TMI Blog1981 (3) TMI 249X X X X Extracts X X X X X X X X Extracts X X X X ..... The respondent No. 2, Messrs Godrej Soaps Limited, herein-after referred to as `the plaintiffs', by a contract dated February 2, 1978 agreed to supply to the respondent No. 3, the Bihar State Food and Civil Supplies Corporation Limited, hereinafter referred to as `the Bihar Corporation', one thousand metric tonnes of `Sizola Brand pure Mustard oil' the total value of which was approximately ₹ 86 lacs, packed in brand new leakproof 62,040 tins of net 16 kg. each at the rate of ₹ 137 per tin. The contract provided inter alia that the Bihar Corporation were to open a letter of credit with the appellant, the United Commercial Bank, for the said amount, which the Bihar Corporation duly did. The letter of credit issued by the appellant was in the following terms : United Commercial Bank Nariman Point Branch United Commercial Bank Frazer Road, Patna Branch, 13th June, 1978. Office : Malbourne Road, Calcutta-1. To M/s Godrej Soaps Ltd., Eastern Express Highway, Vikhroli, Bombay 400 079. Dear Sirs, LETTER OF CREDIT No. 1/78 At the request of Bihar State Food Civil Supplies Corpn. Ltd., Patna, we hereby establish our confirmed irrevocable Letter of Cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich was ₹ 36,52,960, the second lot in 27 sets of the total value of ₹ 49,31,496. The first lot consisted of four sets of the value of ₹ 7.30 lacs, seven sets of ₹ 12.78 lacs, five sets of ₹ 9.13 lacs and four sets worth ₹ 7.30 lacs, the second of 27 sets, consisting of 19 sets of ₹ 34.17 lacs and 8 sets of ₹ 14.16 lacs. It is these two lots of documents which are the subject matter of the suit. When the documents were presented by the plaintiffs for payment of ₹ 36,52,960 against the first lot of 20 sets, and ₹ 49,31,496 against the second lot in 27 sets, the appellant, United Commercial Bank refused to make payment `except under reserve' on the ground of `discrepancies'. The main discrepancy was that the goods were described in the railway receipts as Sizola Brand Pure Mustard Oil `Unrefined '. The plaintiffs accordingly instructed their bankers, the Bank of India, to accept payment of ₹ 36,52,960 against the first lot of documents `under reserve'. The appellant accordingly made an aggregate payment of ₹ 36,52,960 to the Bank of India, that is, the negotiating bank, by three cheques of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y to the various destinations deleting the word`unrefined', with a request that the appellant may, as regards the 27 documents of the second lot, `negotiate the documents and pay for the same forthwith'. On the same day, the plaintiffs also addressed a letter to the Bihar Corporation stating that the word `Unrefined' had no relation to the quality but was inserted for the purpose of paying a lower freight, and further that the railway authorities had agreed to amend the railway receipts by deleting the word `Unrefined'. On July 13, 1978 the plaintiffs addressed the following letter to their bankers, the Bank of India : July 13, 1978. Bank of India, Foreign Exchange Dept., Mahatma Gandhi Road, Bombay 400 023. Attn : MR. SIRUR Dear Sirs. 19 documents for ₹ 1,92,648 each drawn under L/C No. 1/78 dated 13.6.1978 of United Commercial Bank Patna Office. We are enclosing 19 documents as referred to above and request you to forward the same to the United Commercial Bank, Nariman Point, Bombay for negotiations of payment. We request you to collect these funds forthwith and credit our Cash-Credit Account No. 1 with you. We have complied with all the te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9; in the railway receipts, as the same word does not appear in the Letter of Credit along with the words Sizola Brand Pure Mustard Oil . Out of abundant precaution, we then obtained and gave you copies of telegrams issued by the Central Railway to the Station Masters of the various destination stations, to which the goods were booked, to the effect that the word unrefined is superfluous and, therefore, deleted. You have taken the stand that by this action of the Central Railway also the documents still does not continue to be in accordance with the letter of credit. Out of abundant precaution, we are now submitting herewith the railway receipt returned by you wherein the word unrefined has been physically deleted by the railway authorities. We are also enclosing a letter of undertaking which is letter of undertaking issued by our bankers, the Bank of India, in your name indemnifying you against demurrage, wharfage and such other charges which you may have to pay at various destinations, where the goods have been consigned. This action of ours is without prejudice to any of our rights and contentions. We now request you to Pay for these documents forthwith. Director. