1 IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION SUIT NO. 873 OF 1983 State Bank of India ....Plaintiff V/s. Moti Thawardas Dadlani & Ors. ....Defendants Mr.Mody for the Plaintiff. Mr.G. R. Kinkhabwala for the Defendants. AND SUIT NO. 1012 OF 1983 Ramesh Thawardas Dadlani & Ors. ...Plaintiffs V/s. The State Bank of India ...Defendants Mr.G. R. Kinkhabwala for the Plaintiffs. Mr.Mody for the Defendants. CORAM : S.J. VAZIFDAR, J. DATE : 18TH DECEMBER, 2006. ORAL JUDGMENT : 1(A). Suit No.1012 of 1983 is filed for a decree in the sum of Rs.6,49,209.49/- with interest on Rs.5,71,337.49/- at the rate of 18% p.a. from the date of the suit till payment. In the alternative the plaintiffs have sought a decree against the Defendants in the 2 sum of Rs.1,17,364.60/- with interest at the rate of 18% on Rs.1,05,928.58/- from the date of the suit till payment. The suit was originally filed by Dadlani Silk Stores and the present Defendant no.2, Visharaj Garments Private Limited. By an amendment Dadlani Silk Stores were substituted by the present Plaintiff No.1, Ramesh Thawardas Dadlani. (B). Suit No. 873 of 1983 is filed by the Defendants in Suit No. 1012 of 1983 for a decree in the sum of Rs.58,435.44/- together with interest at the rate of 19.50% per annum. Defendant Nos.1 to 3 in this suit were, at the material time, partners of Defendant No.4, Dadlani Silk Stores (Original Plaintiff No.1 in Suit No.1012 of 1983). 2. The parties agreed that the decision in Suit No. 873 of 1983 would follow the decision in Suit No. 1012 of 1983. Hence this common judgment in the two suits. The Counsel addressed me in Suit No. 1012 of 1983. The references in this judgment therefore pertain to the parties and facts in Suit No. 1012 of 1983. The Plaintiff' s Case : 3. The Plaintiff's case is that pursuant to a request made by original Plaintiff No.1, Dadlani Silk Stores, the Defendants by a letter dated 2.2.1979 granted them a documentary imports Letter of Credit facility upto a limit of Rs.50 lacs, which was subsequently increased to Rs.75 lacs by a letter dated 14.12.1979. This was subject to a margin of 20% by way of lien on Term Deposit 3 Receipts issued by the Defendants in favour of Original Plaintiff No.1 or the current account balance of original Plaintiff No.1 and/or their associate concerns including Defendant No.2. (A) The L/C facility was granted by the Defendants on the conditions mentioned in the letters dated 2/2/1979 and 14/12/1979 (Exhibit B-1 and B-2 respectively). The letter dated 2/2/1979 granted the facility to the extent of Rs. 50 lacs and the letter dated 14/12/1979 enhanced the sum to Rs.75 lacs. The common condition pertaining to the margin in both the letters reads as under:- “Margin : 20% by way of lien on Term Deposit Receipts issued by the Bank in your favour or your current account balance and/or your associate concerns, viz. M/s. Vishraj Garments Pvt. Ltd (Defendant No.2) and M/s. Oriented Fashion Exporters.” (B) The letter dated 14/12/1979 relied upon by the Plaintiffs reads as under : “3. As the above arrangement is granted upto 12th December, 1980 please apply to us early in the first week of December, 1980 for its renewal, inter-alia furnishing the requisite data.” (C) In view of the submission based on Clause 3 of the letter dated 14/12/1979 it will be convenient at this stage to refer to a letter dated 3/10/1978 (Exhibit 8-B) addressed by Plaintiff No.2 to the Defendants. Plaintiff No.2 requested the Defendants to grant original Plaintiff No.1 the said L/C facility equal to the full 4 face value of two Term Deposit Receipts (T.D.R.'s) of Rs.5 lacs and Rs.5,45,110/- less the amount noted as lien against the guarantees issued amounting to Rs.6,40,000/-. In other words Plaintiff No.2 requested the Defendants to grant original Plaintiff No.1 the L/C facility against its T.D.R.' s to the extent of Rs.4,05,110/-. Plaintiff No.2 further agreed that in case original Plaintiff No.1 defaulted in the commitment against the L/C the Defendants may deduct such amount from the T.D.R' s without reference to it. The letter did not stipulate any time limit for the validity of this security. 4. Original Plaintiff No.1 had agreed to purchase from Ocilac Inc, (beneficiary) a company based in New York, 200 metric tonnes of Phenol USP (hereinafter referred to as `the said goods') as per an indent dated 4/1/1980 of M/s. Jai Vikas at a price of US$ 800 per metric tonne CIF, Bombay. It was a condition of the contract that the payment should be made by means of an irrevocable Letter of Credit. Jai Vikas by a letter dated 4/1/1980 called upon original Plaintiff No.1 to open the irrevocable L/C without recourse as per the details therein specified. (A). Accordingly original Plaintiff No.1 made an application to the Defendants dated 11/1/1980 to open the L/C of U.S.