1 SJ.286.09.doc ndm IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION SUMMONS FOR JUDGMENT NO. 286 OF 2009 IN SUMMARY SUIT NO. 1103 OF 2009 Thirumalai Chemicals Limited, a Public Limited Company incorporated and registered under the provisions of the Companies Act, 1956, and having its registered office at Thirumalai House, Plot No. 101/102, Sion Matunga Estate, Scheme No.6, Road No.29, Sion (East), Mumbai 400 022 ... PLAINTIFF VERSUS 1) Shreyas Intermediates Limited, a public limited company incorporated and registered under the Companies Act, 1956 and having its office at 122-125 Solaries No. 2, Saki Vihar Road, Powai, Andheri (East), Mumbai 400 072 2) The Hongkong & Shanghai Banking Corporation Ltd., a baking Company incorporated under the provisions of the Companies Act, 1956 and having its office at Trade Services, 1 st Floor, 16, Veer Nariman Road, Fort Mumbai 400 001 ... DEFENDANTS 2 SJ.286.09.doc -------- Ms. Rajni Iyer, Senior Counsel alongwith Mr. Sandeep Parikh, Mr. Kamlesh Patel i/b Devan Dwarakadas and Partners for the Plaintiff Mr. Shyam Mehta a/w Mr.Gautam Ankhad i/b Mr.Hemant Sethi for Defendant No.1 Mr.D.D.Madon, Senior Counsel, a/w Mr.S.Srikrishna i/b Kanga and Company for Defendant No.2 -------- CORAM : A.S.OKA, J. DATE ON WHICH JUDGMENT IS RESERVED : 20 th January, 2011. DATE ON WHICH JUDGMENT IS PRONOUNCED : 8 th April, 2011. JUDGMENT: 1 The Plaintiff has filed a suit for recovery of a sum of Rs. 1,48,51,190/- together with interest thereon of Rs.6,78,679/- at the rate of 12% per annum from 29 th October, 2008 till 2 nd March, 2009 aggregating to Rs.1,55,29,869/-. The Plaintiff prayed for further interest at the rate of 12% per annum on the principal amount of Rs.1,48,51,190/- from the date of institution of suit till realization thereof. 3 SJ.286.09.doc 2 The Plaintiff is relying upon the Annual Quantity Contract for the year 2008-2009 (hereinafter referred to as the said contract) with the Defendant No.1 for supply of Phthalic Anhydride. The Plaintiff is relying upon the said contract dated 29 th February, 2008 for the supply of Phthalic Anhydride for the period between 1 st April, 2008 to 31 st March, 2009. As per the said contract, the Plaintiff agreed to supply minimum 50 MT of quantity each month for the months of April, May and June, 2008 and thereafter, minimum 200 MT for the months of July, August, and September, 2008. The Plaintiff agreed to supply minimum quantity of 300 MT each month from October 2008 to March 2009. According to the Plaintiff, it was agreed that for delayed payment interest at the rate of 12% per annum will be charged. 3 According to the Plaintiff, material was supplied for the months of April, May and June 2008 to the Defendant No.1 in terms of the contract and the payment in respect of material was received by the Plaintiff by way of a letter of credit. In consideration of supply to be made 4 SJ.286.09.doc for the month of July 2008, the Defendant No.1 caused to be issued through the Defendant No.2 an irrevocable letter of credit dated 24 th July, 2008 being Documentary Credit No.DPCDOM842054 for an amount of Rs.1,41,51,200/-. In the said letter of credit, the Defendant No.1 is referred as the Applicant and the Plaintiff has been mentioned as a beneficiary. The expiry date of the letter of credit was 3 rd September, 2008. After receiving the letter of credit on 30 th July, 2008, the material was dispatched by the Plaintiff on 31 st July 2008. The Plaintiff forwarded documents and the letter of credit to the State Bank of India for the purpose of collection. The said Bank forwarded the documents and letter of credit to the Defendant No.2 by their letter dated 27 th August, 2008. The letter was received by the Defendant No.2 on 29 th August, 2008. The Defendant No.2 issued a New Bill Advise dated 2 nd September, 2008 and informed the Defendant No.1 that they have received the documents from the Plaintiff and there were discrepancies namely (i) late presentation and (ii) invoice was not submitted in quadruplicate and not certified as per the documentary credit. The Defendant No.2 by Import Bill Acknowledgment dated 2 nd September, 2008 informed the State Bank of 5 SJ.286.09.doc India that they had received the bill, which contains discrepancies. It is stated in the plaint that though the advice was received by the State Bank of India on 6 th September, 2008, the same was misdirected by the Defendant No.2 and it went to some other department of the State Bank of India as a result of which, till 14 th November, 2008, the concerned department of the State Bank of India was not aware of the said letter. It is