, 1996 itself though the
documents were received by the Mumbai Branch of the
SUIT4651-1999.DOC
defendant Bank on 8th July, 1996. Evidently, the documents
were not scrutinized before the payment was released. This was
in clear breach of the duty of the Banker under the letter of
credit. This factor dismantles the edifce of the defence of the
defendant Bank that it had scrutinized the documents and
found them in order.
42. The aforesaid fnding, in a sense, renders further inquiry
as to whether the documents were examined with reasonable
care unwarranted. However, I deem it in the ftness of things to
deal with this defence of the defendant Bank uninfuenced by
the aforesaid fnding.
43. As indicated above, Mr. Chinoy assailed the tenability of
the claim on the ground that there was inordinate delay in
making the grievance that the documents were discrepant.
Attention of the Court was invited to the letter dated 8 th August,
1996 (Exhibit-P4), whereby, for the frst time, the plaintiff
alleged that the documents were discrepant. Mr. Chinoy laid
emphasis on the fact that in the said letter the only grievance
was that the certifcate issued by the shipper was not in order.
44. On a reading of the letter dated 8th August 1996 (Exhibit-
P4), as a whole, I fnd it diffcult to accede to the submission of
Mr. Chinoy to the extent desired by the defendant. It is true
SUIT4651-1999.DOC
that in paragraph 2 of the said letter, the plaintiff made an
endeaviour to pinpoint the discrepancy with reference to the
certifcate of the shipper. However, the letter makes it clear that
the documents were not in accordance with the terms of the
letter of credit and there were other discrepancies in the
documents which the plaintiff would discuss.
45. On the aspect of delay, Mr. Chinoy invited attention of the
Court to the manner in which Mr. Ashar (PW-1) fared in the
cross-examination. It was elicited that the original documents
were defnitely received and checked by the plaintiff before 23 rd
July, 1996 when the plaintiff's account was debited by the
defendant Bank. Mr. Ashar expressed his inability to account
for the delay in addressing the letter pointing out the alleged
discrepancies, dated 8th August, 1996 (Exhibit-P4). Emphasis
was also laid on an answer elicited to another question, as to
when did the plaintiff frst come to know about the documents
submitted by the seller to be false (Question no.78). Mr. Ashar
(PW-1) asserted that when the plaintiff contacted the
benefciaries in July, 1996 they were informed that the
benefciaries had not shipped the goods. To a pointed question
as to on what basis did the plaintiff come to the conclusion that
the documents submitted by the seller were false, Mr. Ashar
SUIT4651-1999.DOC
(PW-1) replied that there was no mention of ocean vessel's name
in the bill of lading as per the LC term and secondly the
benefciary informed the plaintiff that they have not shipped the
goods. He went on to further concede that the plaintiff did
correspond with China Merchant Shipping and Enterprises
Company Limited to fnd out about the name of the ocean
vessel.
46. Mr. Chinoy thus urged that despite the plaintiff having
been fully aware, in the month of July 1996 itself, that the
goods were not shipped by the benefciary, the plaintiff
approached the Court with a bold case that the letter dated 8 th
August, 1996 (Exhibit-P4) was addressed as they were unable to
get any information about the arrival of the vessels; their agents
etc.
47. I am afraid to agree with the submission on behalf of the
defendant that the plaintiff diserves to be non-suited on the
aforesaid count, even if the defence is taken at par. Evidently, it
is incontrovertible that the goods were not shipped by the seller.
In fact, the absence of information as regards the vessel on
which the goods were boarded stoked the inquiry on the part of
the plaintiff. Even if it is assumed that the plaintiff became
aware of the fact that the goods were not shipped before it
SUIT4651-1999.DOC
addressed the communication dated 8th August, 1996 (Exhibit-
P4) it does not detract materially from the plaintiff's claim as the
said fact 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. Likewise,
the time-lag of a fortnight in addressing communication to the
Banker that the documents, which were honoured by the
Banker, were discrepant, in the circumstances of the case,
cannot be said to be such as to disentitle the plaintiff from
laying the claim.