$ 79,800.35 covering 100 metric tonnes of the said goods as per the indent dated 4.1.1980 in favour of the beneficiary against the import licences of original Plaintiff No.1. In the application original Plaintiff No.1 gave certain instructions. As the same were incorporated in the L/C I will refer to them while dealing with the 5 L/C itself. (B) Pursuant to the said application the Defendants opened an irrevocable L/C dated 11/1/1980 as set out in a telex dated 12/1/1980, to Chemical Bank, New York, USA the intermediary bank, authorising the beneficiary to draw on original Plaintiff No.1 for a sum not exceeding U.S.$ 79800.35 CIF available by their drafts at sight for 100% of the invoice value and accompanied by the documents mentioned therein. The relevant part of the L/C reads as under :- “The goods should be shipped in two lots of approximately 50 tonnes each by separate vessels with minimum gap of ten days between each shipment, containing atleast five bills of lading. none of which exceeding 10 tons”. “This credit is subject to Uniform Customs and Practices for Documentary Credits (1974 Revision) International Chambers of Commerce Publication No.290.” 5(A). By a letter dated 19/2/1980 (Exhibit B-7) the Defendants informed original Plaintiff No.1 of having received the documents negotiated under the said L/C and requested that arrangements be made to retire the same at an earlier date. The letter itself indicated that the documents negotiated by Ocilac Inc., through Chemical Bank contained discrepancies. (B). Original Plaintiff No.1 by a letter dated 22/2/1980 informed the Defendants that the documents were not acceptable 6 due to the discrepancies mentioned therein namely that the bill of lading was dated 15/10/1979 which was prior even to the opening of the L/C and that contrary to the terms of the L/C only one bill of lading was made instead of five bills of lading none of which were to exceed 10 tonnes. Original Plaintiff No.1 therefore requested the Defendants to return the documents to their correspondent, namely Chemical Bank. (C). Original Plaintiff No.1 by a letter dated 28/2/1980 addressed to M/s. Forbes Forbes & Campbell Company Ltd., the agents of American President Lines Ltd. requested information regarding the date of arrival of the ship at the port of Bombay. M/s.Forbes Forbes and Campell Ltd. informed original Plaintiff No.1 that there were in fact seven bills of lading, each of which was dated 15/10/1979. 6. Correspondence ensued between Plaintiff No.1 and the Defendants, in the course of which Plaintiff No.1 referred to the various discrepancies in the documents tendered by the beneficiary Ocilac Inc., while negotiating the L/C. Correspondence in this regard also ensued between the Defendants and Chemical Bank. Suffice it to state at this stage that Chemical Bank took a stand that the negotiation atleast in part was in accordance with the terms of the L/C. As I shall demonstrate while dealing with the issues, the Defendants themselves were of the view that the documents contained discrepancies and were not negotiated in accordance with the L/C. Despite the same, by a telex dated 12/3/1980 the Defendants informed Plaintiff No.1 that payment 7 should be made. The Defendants referred to Articles 8 and 16 of the UCP. It is important to note that the letter did not deal with or consider the various discrepancies pointed out by original Plaintiff No.1. 7. The Defendants also informed the Plaintiffs that Chemical Bank had informed them that the beneficiary had informed Chemical Bank that the matter was being settled with original Plaintiff No.1. The Defendants requested information from original Plaintiff No.1 regarding the same. By their letter dated 20/3/1980, original Plaintiff No.1 stated that they had never been contacted by the beneficiary and that there was no question of any settlement as they were not prepared to accept the documents. In the subsequent correspondence, original Plaintiff No.1 reiterated the same. By a telex dated 2/6/1980 addressed to Plaintiff No.1 the Defendants referred to a telex dated 12/3/1980 received by the Defendants from Chemical Bank. Chemical Bank apparently had alleged that they had examined the documents once again and had come to the conclusion that they fully conformed to the terms of the L/C. Chemical Bank contended in a telex dated 31/5/1980 (Exhibit 8 CC) that the credit did not state that goods must be shipped on separate vessels but only stated “should” be shipped on separate vessels and that they considered the same an option for the beneficiary. 