alleged that the said letter was handed over to the Plaintiff’ peon, who misplaced the same and thus it never reached the concerned person in the Plaintiff’ office. It is contended that the Defendant No.2 also never reverted back to the State Bank of India. On 29 th October, 2008, the Plaintiff inquired with the State Bank of India about the status of the letter of credit forwarded for the collection. The State Bank of India by its letter dated 10 th November, 2008 requested the Defendant No.2 to make payment under the letter of credit. By their letter dated 11 th November, 2008, the Defendant No.2 informed the State Bank of India that as the bill was discrepant; the Defendant No.1 has not accepted the documents. The Defendant No.2 stated that the amount will be paid on maturity as per the documentary credit terms as soon as they received the 6 SJ.286.09.doc acceptance for the said bill. According to the Plaintiff, in the said letter, no reference was made by the Defendant No.2 to letter dated 2 nd September, 2008. The State Bank of India by letter dated 14 th November, 2008 informed the Defendant No.2 that the said Bank has not received any communication about the discrepancies. It is stated that one Ms.Agrawal of the Defendant No.2 telephonically informed the said discrepancies to the State Bank of India. On 14 th November, 2008, the State Bank of India informed the Plaintiff about the fact that Defendant No.2 has not accepted the documents. By letter dated 20 th November, 2008 the Defendant No.2 informed the State Bank of India that the said Defendant had received documents dated 1 st September, 2008 and the same were processed on 2 nd September, 2008. By the said letter, the State Bank of India was informed that advice of refusal was dispatched by courier on 4 th September, 2008. It was stated that till that date, the Defendant No.2 has not received acceptance from Defendant No.1 and they were still holding on the original documents. The Defendant No.2 agreed to remit the proceeds as per the documentary credit terms without any overdue interest as soon as the Defendant No.2 received acceptance 7 SJ.286.09.doc from the Defendant No.1. 4 By letter dated 20 th November, 2008, the State Bank of India replied to the said letter of the Defendant No.2 and denied to have received any advice of refusal sent by the Defendant No.2 through courier on 4 th September, 2008 and requested the Defendant No.2 to forward the copy of the said advice dated 2 nd September, 2008. The Defendant No.2 thereafter, forwarded an office copy of letter dated 2 nd September, 2008 to the State Bank of India which was delivered to the said Bank on 6 th September 2008. By letters dated 2 nd December, 2008 addressed to Defendant No.2 and the State Bank of India respectively, the Plaintiff informed the Defendant No.2 that the documents were deemed to have been accepted by the Defendant No.2. By letter dated 4 th December, 2008, the State Bank of India informed the Defendant No.2 that the letter dated 2 nd September, 2008 issued by the Defendant No.2 was misdirected due to the fact that the Defendant No.2 had mentioned wrong name of the division. It was pointed out in the said letter that the alleged delayed submission of documents had no relevance because the 8 SJ.286.09.doc documents were submitted within the validity of the letter of credit and in any event, the Defendant No.1 has received the goods. It was submitted that submission of less number of sets of documents was mere technicality and the same does not make any material difference to the transaction necessitating withholding of the payment of the bill. According to the case of the Plaintiff, after some efforts, the Defendant No.1 was convinced to give their signed consent for acceptance of the documents submitted with the Defendant No.2. The consent of the Defendant No.1 was received by the Defendant No.2 on 8 th December, 2008. By letter dated 10 th December, 2008, the Plaintiff informed the State Bank of India about the signed consent given by the Defendant No. 1, which was delivered to the Defendant No.2 on 8 th December, 2008. By letter dated 10 th December, 2008, the State Bank of India informed the Defendant No.2 that since the Defendant No.1 had conveyed acceptance of the alleged discrepant documents on 8 th December, 2008, the Defendant No.2 should arrange to immediately make payment by RTGS. The Defendant No.2 issued advice dated 11 th December, 2008 to the State Bank of India and stated that they were returning the documents in 9 SJ.286.09.doc accordance with Article 16 (e) of UCP 600. 