48. Mr. Chinoy next urged that the document in question was
a combined transport of bill of lading. It is governed by Article
26 of the UCP 500. In case of a combined transport bill of
lading, it was not obligatory to name the ocean vessel on which
the goods were shipped. The reliance placed on behalf of the
plaintiff on the stipulation prescribed in Article 23, which deals
with marine / ocean bill of lading, according to Mr. Chinoy is
wholly misplaced. In case of a combined transport of bill of
lading, the Bank was within its rights in honouring the
documents though the ocean vessel was not named.
49. Article 23 which deals with marine / ocean bill of lading,
inter alia, provides that;
SUIT4651-1999.DOC
(a) If a credit calls for a bill of lading covering a port-to-
port shipment, banks will, unless otherwise stipulated in
credit, accept a document, however named, which;
(i) Appears on its face to indicate the name of the
carrier and to have been signed or otherwise
authenticated by the carrier or a named agent for or on
behalf of the carrier,
or the master or a named agent for or on behalf of the
master. .......... and
(ii) Indicates that the goods have been loaded on board,
or shipped on a named vessel. ......... and
(iii) Indicates the port of loading and the port of dicharge
stipulated in the credit, notwithstanding that it: .......
(iv) .....
(v) .....
(vi) ..... and
(vii) in all other respects meets the stipulations of the
Credit."
50. Article 26 which deals with multimodal transport
document, inter alia, provides that,
(a) If a Credit calls for a transport document
covering at least two different modes of transport
(multimodal transport), banks will, unless
otherwise stipulated in the Credit, accept a
document, however names, which:
(i) appears on its face to indicate the name of the
carrier or multimodal transport operator and to
have been signed or otherwise authenticated by:
* the carrier or multimodal transport operator
or a named agent for or on behalf of the carrier or
multimodal transport operator.
Or
* the master or a named agent for or on behalf
of the master.
............ and,
SUIT4651-1999.DOC
(ii) indicates that the goods have been dispatched,
taken in charge or loaded on board. ........ and,
(iii) (a) indicates the place of taking in charge
stipulated in the Credit which may be different
from the port, airport or place of loading, and
the place of fnal destination stipulated in the
Credit which may be different from the port,
airport or place of discharge,
and/or
(b) contains the indication "intended" or similar
qualifcation in relation to the vessel and/or
port of loading and/or port of discharge,
and,
(iv) ...... and
(v) ...... and
(vi) ...... and
(vii) in all other respects meet the stipulations of
the Credit.
51. Comparing and contrasting the stipulations in sub-clause
(ii) of Clause (a) of Article 23 and Article 26, it becomes evident
that in the case of the multimodal transport document it is
suffcient if the document indicates that the goods have been
dispatched, taken in charge or loaded on board, whereas in case
of marine / ocean bill of lading the document should indicate
that goods have been loaded on board or shipped on a named
vessel. In the case of multimodal transport document, there is
no requirement of naming the vessel on which the goods have
been shipped. In the very nature of the multi-modal transport
document, which envisages at least two different modes of
SUIT4651-1999.DOC
transport, the name of particular vessel is not insisted upon.
Instead, the document should indicate that goods have been
dispatched, taken in charge or loaded on board and the name of
the carrier of the multimodal transport operator is specifed.
52. In the case at hand, it is imperative to note that the letter
of credit expressly provided that the seller should furnish
complete set of not less than three original non-negotiable
copies of clean on board ocean bills of ladings (issued by the
carrier or their agents) to the order of the defendant. The
stipulation in the letter of credit was thus abundantly clear.
The parties had not agreed that the payment was to be released
on furnishing of a combined or multimodal transport bill of
lading. The submission on behalf of the defendant, if viewed in
the context of the stipulations in the letter of credit, runs
counter to the express condition thereof and thus does not
advance the cause of the defendant. It may be urged that for
the very reason that the combined transport of bill of lading
(Exhibit-P8) did not satisfy the primary requirement that the
seller shall submit clean on board ocean bill of lading, the
defendant Bank was under no obligation to release the payment.
53. The combined transport bill of lading (Exhibit-P8), on the
face of it, reveals that the goods were not shipped on an ocean
SUIT4651-1999.DOC
vessel. The goods were shown to have been shipped, clean on
board YUE HUA 523 at HUANGPU port of loading. YUE HUA
523 was designated as pre-carrier. The fact that YUE HUA 523
was not an ocean vessel was evident from the said designation.