8. Unfortunately Chemical Bank is not a party to the suit. Subject to what they may hypothetically have to say the stand and the conduct of Chemical Bank appears to be ex-facie 8 unsustainable. It is difficult to understand how Chemical Bank could have considered the word “should” as an option for the benefit of the beneficiary. Chemical Bank had not even addressed themselves of any of the material discrepancies. 9. By a telex dated 29/10/1981 the Defendants informed original Plaintiff No.1 that they had been able to prevail upon the Chemical Bank to refund U.S.$ 39,644 pertaining to the second negotiation under the credit. The Defendants further stated that in respect of bill no. 80/80809 also for US$ 39,644/- negotiated by the Chemical Bank, they had retained the documents and not intimated the Chemical Bank about non-acceptance of the documents as required under the UCP as per the request of original Plaintiff No.1 vide their telex dated 22.2.1980. The request refers to an endorsement by/on behalf of original Plaintiff No.1 on the telex. One of the disputes before me is whether in fact there was an endorsement on the telex dated 22/2/1980 (Exhibit B- 8) as alleged by the Defendants as under :- “Please keep this matter pending. We are verifying from the shipping company the exact date of the arrival of the steamer”. The Plaintiffs have disputed this endorsement. The Defendants also stated that by letters dated 3/3/1980 and 13/3/1980, original Plaintiff No.1 advised them to refuse the documents. The Defendants stated that Chemical Bank had finally contended that the documents conformed to the credit. 9 The Defendants further stated that if they failed in their attempt to recover the amount from Chemical Bank they would recover the amount from the Plaintiffs. 10. By their letter dated 9/11/1981 original Plaintiff No.1 once again instructed the Defendants to return the documents to Chemical Bank stating therein the reasons for refusal. Original Plaintiff No.1 further stated that the stand of Chemical Bank was untenable and constituted a fraud. The Plaintiffs have also alleged that the Chemical Bank and the beneficiary had tampered with the documents after the discrepancies had been pointed out. 11. By a letter dated 23/8/1982 (Exhibit B-10) the Defendants advised Plaintiff No.2 that out of the aforesaid T.D.R's, a sum of Rs.4,28,000/- was credited to its current account and Rs.4,76,337.49/- had been held under suspense account. By a further letter dated 25/8/1992 the Defendant informed Plaintiff No.2 that an amount of Rs.4,76,337.49/- was being held as a cover for the liabilities of original Plaintiff No.1 and that it was therefore not possible to release the same. Plaintiff No.2 by its letter dated 5/10/1982 contended that the same was unauthorised. 12. Thereafter meetings were held between the parties in an endeavour to resolve the disputes. 13. Thereafter, further correspondence ensued between the parties in the course of which each of them reiterated their respective stands. It is pertinent to note that there are no allegations by the Plaintiffs against the Defendants of any mala-fides. Nor are there 10 any allegations against the Defendants of their having colluded with the intermediary bank and/or the beneficiary. 14. The subsequent correspondence between the parties essentially deals with what had been stated by them throughout. It is sufficient to note here only a few letters. By a letter dated 8/10/1982 (Exhibit B20), the Plaintiffs inter-alia stated that if any demand was conclusively established against them they were sufficiently solvent to pay the same. By a letter dated 24/1/1983 (Exhibit B-23) the Plaintiffs stated as under :- “Therefore we cannot understand why there is no action on your part to recover the amount from your correspondent bank”. It may be noted that in none of these letters nor in any other correspondence or otherwise did the Plaintiffs instruct / direct the Defendants to adopt legal proceedings against the intermediary bank or the beneficiary stating that they would bear the costs of such litigation. Nor did the Plaintiffs offer to pay the Defendants the loss caused as a result, I will presume, of the wrongful act of Chemical Bank in debiting the Defendants account. This aspect will assume considerable significance while dealing with the defence based on Article 12 of the UCP. In this connection it is also pertinent to note a letter dated 25/1/1983 (Exhibit B-24) addressed by the Defendants to the Plaintiffs contending that the documents in question were in order according to the rules of the International Chamber of Commerce 11 and that it was not possible for the Defendants to bring or sustain any action against the Chemical Bank in USA. The Defendants therefore called upon the Plaintiffs to discharge their liability under the agreement of indemnity contained in the application for the Letter of Credit and/or otherwise under law. The Defendants informed the Plaintiffs of their