5 By letter dated 12 th December, 2008, the Defendant No.1 called upon the Defendant No.2 to make payment under the letter of credit to the Plaintiff. It was contented that the Defendant No.2 was holding excess payment in the tune of Rs.1,11,74,631/- over and above the amount payable to the Plaintiff. The State Bank of India by its letter dated 15 th December, 2008 stated that the matter should be examined by the Defendant No.2 in proper perspective and upon receiving the consent from the Defendant No.1, the State Bank of India will once again present the documents for payment. By letter dated 16 th December, 2008, the Defendant No.1 called upon the Defendant No.2 to either refund the entire amount of Rs.2,45,40,711/- lying with the Defendant No.2 or to pay the letter of credit and refund the balance amount lying with the Defendant No.2. The State Bank of India by a letter dated 16 th December 2008 made a query to the Defendant No.2 as to whether the said Bank should re-submit the documents to the Defendant No.2. By letter dated 17 th December, 2008 addressed by the Defendant No.2 to the State Bank 10 SJ.286.09.doc of India, it was alleged that the Defendant No.1 had not reverted in time and as a consequence, the Defendant No.2 had returned the documents by letter dated 11 th December, 2008 in accordance with Article 16 (e) of UCP 600 and therefore, the Defendant No.2 informed the State Bank of India not to present the documents again. 6 The Plaintiff issued Advocate’s notice dated 23 rd December, 2008 to the Defendants and called upon the Defendants to pay a sum of Rs.1,48,51,190/- with interest. In the meanwhile, by letter dated 2 nd January, 2009, the State Bank of India lodged a complaint to the Chief Executive, Foreign Exchange Dealers Association of India regarding the conduct of the Defendant No.2. The Defendant No.2 replied to the Advocate’s notice and contended that the discrepancies in the documents were communicated in accordance with Article 16 (d) of UCP 600 and since there was no response from the Defendant No.2 within the time prescribed, the documents were returned to the State Bank of India. By letter dated 12 th January, 2009, the Defendant No.1 replied to the Advocate’s notice by contending that the only the Defendant No.2 was 11 SJ.286.09.doc liable to make payment under the aforesaid letter of credit and the Defendant No.1 was not liable to make any payment. 7 As the payment was not made, the Plaintiff filed the present Summary Suit on the basis of the said contract for the year 2008-2009 executed between the Plaintiff and Defendant No.1 on 29 th February, 2008 and the letter of credit dated 24 th July, 2008 issued by the Defendant No.2. It is contended that the liability of the Defendant No.1 and the Defendant No.2 is joint and several. 8 The Defendant No.1 filed a reply to the Summons for Judgment. It was contended that as per the terms of the said contract, payments were directly made by the Defendant No.2 as a banker of the Defendant No.1 to the Plaintiff for the supplies from April 2008 to June 2008. It was contended that as regards the payment for the disputed period, the Plaintiff’s Bank i.e the State Bank of India did not take any steps to realize proceeds from the Defendant No.2. It was contended that in view of the fact that the payment was to be made by the opening 12 SJ.286.09.doc a letter of credit, the liability was only of the Defendant No.2. It is contended that in the terms of the said contract and the letter of credit, it was the Defendant No.2, who was liable to pay amount to the Plaintiff. 9 The Defendant No.2 filed affidavit-in-reply of one Mr.Bhriguraj Singh. The Defendant No.2 did not dispute that the Defendant No.2 on behalf of the Defendant No.1 established documentary credit dated 24 th July, 2008 favouring the Plaintiff for an amount of Rs.1,48,51,200/-. Reliance was placed on Clauses 46-A and 47-A of the documentary credit. It was contended that if the documents presented were discrepant, the Defendant No.2 had right to give notice of refusal to accept such discrepancies in accordance with the provisions of UCP(Uniform Customs and Practice). It was contended that the Defendant No.2 retained the right to accept a waiver of the discrepancies by the Defendant No.1 and to release the documents of Documentary Credit on such waiver, subject to such waiver being acceptable to the Defendant No.2. It was contended that on 8 th December, 2008, the Defendant No.1 submitted Bill Acknowledgment Advice indicating to the 13 SJ.286.09.doc Defendant No.2 that the Defendant No.1 was accepting the documents by waiving the discrepancies. It was contended that waiver of the discrepancies was unacceptable to the Defendant No.2 and therefore, the Defendant No.2 exercised its option not to accept waiver of the discrepancies by the Defendant No.1 and accordingly, returned the documents to the State Bank of India on 12 th December, 2008 in accordance with Article 16 (E) of the UCP. It was contended that the Summary Suit was not maintainable and in any case, the Plaintiff had no cause of action against the Defendant No.2. Separate rejoinders were filed by the Plaintiff dealing with the reply of the Defendant No.1 and Defendant No.2 respectively. 