Conversely, the ocean vessel was not named. The aforesaid
discrepancies were thus evident on a bare perusal of the
combined transport bill of lading (Exhibit-P8), on its face. No
further inquiry was warranted.
54. The situation is further exacerbated by the fact that the
certifcate of the shipper (Exhibit-P9), which according to
terms of the letter of credit was indispensable, did not certify
that the goods were shipped on a particular vessel, much less a
sea worthy vessel classifed 100 A1 by Lloyd's. It cannot be said
that the stipulation that "goods to be shipped by the sea worthy
the vessels which are not more than 25 years old classed 100 A1
by Lloyd's or equivalent classifcation society" was sans any
purpose. A certifcation to the effect that the goods were so
shipped on a sea worthy vessel would have ensured two things.
One, the shipment of the goods on board. Two, the safety of the
goods as they were boarded on a sea worthy vessel of a specifed
class. Mr. Mehta, the learned Senior Counsel was thus justifed
in advancing a criticism that the document (Exhibit-P9) cannot
SUIT4651-1999.DOC
be clothed with the character of a certifcate. Indeed, the
document does not certify anything.
55. Mr. Chinoy, the learned Senior Counsel, attempted to
salvage the position by placing reliance upon the judgment of
the Privy Council in the case of Commercial Banking Co. of
Sydney (supra). The endeavour does not deserve acceptance. In
the said case, the surveyors had certifed that they had
inspected the containers. In the case at hand, the document in
question (Exhibit-P9), as indicated above, certifes nothing. In
contrast, it incorporates the condition of the letter of credit. It
would be illogical to hold that the condition that, "certifcate to
this effect from shipping line or their agents must company
document" would stand satisfed if a certifcate incorporating
the very condition verbatim is issued. The very purpose of
insisting upon such certifcation is defeated if the shipper does
not name the vessel and further certify that it is of the specifed
class.
56. The conspectus of aforesaid consideration is that even if
the offcers of the defendant Bank are provided some allowance
for the inadvertence in the scrutiny of the combined transport
bill of lading (Exhibit-P8), yet no such dispensation is
conceivable in the case of Shipper's certifcate (Exhibit-P9). The
SUIT4651-1999.DOC
said document (Exhibit-P9) was of such a nature that no
prudent person exercising ordinary care would have accepted
and construed it to be a certifcate under the terms of the letter
of credit, since it certifes nothing. Cumulatively, the combined
transport bill of lading (Exhibit-P8) and the certifcate (Exhibit-
P9) were of such a nature that they hardly satisfed the
requirements envisaged by the letter of credit and UCP 500.
The discrepancies in the aforesaid documents were so glaring
that no Banker would have accepted and honoured those
documents.
57. In the backdrop of the admission in the written statement
that the defendant Bank had released the payment on 4 th July,
1996, much before the receipt of the documents on 8 th July,
1996, the aforesaid lapse in the scrutiny of the documents on
the part of the Bank can only be explained on the premise that
the Bank had not at all examined and scrutinised the
documents before releasing the payment. Post dispute, the
defendant Bank has made an unsustainable endeavour to
establish that the documents were in order. However, no
evidence was led by the defendant Bank to substantiate the
said defence. This assumes signifcance in the context of the
admission in the written statement that the payment was
SUIT4651-1999.DOC
released even before the receipt of the documents. Resultantly, I
am impelled to held that the defendant did not discharge its
duty to examine the documents with a reasonable care, before
making payment thereunder. Issue nos.2, 3, 4, 5 are thus
required to be answered in the affrmative and Issue nos.6 and
7 are required to be answered against the defendant.
58. Issue no.8:
The defendant contended that the master counter
indemnities dated 30th December, 1996 and 10th July, 1997
constituted an estoppel against the plaintiff and the latter was
precluded from asserting the claim once the defendant Bank
made the payment under letter of credit. The fact, that the
plaintiff had executed the indemnity on 30th December, 1996
and 10th July, 1997, was not contested. However, the question of
estoppel turns upon the nature of the indemnities.
59. Both the indemnities are in almost identical terms. The
following clauses are relevant and bear upon the controversy.
"In consideration of your issuing or establishing from time to
time at our request such documentary credits ("credits") as
you may think ft we hereby agree that the following
agreements terms and conditions shall apply to all such
credits.