having adjusted the TDR's and demanded payment of the balance of Rs.58,124.91/-. As observed earlier, on receipt of the letter the Plaintiffs did not tender the amounts demanded by the Defendants but called upon them to adopt appropriate proceedings at their cost. This aspect too will assume significance while dealing with the defence based on Article 12 of the UCP. 15. It is in these circumstances that the Plaintiffs contended that the Defendants are not entitled to claim any amounts either by way of indemnity or otherwise. In Suit No.1012 of 1983, the Plaintiffs accordingly claimed a decree for the amounts adjusted/appropriated by the Defendants and resisted the Defendants Suit No. 873 of 1983. The Defendants Case : 16. The Defendants contended that the suit is not maintainable as it is filed on behalf of Plaintiff No.2 without a prior resolution being passed by Plaintiff No.2 to that effect and is liable therefore to be dismissed. The Defendants contended that in view of the application for opening the L/C the Plaintiffs were bound and liable to pay all amounts that the Defendants would be required to pay under the L/C. 12 17. Chemical Bank negotiated the first set of documents on presentation thereof by the beneficiary on 5/12/1980 and forwarded the same to the Defendants for payment. These documents were received by the Defendants on 19/2/1980 and immediately on receipt thereof, the Defendants called upon original Plaintiff No.1 to pay the amount under the said documents and to retire the same. 18. The beneficiary drew upon the L/C by a second set of documents. Chemical Bank negotiated the documents on 13/2/1980 and forwarded the same to the Defendants. The second set of documents were received by the Defendants on 22/2/1980. The Defendants called upon original Plaintiff No.1 to pay the amount under the second set of documents and to retire the same. The Defendants admit the letter dated 22/2/1980 by which the Plaintiffs stated that the documents were not acceptable as they contained certain discrepancies. The Defendants, however, alleged that one Moti Thawardas Dadlani, who was the partner of original Plaintiff No.1 by the said endorsement on the letter requested the Defendants to keep the matter pending as original Plaintiff No.1 was verifying from the shipping company the exact date of the arrival of the steamer. I have quoted the endorsement earlier. The Defendants further allege that they were orally informed that original Plaintiff No.1 expected to settle the matter with the beneficiary and that the only dispute between them was as regards the liability for payment of demurrage charges to the Bombay Port Trust. The demurrage had arisen on account of the fact that the goods had arrived and been at the docks prior to the 13 date of the issuance of the L/C. The Defendants thereafter set out the correspondence which I have already referred to while setting out the Plaintiffs case. 19. The Defendants contended that in exercise of their rights under the indemnity and guarantee and the said letters dated 3/10/1978 they appropriated a sum of Rs.95,000/- retained by the Defendants out of the Current Account of original Plaintiff No.1 and Rs.4,76,337.49/- out of the proceeds of TDR No.048876 dated 22/7/1977 belonging to Plaintiff No.2. There remains according to the Defendants the balance amount which is claimed by them in Suit No. 873 of 1983. 20. It may be noted that in paragraphs 11 and 27 of the Written Statement, the Defendants have set out the stand taken by the Chemical Bank to the effect that the documents tendered by the beneficiary were valid and in order and that they had duly negotiated the L/C ; that in any event the first set of documents were in full compliance with the terms of the L/C and that they had refused to reverse the debit against the Defendants in respect of the first set of documents in the sum of U.S.$ 39,688. The monies were withheld by them pursuant to the lien created by Plaintiff No.2 by the letter dated 3/10/1978 (Exhibit 8-B). In paragraph 34 the Defendants denied that Chemical Bank cleared the bills with discrepancies; that the documents were tampered with; that they did not safeguard the interest of the Plaintiffs; that no valid demand had been made; that no liability had been proved and that the adjustments made by the 14 Defendants were unauthorised. The Defendants denied that the documents tendered were not in accordance with the terms of the L/C and submitted that therefore there was no question of rejecting the same or not claiming indemnity or reimbursement by the Plaintiffs in respect of the payments made by the Defendants against the documents. It may also be noted here that there is no submission that the discrepancies which admittedly were apparent on the face of the documents