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Judgment
J. Kanakaraj, J.—Defendants Nos. 1 to 6 in C. S. No. 338 of 1981 are the appellants in both the appeals. The first respondent, State Bank
of India, filed the suit, C. S. No. 338 of 1981, seeking a preliminary decree against the first defendant-firm in a sum of Rs. 8,74,137.77 with
interest on the principal amount at the rate of 19.5 per cent. per annum with quarterly rests, for a personal decree against the first defendant for the
same amount, and a personal decree against defendants Nos. 2 to 6 in a sum of Rs. 13,81,894.26 with interest at 19.5 per cent. per annum with
quarterly rests. After the plaint was amended as per the order in Applications Nos. 868 and 869 of 1984, dated February 27, 1984, the seventh
defendant was impleaded and a prayer for a decree in a sum of Rs. 11,99,805.18 against defendants Nos. 2 to 7 with interest at 19.5 per cent.
per annum with quarterly rests was also sought for.
The case of the first respondent/plaintiff is as follows : The first defendant was carrying on a business as a partnership firm with defendants Nos.
2 to 5 and one Mrs. Safia Bee as partners. On July 1, 1978, the said Mrs. Safia Bee assigned her rights to the third defendant and the partnership
firm was reconstituted. The firm approached the plaintiff for credit facilities for the purpose of its business. Two facilities were granted by the
plaintiff, the first being export packing credit facility up to a limit of Rs. 3 lakhs and the second was a documentary bill under letter of credit to the
extent of Rs. 5 lakhs. The first defendant was exporting handloom garments. Various documents were executed by the first defendant, like an
agreement for cash credit on security, promissory note dated March 22, 1977, for Rs. 3 lakhs with interest at 11.5 per cent. per annum,
agreement of guarantee dated March 22, 1977, general letter of indemnity, dated March 22, 1977, relating to the documentary bills and a general
letter of hypothecation dated March 22, 1977. An equitable mortgage was also created on the suit property under a letter received by the plaintiff
on December 4, 1978, as and by way of collateral security for the advances sanctioned by the plaintiff. The suit comprised a claim for Rs.
1,72,089.08 under the packing credit facility and a sum of Rs. 11,99,805,18 under the documentary bill facility. We are not concerned in these
appeals with the packing credit facility, because that amount has since been paid by defendants Nos. 1 to 6.
So far as the documentary bill facility is concerned, the first defendant was exporting garments to foreign countries and negotiating the bills
through the plaintiff-bank. The plaintiff acted as an agent for the first defendant in negotiating such bills as against the letters of credit. The State
Trading Corporation of India had entered into a contract with Hillingdon Shirt Company Limited, United Kingdom, for the supply of garments and
this contract was assigned in favour of the first defendant. The foreign buyer opened a letter of credit No. 0C 10399, dated February 1, 1979, in
favour of the State Trading Corporation on the seventh defendant-bank and this letter of credit was duly transferred to the first defendant. The first
respondent was exporting garments from time to time by negotiating the bills and some bills were in fact honoured by the seventh defendant. But in
respect of the suit transactions, the seventh defendant-bank refused payment and consequently, the plaintiff-bank, who had credited the first
defendant with the amount due under the bills sought to recover the amounts due under the said transactions. The particulars of one of the suit
transactions are a bill dated March 15, 1979, for � 11,340. The plaintiff-bank credited the first defendant with the amount due under the bill, but
found the documents not in accordance with the letter of credit and, therefore, informed the first defendant by letter dated May 16, 1979. that they
would negotiate the bill ""under reserve"". The reason for stating that the documents were not in accordance with the letter of credit, is that there was
100 per cent. over shipment under the Style H 1014. Though the first defendant assured that the goods would be accepted by the foreign buyers,
the seventh defendant-bank ultimately refused payment. Similarly, in respect of the two other bills dated May 31, 1979, for � 24,975 and �
12,015, the seventh defendant-bank refused to honour the bills. Even in respect of these two bills, the plaintiff had credited the first defendant with
the amounts due on the bills, but wrote a letter on June 1, 1979, that they would negotiate the bills ""under reserve"". The seventh defendant having
refused payment, the plaintiff necessarily sought recourse to the first defendant for reimbursement. According to the plaintiff, they had acted as an
agent in respect of all the three bills under the letter of credit facility, in respect of which the first defendant had agreed to indemnify the plaintiff for
any non-payment of such bills. So far as the claim of interest at the rate of 19.5 per cent. per annum, compounded quarterly is concerned, the
plaintiff states that the contract between the parties entitled them to claim the interest at the said rate.