10 The learned senior counsel appearing for the Plaintiff has invited attention of the Court to the correspondence and documents on record. The learned senior counsel pointed out that the suit is based on said contract which is at Exhibit – A to the plaint. The learned senior counsel submitted that the contract does not provide that the payment of price will be made only by a letter of credit. The learned senior counsel 14 SJ.286.09.doc submitted that though there is a reference to the letter of credit in payment terms, specific banker is not named. The learned senior counsel pointed that there are clauses in the contract, which provide for overdue interest at the rate of 12% per annum on delayed payment. It also provides that if delay in making payment is of more than 15 days, supply will be stopped till clearance of payment along with accrued interest. The learned senior counsel invited attention of the Court to clause 46-A of the documentary credit, which provides that only two documents were required for releasing the payment. The first requirement was of submitting signed commercial invoices in quadruplicate certifying that the goods are as per order dated 3 rd July, 2008 and the second requirement was of submitting a the Lorry receipt quoting the documentary credit number. The learned senior counsel pointed out that even assuming that there were discrepancies in the documents, the Defendant No.2 was bound to accept waiver by the Defendant No1 and in fact, in the facts of the case, admittedly there was such a waiver by the Defendant No.1. The learned senior counsel submitted that though documentary credit was issued by the Defendant 15 SJ.286.09.doc No.2, under the said contract, the Defendant No.1 continued to be liable to pay the price of the goods as letter of credit does not amount to absolute payment by the buyer of the goods. The learned senior counsel submitted that there is not dispute about the receipt of the documents by the Defendant No.2 – Bank. The learned senior counsel pointed out that even in letter dated 20 th November, 2008 addressed by the Defendant No. 2 to the State Bank of India, the Defendant No.2 pointed out that the original documents were with the Defendant No.2 and the Defendant No. 2 was willing to remit the proceeds as per the terms of the documentary credit without any overdue interest. The learned senior counsel pointed out that waiver/acceptance was communicated by the Defendant No.1 to the Defendant No.2 on 8 th December, 2008. The learned senior counsel submitted that notwithstanding the said waiver by the Defendant No.1, without assigning any reason, on 11 th December, 2008, the Defendant No. 2 illegally invoked Article 16 (E) of UCP by returning the original documents to the State Bank of India. The learned senior counsel pointed out the letter dated 12 th December, 2008 addressed by the Defendant No.1 to the Defendant No.2. 16 SJ.286.09.doc 11 The learned senior counsel appearing for the Plaintiff made a reference to a decision of the Court of Appeal in the case of W.J. Allan & Co. Ltd. Vs. EL Nasr Export and Import Co. [1972 (2) Court of Appeal]. The learned senior counsel pointed out that the Court of Appeal has considered effect of an irrevocable letter of credit. The learned senior submitted that if a letter of credit is not honoured by the Bank, the debt payable to the seller is not discharged and the seller has a remedy against both the banker and the buyer. The learned senior counsel also relied upon a decision of Queens Bench in the case of NG Chee Chong, NG Weng Chong, NG Cheng and NG YEW (a firm trading as Maran Road Saw Mill) Vs. Austin Taylor & Company Limited [1975 Vol.1 Queens Bench (Commercial Court)]. The learned senior counsel submitted that the letter of credit operates as a conditional of payment of the price and not absolute payment. The learned senior counsel submitted that the defence of both the Defendants is absolutely frivolous and they are not entitled to grant of leave to defend. 