were liable to be ignored by the Defendants, as the issuing bank and by Chemical Bank, the negotiating bank. This stand in the written statement is indeed curious as it is contrary to the stand taken by the Defendants in the correspondence with Chemical Bank. 21. In regard to one of the issues concerning the authority of the present Plaintiff No.1 to act on behalf of Plaintiff No.2, it is pertinent to note that in the Written Statement and in particular paragraph 33 thereto, the Defendants have expressly stated that original Plaintiff No.1 and Plaintiff No.2 were associate concerns. In paragraph 5 of the Written Statement the Defendants have stated that the partners of original Plaintiff No.1 were also shareholders and directors of Plaintiff No.2. This is in fact correct and is an admitted position. ISSUES 22. Issues were settled by an order dated 8/8/2004. Thereafter evidence was led before the Commissioner and the matter first came up for hearing on 15/6/2006. At the request of the learned counsel I reframed the issues. The issues as 15 reframed are as under :- 1(a) Whether the Plaintiff No.1 has become the sole proprietor of M/s.Dadlani Silk Stores ? (b) Whether Plaintiff No.1 is entitled to prosecute an defend legal proceedings filed by or against the said M/s.Dadlani Silk Stores - the Original Plaintiff No.1 as alleged in para 1 of the plaint ? 2(a) Whether Plaintiff No.1 was or is authorised to give evidence on behalf of Plaintiff No.2 ? (b) If the answer to Issue No.2(a) is in the negative, whether the suit is liable to be dismissed as far as Plaintiff No.2 is concerned ? 3. Whether the Plaintiffs prove that the bills of lading dated 15th October, 1979 contained discrepancies as alleged in paragraph 13 of the plaint ? 4. Whether the documents tendered by the beneficiary / Chemcial Bank for negotiating the letter of credit were not in accordance with the terms and conditions of the letter of credit as alleged in paragraph 27 of the plaint ? 5. Whether the Defendant was bound to reject the documents tendered by the beneficiary/Chemcial Bank for the reasons alleged in paragraph 27 of the plaint ? 6. Whether the Plaintiffs prove that the Defendants were not entitled to claim indemnity and reimbursement from the Plaintiffs for the reasons alleged in paragraph 27 of the plaint ? 16 7. Whether the Plaintiff by an endorsement on their letter dated 22nd February, 1980 requested the Defendants to keep the matter pending as Plaintiff No.1 was verifying from the shipping company the exact date of arrival of the steamer as alleged in paragraph 11 of the written statement ? 8. Whether the Defendants prove that they were informed by the partner of Original Plaintiff No.1 that the dispute between the beneficiary is with regard to demurrage and that they were expected to settle the same with the beneficiary of the Letter of Credit as alleged in paragraph 11 of the written statement ? 9. If the answer to Issue No.7 is in the affirmative, whether the Defendant was entitled to claim reimbursement or indemnity from the Plaintiffs even assuming that the answer to Issue Nos. 4 and 5 are in the affirmative ? 10. Whether the Defendants were negligent as alleged in paragraph 27 of the plaint ? 11. Whether the Plaintiffs prove that the action of the Defendants withholding the sums of Rs.95,000/- and Rs.4,76,337.39/- belonging to the Plaintiff No.1 and Plaintiff No.2 respectively was unjustified and not valid as alleged in paragraphs 20, 23 and 28 of the Plaint ? 12. Whether the Defendants were bound to initiate legal action against the correspondent bank and the beneficiary of the letter of credit as alleged by the Plaintiffs as alleged in paragraph 24 of the plaint ? 17 13. To what reliefs, if any, are the Plaintiffs entitled ? 14. What orders are to be passed ? The learned Commissioner tendered his report. I will deal only with those objections to the oral and documentary evidence as counsel addressed me on. RE: ISSUE NO. 1(a) and 1(b) 1 (a) Whether the Plaintiff No.1 has become the sole proprietor of M/s. Dadlani Silk Stores ? (b) Whether Plaintiff No.1 is entitled to prosecute and defend legal proceedings filed by or against the said M/s. Dadlani Silk Stores the Original Plaintiff No.1 as alleged in para 1 of the plaint ? 23. According to Plaintiff No.1 he became the sole proprietor of M/s. Dadlani Silk Stores pursuant to the dissolution of original Plaintiff No.1 as recorded in a Deed of Dissolution dated 7/2/1984 (Exhibit B-26). As per the deed of dissolution, three partners namely Indur T. Dadlani, Moti T.Dadlani, M/s. Sterling Shoes Private Limited retired as partners and Plaintiff No.1 became the sole proprietor of M/s. Dadlani Silk Stores. Plaintiff No.1 became the sole proprietor of the firm and took over the assets and liabilities of