IN THE HIGH COURT OF JUDICATURE OF MADRAS DATED: 08.08.2008 CORAM: THE HONOURABLE MR. JUSTICE G.RAJASURIA A.S.No.446 of 1999 The Karnataka Bank Ltd., Oppanakara Street, Coimbatore 641 001 rep. by its Deputy Regional Manager. ..Appellant/1st Defendant ..vs.. 1. Indian Bank, Mylapore Branch, 21, North Mada St, Madras-600 004 rep. by Sri B. Natarajan, Asst.General Manager ..1stRespondent/Plaintiff 2. M/s. Gomes Associates, 255, Navratna Buildings, Coimbatore-641 002 Proprietor Mr. H. Gomes 3. M/s. Ra-VELTRONICS No.5, North Mada Street, Mylapore, Madras - 600 004 rep. by Power of Attorney ..Respondents 2 & 3/ V.K.K. Dasan. Defendants 2 & 3 Appeal filed under Section 96 of the C.P.C. against the judgment and decree of the learned XVII Asst. City Civil Judge, Madras made in OS No.6845 of 1996 dated 30.04.1997. For Appellant : Mr.C.T.Selvam For R1 and R2 : No appearance For R3 : Mr.R.Vijaya Raghavan JUDGMENT This appeal is focussed as against the judgment and decree dated 30.04.1997 passed by the learned XVII Asst. City Civil Judge, Madras in OS No.6845 of 1996. For convenience sake, the parties are https://hcservices.ecourts.gov.in/hcservices/ referred to here under according to their litigative status before the trial Court. 2. Heard both sides. 3. Niggard and bereft of details, the case of the plaintiff as stood exposited from the averments in the plaint would run thus: The plaintiff is the Bank which was approached by the third defendant for grant of certain loan facilities, including Bills purchase facilities. Consequently, the former sanctioned the same in favour of the latter who started availing the facilities. In respect of the bills drawn by the third defendant on second defendant, the first defendant Bank, viz., M/s Karnataka Bank Ltd. had opened Letter of Credit in favour of the plaintiff Bank at the request of the second defendant agreeing to honour the bills drawn by the third defendant on the second defendant on presentation. The first defendant in fact was bound to honour the bills on due presentation to it by the plaintiff Bank, if the terms of Letter of Credit were complied with. It was also agreed that the amount utilised under the Letter of Credit would again be available for utilisation on receipt by the negotiating Bank of the advice that the Bill already drawn by the beneficiary had been reimbursed. Accordingly, on receipt of such advice, the plaintiff had been purchasing further Bills within the Letter of Credit upto Rs.2,00,000/-. The Letter of Credit itself was renewed for a further period of six months i.e. upto 11.01.1988 by the first defendant, vide its letter dated 16.07.1987 and it was again extended upto 11.01.1989. While so, the bills to the value of Rs.1,80,175/- were returned by the first defendant unpaid, as though reinstatement was required for negotiating the Bills under the Letter of Credit. In fact, the first defendant even paid upto Rs.10,00,000/- without insisting for separate reinstatement advice from the first defendant There is no condition in the Letter of Credit that reimbursement of commitment was required to honour the Bill drawn under it after utilisation of Rs.2,00,000/-. The details of the invoices relating to the sum of Rs.1,80,175/- are furnished hereunder. " 1. Invoice No.2478 dated 16.6.88 : Rs.28,450.00 2. Invoice No.2481 dated 17.6.88 : Rs.29,150.00 3. Invoice No.2487 dated 20.6.88 : Rs.32,450.00 4. Invoice No.2488 dated 20.6.88 : Rs.88,500.00 5. Invoice No.2489 dated 20.6.88 : Rs. 1,625.00 -------------- Rs.1,80,175.00 -------------- " 4. In the Demand Drafts issued by the first defendant, details of the relevant bills purchased were found incorporated and hence the https://hcservices.ecourts.gov.in/hcservices/ Demand Drafts themselves were treated as advices. After issuing notice, the plaintiff filed the suit as against defendants 1 and 3. Defendants 2 and 3 remained ex parte. 