(d) We undertake to indemnify you against all issues costs
damages expenses claims and demand which you may incur
sustain by reason or your issuing or establishing any such
credit and to provide you with funds with which to meet all
payments made by you or by a nominated bank and all drafts
SUIT4651-1999.DOC
drawn or accepted by you or by a nominated bank, together
with all interest, commission charges, disbursements and
expenses of whatsoever nature due to or incurred or defrayed
by you and/or your offces and by a nominated bank in
relation to any such credit.
(e) We authorise you to bit any of our accounts with you
with all monies for which you may be or become liable to pay
under or by virtue of any credit issued or established
hereunder at such time or times as your liability in respect
thereof shall be incurred whether or not prior to receipt by
you of advice of payment or at your discretion, at any time
thereafter and we confrm that you shall not be under any
obligation to give us notice of such debit either before or after
the same is made.
(f) We agree that you or your offcers or a nominated bank
or any person frm or company who shall make any payment
or accept any bill of exchange in consequence of any such
credit shall only be bound to examine with reasonable care
the drafts and documents issued under any such credit to
ascertain that they appear on their face to be in accordance
with the terms and conditions of the credit and that in
particular but without in any way limiting the foregoing
neither you nor any such offcer, person frm or company nor
a nominated bank shall be responsible for:
(i) .........
(ii) .........
(iii) .........
(iv) .........
(v) .........
(p) On no account shall any claim be made against the
Bank after the draft has been accepted or paid by us."
60. From a bare perusal of the aforesaid stipulations, it
becomes evident that under Clause (d) the plaintiff had
undertaken to indemnify the Bank against the costs, damages,
expenses, claims and demands in respect of the issue of the
credit and make available the funds to meet all the payments
made thereunder along with interest, charges and commissions
etc. In Clause (e) the plaintiff authorised the defendant Bank to
SUIT4651-1999.DOC
debit any of its accounts with the Bank with all moneys for
which the Bank was required to pay for the said credit facility.
Clause (f) reiterated that the plaintiff acknowledged that the
Bank's liability was only to examine with reasonable care the
drafts and documents issued under any such credit to ascertain
that they appeared on their face to be in accordance with the
terms and conditions of the credit and not hold the Bank
responsible for the underlying contract, genuineness and
validity of the documents etc. Clause (p) precluded the plaintiff
from laying any claim against the Bank after the draft has been
accepted or paid by the plaintiff.
61. The aforesaid conditions, which appear in the nature of
indemnity, primarily constitute the undertaking on the part of
the plaintiff that once the Bank lawfully makes the payment
under the letter of credit, the plaintiff would reimburse the
Bank along with the incidental costs, charges, interest and
damages, if any, without any demur. These indemnities thus
reinforce the contract between the buyer and the Bank that
once the Bank makes the payment, in accordance with the
terms and conditions of the letter of credit, the buyer would
make good the same. However, these stipulations operate only
when the Banker lawfully makes the payment. It is imperative
SUIT4651-1999.DOC
to note that even in Clause (f) of the indemnity, extracted above,
the duty to examine the documents with reasonable care is
spelled out. Where the evidence indicates that the Banker was
negligent in making the payment in as much as the documents
tendered did not conform with the terms and conditions of the
letter of credit and were, ex facie, discrepant, the aforesaid
indemnities do not insulate the Bank. In other words, where
the evidence establishes that the payment was wrongfully made
by the Bank, the latter is not entitled to fall back upon the
aforesaid indemnities. Hence, I am persuaded to answer issue
no.8 in the negative.
62. Issue no.9:
This propels me to the aspect of reliefs. Indisputably, the
account of the plaintiff was debited with Rs.2,22,54,460/- on
23rd July, 1996. Indubitably, as indicated above, the plaintiff
entered into a composition with the shipper and received a sum
of Rs.4,36,25,839/- (Rupee equivalent of US$999000) on 1 st
February, 2005. In the aforesaid context, the question of the
entitlement of plaintiff warrants determination.