17 SJ.286.09.doc 12 The learned counsel appearing for the Defendant no.1 invited attention of the Court to the said contract. He submitted that the only mode of payment of price of the goods provided under the contract is by a letter of credit. He submitted that the commercial invoices issued by the Plaintiff make a specific reference to the Documentary Credit issued by the Defendant no.2. He submitted that as the mode of payment provided in the contract is by letter of credit, the compliance with the said condition by the Defendant no.1 amounts to complete payment. He pointed out that the funds in excess of the amount payable to the Plaintiff were placed at the disposal of the Defendant no.2. He submitted that though the Defendant no.2 informed both the Plaintiff and the Plaintiff's banker on 4 th September, 2008 that the documents submitted by the Plaintiff were discrepant, no steps were taken by the Plaintiff or by the Plaintiff’s banker till December 2008. He submitted that immediately after it was brought to the notice of the Defendant no.1 that the documents were discrepant, the Defendant no.1 issued a letter of waiver to the 2nd defendant. He pointed out that gross illegality has been committed by the Defendant no.2 by not honouring the letter of credit though there is no default on the part of the 18 SJ.286.09.doc Defendant no.1. He submitted that the remedy, if any, available to the Plaintiff is against the Defendant no.2. He made a reference to the decision of the Queens Bench in the Case of Soproma S.p.A.v Marine and Animal By-products Corporatrion [(1966) Vol.I Lloyd’s List Law Reports 367]. He submitted that the law laid down by the Court of Appeal in the Case may not be correct. He submitted that the Defendant no.2 had the funds lying in the bank which could have been utilized for making payment to the Plaintiff. He submitted that there is a sound defence available to the 1st defendant and therefore, this is a case where unconditional leave has to be granted. 13 The learned senior counsel appearing for the Defendant No. 2 pointed out relevant clauses of the Documentary Credit issued by the Defendant no.2 and in particular clauses 46A and 47A. He submitted that by communication dated 4 th September 2008, the Defendant no.2 had informed the state bank of India that the documents submitted were discrepant and the said letter was duly received by the State Bank on 6 th September, 2008. He pointed out that a communication to that effect was 19 SJ.286.09.doc also issued to the Plaintiff. He pointed out that by e-mail issued on 4 th December 2008, the Defendant no. 2 informed the Defendant no.1 that after receiving authorisation to accept the discrepant documents and funds in the account, the payment will be released by the Defendant no.2. He submitted that the Defendant no.2 gave a reasonable time to the Plaintiff and the Defendant no. 1 for action. He pointed out e-mail dated 11 th December 2008 sent by the Defendant no.2 to the Defendant No.1 in which it was clearly mentioned that if the Defendant No. 1 fails to advise the date by which the funds will be arranged, the documents will be returned to the State Bank of India. He submitted that the Defendant No. 2 had every right not to accept the waiver of discrepancies by the Defendant no.1 and that the Defendant no. 2 has rightly exercised the said option. He submitted that apart from the fact that the Defendant No.2 has a valid defence, the issue of interpretation of the contract is involved which calls for grant of unconditional leave. 14 I have given careful consideration to the submissions. The first issue will be regarding the defence of the Defendant no.1. The said 20 SJ.286.09.doc defence in short is that the right of the Plaintiff to receive the price of the goods supplied to the said defendant is only under a letter of credit issued by the Defendant No. 2. It is contended that this was the only mode under which the Plaintiff can receive the price of the goods supplied. In short, the contention is that after opening a letter of credit, the liability of the Defendant No. 1 ends and the letter of credit operates as an absolute payment. 15 Admittedly, the Defendant No. 1 received the goods under the said contract and there is no dispute about the quality or the quantity of the goods. A buyer of the goods is under an obligation to pay the price of the goods purchased by him. It will be necessary to make a reference to the terms of the said contract. The relevant terms read thus: “Payment Terms :: LC 90 days from Invoice date. If payment is made in advance then the price working Will be as under: Base Pricing :: Price basis will be: Average of first