5. Per contra, the first defendant filed the written statement raising various pleas, the gist and kernel of them would run thus: The Letter of Credit should be interpreted strictly. The amount utilised under the Letter of Credit would again be available for utilisation on receipt by the negotiating Bank of the advice that the bill already drawn by the beneficiary had been reimbursed. The plaintiff was aware of the pre-requisite as contemplated in the Letter of Credit. The mere issuance of Demand Draft by the first defendant by itself would not constitute "advice" as contemplated in the Letter of Credit. The renewal of the Letter of Credit would not in any way enable the plaintiff to wriggle out of the conditions imposed in the Letter of Credit. The first defendant did not honour the bills to the tune of Rs.10,00,000/- in ignoring the conditions in the Letter of Credit. Accordingly, the first defendant prayed for the dismissal of the suit. 6. The trial Court framed the relevant issues. During trial, on the side of the plaintiff, P.W.1 was examined and Exs.A1 to A11 were marked. On the side of the defendants, D.W.1 was examined and Exs.B1 and B2 were marked. 7. Ultimately, the trial Court decreed the suit directing the defendants 1 to 3 to pay jointly and severally the suit amount with 18.5% interest per annum with quarterly rests. Being aggrieved by and dissatisfied with the judgment and decree of the trial Court, the first defendant Bank preferred this appeal on various grounds, the pith and marrow of them would run thus: i) The judgment and decree of the trial Court is against law and weight of evidence. ii) The trial Court failed to consider the conditions as found set out in the Letter of Credit. iii) The Letter of Credit would unambiguously highlight that only on receipt of advice from the first defendant, the plaintiff should further honour the bills. iv) The limit of Rs.2,00,000/- as contemplated in the Letter of Credit was not considered by the trial Court. v) The expectation of the trial Court that the first defendant on seeing the bills Exs.A3 to A7 should have paid the amount concerned to the plaintiff Bank was wrong and https://hcservices.ecourts.gov.in/hcservices/ contrary to the terms and conditions of the Letter of Credit. Accordingly, the first defendant prayed for setting aside the judgment and decree of the trial Court passed as against it. 8. The points for consideration are as to: (i) whether the plaintiff was justified in honouring the bills forwarded to it by the third defendant, even though the plaintiff had not received from the first defendant the advice as contemplated under Ex.A1 the Letter of Credit? (ii) Whether the business practice pleaded by the plaintiff that the first defendant honoured the earlier bills upto Rs.10,00,000/- without insisting for any pre condition has been proved? (iii) Whether there is any infirmity in the judgment and decree of the trial Court? Heard the learned counsel for the appellant/first defendant and the learned counsel for the respondent/third defendant. POINT 1 AND 2: These two points are taken together for discussion as they are inter-linked and inter-woven with each other. 9. The learned counsel for the appellant/first defendant would draw the attention of this Court to the last paragraph of Ex.A1 - the Letter of Credit and develop his argument to the effect that ex facie and prima facie it is clear that the plaintiff Bank ought not to have honoured the bills at its own whims and fancies without getting advice from the first defendant as contemplated in the Letter of Credit. For better appreciation, I would like to extract hereunder the last paragraph of Ex.A1, which would run thus: "The amount utilised under this credit shall be again available for utilisation only on receipt by the nogitating Bank/Branch of the advice that the bill already drawn by the beneficiary has been reimbursed by the buyer." 