63. Mr. Chinoy, the learned Counsel for the defendant,
submitted that since the plaintiff had not issued a notice to pay
interest on the said amount, from the date of the debit to the
SUIT4651-1999.DOC
date of the institution of the suit, as envisaged by Section 3 of
the Interest Act, 1978, the plaintiff is not entitled to claim pre-
suit interest. As regards the interest pendente lite, Mr. Chinoy
would urge that the prayer for interest at the rate of 20.5% p.a.
is wholly unjustifable. Conversely, there is no prayer for award
of the interest at a reasonable rate. A strenuous submission
was made on behalf of the defendant that, in any event, the
interest pendente lite on the said debited amount cannot exceed
the Bank rate. Inviting the attention of the Court to the
structure of interest rates provided by the Reserve Bank of India
in Handbook of the Indian Economy, it was submitted that in no
case the interest can exceed 9% to 10%, in the maximum. Thus
computed, according to Mr. Chinoy, the entire claim of the
plaintiff would stand satisfed with the receipt of the sum of
Rs.4,36,25,839/-, on 1st February, 2005.
64. Mr. Mehta, the learned Counsel for the plaintiff fairly
submitted that the plaintiff does not press the revised statement
of claim. Instead, the plaintiff seeks the said sum of
Rs.2,22,54,460/- plus interest thereon at the rate of 13% p.a.
from the date of debit i.e. 23rd July, 1996 to the date of the
institution of the suit, which would then constitute 'the
principal sum adjudged'. On the said sum, the plaintiff is
SUIT4651-1999.DOC
entitled to interest pendente lite as well as post decree, at the
rate at which the Banks lend money. Mr. Mehta further
submitted with tenacity that the defendant Bank having
charged interest on the said amount at the rate of 26.37%,
cannot be heard to say that the plaintiff is not entitled to claim
interest at the rate of 20.5% p.a. Having regard to the nature of
the transaction, according to Mr. Mehta, the plaintiff cannot be
deprived of the interest on the said amount at average lending
rate.
65. The entitlement of the plaintiff to claim interest on the said
amount which was wrongfully debited to the account of the
plaintiff, is required to be considered in two parts. One, interest
for the pre-suit period i.e. from 23rd July, 1996 to 21st July,
1999. Two, interest pendente lite and post decree. It is trite that
different considerations inform the entitlement to interest for the
aforesaid periods. The claim for pre-suit interest depends on
the nature of the contract, usage of trade and the provisions of
the Interest Act, 1978. Pendente lite interest, on the other hand,
is governed by Section 34 of the Code.
66. An useful reference, in this context, can be made to a
judgment of the Supreme Court in the case of State of
SUIT4651-1999.DOC
Rajasthan vs. Ferro Concrete Construction Private Limited, 5 on
which reliance was placed on behalf of the defendant, wherein
the legal position was expounded instructively, as under:
"65. The position regarding award of interest after the
Interest Act, 1978 came into force, can be stated thus:
(a) Where a provision has been made in any contract,
for interest on any debt or damages, interest shall be paid in
accordance with the such contract.
(b) Where payment of interest on any debt or damages
is expressly barred by the contract, no interest shall be
awarded.
(c) Where there is no express bar in the contract and
where there is also no provision for payment of interest then
the principles of section 3 of the Interest Act will apply in
regard to the pre-suit or pre-reference period and
consequently interest will be payable :
(i) where the proceedings relate to a debt
(ascertained sum) payable by virtue of a written
instrument at a certain time, then from the date when
the debt is payable to the date of institution of the
proceedings;
(ii) where the proceedings is for recovery of
damages or for recovery of a debt which is not payable
at a certain time, then from the date mentioned in a
written notice given by the person making a claim to
the person liable for the claim that interest will be
claimed, to date of institution of proceedings.
(d) payment of interest pendente lite (date of institution
of proceedings to date of decree) and future interest (from
the date of decree to date of payment) shall not be governed
by the provisions of Interest Act, 1978 but by the provisions
of section 34 of Code of Civil Procedure 1908 or the
provisions of the law governing Arbitration as the case may
be."
67. In the light of the aforesaid exposition of law, reverting to
the facts of the case, it has to be determined whether the
plaintiff is entitled to claim pre-suit interest. First and foremost,
the dispute arose out of a banking transaction. Indisputably,
5 (2009)12 Supreme Court Cases 1.
SUIT4651-1999.DOC
the defendant Bank had claimed interest on the delayed
payment, albeit under the terms of the contract. It is true that
there was no stipulation in the contract between the parties that
in the event of wrongful payment under letter of credit the Bank
would be liable to pay interest to the buyer. Yet, the very nature
of the transaction implies that the person whose account is
wrongfully debited and consequently deprived of the money,
ought to be compensated.