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 377; 36,52,960. As regards the second lot of 27 documents towards which the balance amount of ₹ 49,31,496 was payable to the Bank of India, in terms of the letter of indemnity or guarantee executed by it he was informed that the instructions were awaited from the head office and was asked to come in the evening on the same day. The plaintiffs on the same day, i. e., on July 19, 1978, brought the suit in the Original Side of the Bombay High Court alongwith an application for the grant of a temporary injunction to restrain the appellant from recalling the amount of ₹ 36,52,960 but the learned Single Judge, Bharucha J., declined to grant an ex parte ad interim injunction, while allowing liberty to the plaintiffs to take out notice of motion returnable on August 4, 1978 but it appears that no such notice was ever taken out. When the appellant came to know of the suit, the plaintiff's representative made an endorsement at the foot of the letter dated July 17, 1978: As per Mr. Sharma's talk with Mr.K.R. Gokulam we hereby undertake not to proceed with this suit. sd.R.V. Shekar 19.7 1978 On the faith of the undertaking the appellant made payment of ₹ 49,3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated 18th July 1978 for ₹ 86,00,000 and in terms of our letters date 24.6.1978, 27.6.1978 and 28.6.1978 and two letters of 19.7.1978, under cover of which we had made payment of the bills to you, we hereby call upon you to refund to us the amount of bills viz. ₹ 85,84,456 (Rupees Eighty five lacs eighty four thousand four hundred and fifty six) together with interest from the date of payment by us to you to the date of refund by you to us @ 15% per annum. In the meantime, please note that the documents are held by us at your sole risk and responsibility. You may, if you so desire protect the merchandise including keeping insurance covernote valid. ................................................. Please treat this as MOST URGENT. sd.......Manager The 47 Notary's protest Certificates show that when the bills of exchange were re-presented for payment to the Bihar Corporation on August 2, 1978 the drawees dishonoured the bills of exchange on August 3, 1978 for the reason that (1) the railway receipts accompanying the bills were `stale', (2) the goods had not been supplied as per the terms of agreement, and (3) the chemical analysis showed that the oil require ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... letter of indemnity nor was the Bank of India restrained from making payment thereunder. The appellant being aggrieved by the order of the learned Single Judge dated August 24, 1979 preferred an appeal but a Division Bench of the High Court summarily dismissed the appeal on October 17, 1979. The result of all this has been that the plaintiffs have not only received ₹ 85,84,456 towards the price of 1000 metric tonnes of `Sizola Brand Pure Mustard Oil', but also have the mustard oil in question on payment of ₹ 18,53,000. The repercussions arising from the learned Single Judge's order dated August 24, 1979 are reflected in the correspondence that ensued between the parties. There is no need to refer to all the letters except a few. The plaintiffs by their solicitor's letter dated August 29, 1979, drew the attention of the Bank of India to the learned Single Judge's order granting injunction, and `instructed' it not to pay. It reads : The said interim order makes it absolutely clear that our clients will in no way be liable and responsible to return the amounts received under reserve and therefore our clients are in no way liable to pay any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to receive payment and to enable the Bank of India to make payment to it. This was contrary to its earlier stand taken in the affidavit filed in June, 1979, in opposition to the notice of motion, by which it denied that `it was trying to wriggle out of its obligations' under the letter of guarantee or indemnity and by which it said that it `submits to the order of the Court'. The main point in controversy is: Whether the Court should in a transaction between a banker and a banker grant an injunction, at the instance of the beneficiary of an irrevocable letter of credit, restraining the issuing bank from recalling the amount paid under reserve from the negotiating bank, acting on behalf of the beneficiary against a document of guarantee/indemnity at the instance of the beneficiary ? Another question also arises as to whether the Court should not in a matter like this, depart from its normal practice, and refuse to interfere with an interlocutory order under Art, 136 of the Constitution. The nature of the contractual obligations flowing from a banker's letter of irrevocable credit and more particularly, the rights of the seller as the accredited party or beneficiar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s meant to be absolute, that when the documents are presented they have to accept the bill. That is the commercial meaning of it. The fulfilment of the terms of the sales contract is a matter for the seller and the buyer alone. In Urguhart, Lindsay and Co. Ltd. v. Eastern Bank Ltd. (supra) Rowlatt J. held that the position of the banker under an irrevocable credit is in law the same as that of a person who has contracted to buy a shipping document representing the goods shipped, or to be shipped, under the contract between the beneficiary and the person at whose instance the credit has been issued. The credit in this case was opened in pursuance of a contract between Urguhart, Linsday and Co. and Benjamin Jute Mills, by which the former were to manufacture certain machinery and deliver it f.o.b. Glasgow, for shipment to Calcutta. Two instalments of the machinery were manufactured and shipped and duly paid for by the bank. A third instalment was also manufactured and shipped, but the bank in this case refused to take up the shipping documents and honour the draft on the ground that items for extra cost of labour were included in the invoice price of the goods and that the bank ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 : 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. 