10. A bare perusal of it would spotlight and highlight that once bills to the tune of Rs.2,00,000/- were honoured by the plaintiff and got the said amount from the first defendant, the plaintiff should not further honour the bills without getting advice from the first defendant to the effect that the bill already drawn by the beneficiary has been paid by buyer. Here the term 'Negotiating Bank' would refer to the plaintiff Bank. The third defendant is the https://hcservices.ecourts.gov.in/hcservices/ beneficiary. The second defendants is the buyer. Accordingly if viewed, the facts as set out in the plaint would clearly demonstrate that the first defendant Bank cannot be mulcted with liability to pay the suit unless the plaintiff Bank could prove that it received advice as contemplated under Ex.A1 from the first defendant. Indubitably and undoubtedly, admittedly and unassailably, the plaintiff without getting the advice as contemplated in Ex.A1 has honoured the bills concerned sent by the beneficiary, for which the plaintiff tries to take umbrage under the so called business practice that on earlier occasion accounts upto Rs.10,00,000/- were paid by the first defendant to the plaintiff without any demur or insisting for any advice. 11. Learned counsel for the appellant/D1 would convincingly and and correctly argue that absolutely there is no iota or modicum of evidence to exemplify such business practice prevailed between the plaintiff and the first defendant. In the absence of any such proof, the trial Court was wrong in paragraph No.8 of its judgment in jumping to the conclusion that the first defendant was liable to honour the demand of the plaintiff. Not even the statement of accounts were filed so as to demonstrate that on earlier occasions, the first defendant waived the terms and conditions of the Letter of Credit relating to "advice". At the end of paragraph 8, the trial Court erroneously held as though absolutely there was no stipulation in the Letter of Credit relating to advice from the first defendant being sent to the plaintiff before honouring the bills. It is therefore explicitly and obviously clear that the trial Court fell into error in reading and understanding the terms and conditions of the Letter of Credit. 12.The learned counsel for the appellant/D1 cited the decision of the Hon'ble Supreme Court reported in 1981 SC 1426 [United Commercial Bank v. Bank of India and others]. An excerpt from it would run thus: "28. 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 beneficiary of the credit, against the issuing and drawee bank was dealt with by this Court in Tarapore & Co., Madras v. Tractors Export, Moscow, 1969 2 SCR : (AIR 1970 SC 891). It was held that the opening of a confirmed 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 https://hcservices.ecourts.gov.in/hcservices/ 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) 2 QB 127 and Urguhart Lindsay & Co. Ltd. v. Eastern bank Ltd., (1922) 1 KB 318 and observed at p. 930 of the Report, 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." 13. The learned counsel for the appellant relied upon the said paragraph 28, so as to highlight that terms and conditions in the Letter of Credit should be understood strictly and there should not be any liberal interpretation. Accordingly if viewed, it is crystal clear from the last paragraph of Letter of Credit that the amount once utilised under the letter of credit upto two lakhs once again the facility would be available only on receipt of advice from the first defendant by the negotiating Bank/the plaintiff. Hence, in this view of the matter I would like to adjudge that both the issues in favour of the appellant/first defendant as against the defendants 2 and 3. In view of the above ratiocination, the judgment and decree of the trial Court as against the first defendant only is liable to be set aside and accordingly, the same is set aside. 14. The learned counsel for the plaintiff would make an extempore submission to the effect that at the time of granting stay in this appeal, the first defendant was directed to pay the cost of the suit to the respondent 1, which was also duly paid and that the appellant/D1 might be permitted to recover it from the plaintiff. I could see considerable force in the argument of the learned counsel for the plaintiff and a direction to that effect also shall be incorporated in the decree of this Court. Accordingly, this appeal is allowed with cost. sd/- Asst.Registrar /true copy/ Sub Asst.Registrar gms https://hcservices.ecourts.gov.in/hcservices/ To The XVII Asst. City Civil Judge, Madras. Copy to: The Section Officer, V.R. Section, High Court, Madras. + 1 c.c. to Mr. R. Kolanchinathan, Advocate. S.R.No.43993. A.S.No.446 of 1999 GGK (CO) GSK 29.07.2009. https://hcservices.ecourts.gov.in/hcservices/