68. In the absence of a contract for payment of interest and
also barring a claim for interest, it has to be seen whether the
notice claiming interest was addressed as envisaged by Section
3 of the Interest Act, 1973. The letter dated 22 nd August, 1996
(Exhibit-D2-1) addressed by the plaintiff to the defendant Bank
incorporates the demand of interest at the rate 22% p.a. on the
amount of Rs.2,23,20,741.22, with which the account of the
plaintiff was debited. In the face of the said demand I am afraid
to accede to the submission on behalf of the defendant that no
notice as contemplated by Section 3 of the Interest Act, 1978
was issued.
69. In order to lend support to the submission that the
plaintiff is entitled to claim pre-suit interest and add the same
to the principal sum, with which the account of the plaintiff was
SUIT4651-1999.DOC
debited, so as to make the said sum as the 'principal sum
adjudged' within the meaning of Section 34 of the Code, Mr.
Mehta placed reliance on the Constitution Bench judgment of
the Supreme Court in the case of Central Bank of India vs.
Ravindra and others6. In the said case, the Supreme Court
considered as to what is the meaning to be assigned to the
phrases, "the principal sum adjudged" and "such principal
sum", as occurring in Section 34 of the Code, and held as
under:
"(1) Subject to a binding stipulation contained in a
voluntary contract between the parties and/or an
established practice or usage interest on loans and
advances may be charged on periodical rests and also
capitalised on remaining unpaid. The principal sum actually
advanced coupled with the interest on periodical rests so
capitalised is capable of being adjudged as principal sum on
the date of the suit.
(2) The principal sum so adjudged is "such principal sum"
within the meaning of Section 34 of the Code of Civil
Procedure Code, 1908 on which interest pendente lite and
future interest i.e. post-decree interest, at such rate and for
such period which the Court may deem ft, may be awarded
by the Court."
(emphasis supplied)
70. It would be imperative to note that, while arriving at the
aforesaid conclusion, in paragraph 49, the Supreme Court has
observed as under:
"49. ......... A creditor can charge interest from his debtor on
periodical rests and also capitalise the same so as to make it
a part of the principal. Such a course can be justifed by
stipulation in a contract voluntarily entered into between the
6 (2002)1 Supreme Court Cases 367.
SUIT4651-1999.DOC
parties or by a practice or usage well established in the world
to which the parties belong. Such practice is to be found
already in vogue in the feld of banking business. Such
contract or usage or practice can stand abrogated by
legislation such as Usury Laws or Debt Relief Laws and so
on."
(emphasis supplied)
71. On the aforesaid touchstone, reverting to the facts of the
case, especially the nature of the transaction, which arose out of
a core banking business, in my considered view, the plaintiff is
entitled to claim pre-suit interest and add the same to the
principal amount which was debited to the account of the
plaintiff so as to constitute the same as principal sum adjudged.
72. The plaintiff has claimed interest on the amount of
Rs.2,22,54,460/- at the rate of 13% p.a. from 23 rd July, 1996 to
21st July 1999. The structure of interest rate (Table 74) provided
in Handbook Of Statistics On The Indian Economy, issued by
Reserve Bank of India, for the year 2009 - 2010 indicates the
then prevalent lending rates, as under:
Year Lending rates
SBI advance Key lending rates as prescribed by
rate RBI (All commercial banks including
SBI)
Ceiling Minimum Minimum rate
rate rate general selective credit
general control
1996-97 14.50 - 14.50-15.00 Free
1997-98 14.00 - 14.00 Free
1998-99 12.00-14.00 - 12.00-13.00 Free
SUIT4651-1999.DOC
1999-00 12.00 - 12.00-12.50 Free
2000-01 11.50 - 11.00-12.00 Free
2001-02 11.50 - 11.00-12.00 Free
2002-03 10.75 - 10.75-11.50 Free
2003-04 10.25 - 10.25-11.00 Free
2004-05 10.25 - 10.25-10.75 Free
73. If the lending rates for the year 1996-1997 to 1999-2000
are taken into account, it becomes evident that the rates were in
the range of 15.00% (max.) to 12.00% (min.). Even if we reckon
the minimum of the bracket, for the relevant period, the rate of
interest would be 12% p.a.. Thus, the plaintiff is entitled to the
principal sum of Rs.2,22,54,460/-, with which the account of
the plaintiff was wrongfully debited, along with interest at the
rate of 12% p.a. from the date of the debit i.e. 23 rd July, 1996 to
the date of the institution of the suit i.e. 21 st July, 1999, which
thus constitutes and designated as "the principal sum
adjudged".