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 whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... im: 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. 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 ratified the defendant's action in accepting the documents. The dicta in American cases are to the same effect. In Lamborn v. Lake Shore Banking Co. Smith J. said: A party who is entitled to draw against a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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: Unless docume ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... credit sometimes resembles and is analogous to a contract of guarantee. In Elian and Anr v. Matsas and Ors. Lord Denning, M.R., while refusing to grant an injunction stated: ...... a bank guarantee is very much like a letter of credit. The courts will do their utmost to enforce it according to its terms. They will not in the ordinary course of things, interfere by way of injunction to prevent its due implementation. Thus they refused in Malas v. British Imex Industries Ltd. But that is not an absolute rule. Circumstances may arise such as to warrant interference by injunction. A Bank which gives a performance guarantee must honour that guarantee according to its terms. In R.D. Harbottle (Mercantile) Ltd. v. National Westminster Bank Ltd., Kerr, J. considered the position in principle. We would like to adopt a passage from his judgment at p. 761: It is only in exceptional cases that the courts will interfere with the machinery of irrevocable obligations assumed by banks. They are the life-blood of international commerce. Such obligations are regarded as collateral to the underlying rights and obligations between the merchants at either end of the banking chain. Except possi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry large sum of money in exchange for them. Its duty was not to go out and - determine by physical examination of the consignments, or employment of experts, whether the goods actually conformed to the contracts between the buyer and the seller, nor even determine either from its own or expert advice whether the documents called for the goods which the buyer would be bound to accept. The banker knows only the letter of credit which is the only authority to act, and the documents which are presented under it. If these documents conform to the letter of credit, he is bound to pay. If not, he is equally not bound to pay. The letter of credit called for 'Sizola Brand Pure Mustard Oil' while the railway receipts carried the description Siloza Brand Pure Mustard Oil 'Unrefined' and it was not within the province of the appellant to say that the latter description meant identically the same thing as the former. In an action against a purchaser for reimbursement, it is only necessary to prove that the goods tendered were the goods purchased, no matter how described, i.e., the purchaser was offered that which he had contracted for, while in such a case as this, in an a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was no question of the appellant paying this large sum of money except against the letter of guarantee or indemnity executed by the Bank of India. It was represented by the Bank of India that it had made arrangements for due payment of the bills of exchange. When the bills of exchange were dishonoured on being presented on August 3, 1978 the amount of ₹ 49,31,496 became immediately repayable on demand. There still remains the question whether the court should interfere with an order of this nature. The Court's powers under Art. 136 of Constitution are untrammelled, but they are subject to self-ordained restrictions. The Court does not, as a matter of rule, interfere with interlocutory orders, save under very exceptional circumstances. The grant of a temporary injunction by the High Court under O. 39 rr. 1 and 2 appears to be wholly unwarranted. For reasons already stated, the appellant was within its rights in making a recall of the amount of ₹ 85,84,456 paid 'under reserve' and/or in terms of the letter of guarantee or indemnity. We fail to appreciate any justification for grant of a temporary injunction to the plaintiffs, the effect of which virtuall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e while that of ₹ 49,31,496 was also made under reserve as well as against the letter of guarantee or indemnity executed by it. A payment 'under reserve' is understood in banking transactions to mean that the recipient of money may not deem it as his own but must be prepared to return it on demand. The balance of convenience clearly lies in allowing the normal banking transactions to go forward. Furthermore, the plaintiffs have failed to establish that they would be put to an irreparable loss unless an interim injunction was granted. It was, however, tried to be impressed upon us that the balance of convenience lay in granting the injunction since the appellant would not be put to any loss because it had furnished the letter of guarantee against 100 per cent margin, i.e. on deposit being made by the Bihar Corporation of ₹ 85,84,456 for meeting the payment to be made under the credit. It was also said that the effect of recalling of ₹ 85,84,456 from the Bank of India will result in the plaintiffs facing a serious credit-freeze, as the Bank of India will, on its turn, recall the amount from the plaintiffs. We are afraid, these considerations cannot prevai ..... X X X X Extracts X X X X X X X X Extracts X X X X
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