74. As regards the interest pendente lite, it was urged on
behalf of the defendants that, at the highest, the plaintiff would
be entitled to interest at deposit rates. The frst proviso to
Section 34 of the Code, inter alia, provides that the rate of
further interest, in the absence of the contractual rate, shall not
exceed the rate on which moneys are lent or advanced by
SUIT4651-1999.DOC
nationalised banks in relation to commercial transactions.
Thus, the benchmark for the award of interest from the date of
the suit ought to be also the lending rate.
75. In the Handbook Of Statistics On The Indian Economy
(2018-2019) issued by the Reserve Bank of India, the lending
rates for the period 2004 - 2005 to 2019 - 2020 are as follows:
Year (Per cent per annum)
Lending Rates MCLR (1-year)
2004-05 10.25-11.00 -
2005-06 10.25-12.75 -
2006-07 12.25-14.75 -
2007-08 12.25-15.75 -
2008-09 11.50-16.75 -
2009-10 11.00-15.75 -
2010-11 8.25-9.50 -
2011-12 10.00-10.75 -
2012-13 9.70-10.25 -
2013-14 10.00-10.25 -
2014-15 10.00-10.25 -
2015-16 9.30-9.70 -
2016-17 7.75-8.20 8.00-8.50
2017-18 7.80-7.95 8.15-8.30
2018-19 8.05-8.55 8.45-8.80
[email protected] 7.90-8.40 8.25-8.65
76. In the backdrop of the aforesaid historical trajectory of the
movement of the lending rates, the entitlement to interest is
required to be determined in two stages. First, the pendente lite
SUIT4651-1999.DOC
interest on the, "principal sum adjudged" (as computed in
paragraph 73 supra) from the date of the suit till 1 st February,
2005, the date plaintiff received the sum of Rs.4,36,25,893/-
from the shipper. Having regard to the movement of the
lending rates from 1999 to 2004 - 2005 it would be just and
proper to award simple interest at the rate of 10% p.a. on the
principal sum adjudged (as computed in paragraph 73 supra).
The principal sum adjudged and the simple interest thereon at
the rate of 10% would thus constitute the Total Amount, till 1 st
February, 2005. Since the plaintiff received a sum of
Rs.4,36,25,893/- from the shipper, the said amount of
Rs.4,36,25,893/- would be adjusted against and deducted from
the aforesaid Total Amount (the principal sum adjudged plus
interest accrued thereon at the rate of 10% p.a. from 21 st July,
1999 to 1st February, 2005) so as to constitute the shortfall in
the receipt, which is designated as the Balance Amount.
77. The entitlement of the plaintiff thus gets crystallized to the
aforesaid Balance Amount (Principal sum adjudged + interest @
10% p.a. till 1st February, 2005 - Rs.4,36,25,893/-). Secondly,
the plaintiff would also be entitled to interest on the aforesaid
Balance Amount from 2nd February, 2005. Again having regard
to the movement of the lending rates, for the years 2005 - 2006
SUIT4651-1999.DOC
to 2019 - 2020, extracted above, even on a conservative
estimate, it would be just and proper to award interest on the
said Balance Amount at the rate of 8% p.a. from 2 nd February,
2005 till realization.
78. The upshot of the aforesaid consideration and fndings on
issue nos.1 to 9 is that the suit deserves to be partly decreed.
Hence, the following order:
:ORDER:
(i) The suit stands partly decreed with proportionate
costs to be paid by the defendants to the plaintiff.
(ii) The defendants do pay to the plaintiff the "Balance
Amount" as computed in paragraph no.76 of this
judgment along with simple interest at the rate of 8%
p.a. from 2nd February, 2005 till realisation.
(iii) Decree be drawn up and sealed expeditiously.
[N. J. JAMADAR, J.]