The written statement of the first defendant which has been adopted by defendants Nos. 2 to 6 denies the allegation of the plaintiff that the bills
were negotiated ""under reserve"". The plaintiff was all the time negotiating with the seventh defendant on the ground that the documents were in
order and, therefore, it was not open to the plaintiff to say that the bills were defective. The defendant emphatically denies the alleged letters, dated
May 16, 1979, and June 1, 1979. Under Articles 7 and 8 of the Uniform Customs and Practice for Documentary Credits (1974), the seventh
defendant had no right to refuse payment and consequently, the plaintiff was justified in making a claim against the seventh defendant. It was further
contended by defendants Nos. 1 to 6 that the letter of indemnity could not cover the suit transactions. Certain other incidental pleas were also
taken, but it is not necessary to narrate the same in view of the subsequent events and the arguments placed before us. It was, however, stated that
the plaintiff cannot claim the suit amount as a holder in due course. It was further contended that the payments under the bills to the first defendant
were clean payments and that there was no indication of the bills being negotiated ""under reserve"".
On January 4, 1984, a decision was rendered on certain preliminary issues raised by the parties and the learned single judge ordered as follows:
This application is by the State Bank of India, overseas branch for a declaration that it be deemed to have been on record from the date of plaint.
It is made clear that the newly proposed defendant, viz., the seventh defendant will be at liberty to raise the question of limitation on his written
statement with this observation the petitioner is ordered. . . .
We will now refer to the written statement of the seventh defendant, who was impleaded. His first contention is that as against them, the suit was
barred by limitation. The validity of the letter of credit expired on May 31, 1979. The goods were subsequently sold and the sale proceeds were
remitted to the plaintiff in August, 1980. The seventh defendant having been impleaded only in 1984 and liberty having been reserved for raising the
question of limitation, it is contended that as against the seventh defendant, the suit claim is barred by limitation. The second plea is that the foreign
importer, Hillingdon Shirt Company, United Kingdom should have been impleaded as a party to the suit. It is further pointed out that the letter of
credit was amended on February 8, 1979, March 2, 1979, March 8, 1979, March 29, 1979, May 2, 1979, and June 14, 1979. In spite of such
amendments, the disputed bills were not in accordance with the letter of credit. It is also pointed out that the two bills, one for � 9,000 and
another for � 9,306 were honoured by the seventh defendant, because the goods were accepted by the importer. In respect of the suit bills, the
seventh defendant says as follows :
On May 16, 1979, and June 1, 1979, the plaintiff forwarded bills for � 11340 dated May 15, 1979, and for � 24,975 and at � 12,015
dated March 31, 1979, drawn by the first defendant to the order of the plaintiff against the aforesaid letter of credit. The documents pertaining to
these shipments were not in order inasmuch as there was an over shipment in respect of certain garments as detailed below :
SBI Reference Description of goods Quantity of overshipment
FSBH 7/1392 Style 2 (NOUVOI fabric H 1014 (boys) 75 dozens
FSBH 4/1428 78038 fabric H 1030 (Mana style) 250 dozens
FSBH 4/1429 Style twill 3 fabric H 1014 (boys) 75 dozens
Apart from over shipment other discrepancies were also noticed ...
It is next contended that by a telex message, dated June 21, 1979, the seventh defendant had given the following reasons for non-payment of
the bills :
Letter of credit had expired.
Non-presentation of copy letter addressed to Hillingdon Shirt Company Limited.
Non-presentation of cables regarding import licence.
Insurance policy does not cover 20 per cent. above CIF.
over shipment of Style 78028 fabric H 1030 and
Overshipment of Style twill 3 fabric H 1014 . . .
By a telex message, dated March 10, 1980, the seventh defendant had informed the plaintiff that if no instructions were forthcoming within seven
days from the date of the cable, the goods which were accruing heavy warehousing charges would be sold in public auction. Since the plaintiff was
unable to arrange for an alternative buyer, the goods were sold on the instructions of the plaintiff and the sale proceeds, deducting all the charges,
viz., � 1984.95 was remitted back to the plaintiff under a covering letter, dated August 13, 1980. The seventh defendant also placed reliance on
Article 8(c) and 8(e) of the Uniform Customs and Practice for Documentary Credits (1974 revision) for justifying the stand taken by them to
honour the suit bills.
One other important application that was taken out on behalf of appellants (defendants) Nos. 1 to 6, is Application No. 608 of 1987, seeking a
third party notice to the seventh defendant under Order VA of OS Rules read with Order VIII-A of the Code of Civil Procedure, seeking a
decree against the seventh defendant for Rs. 11,99,805.18 or such other sum which might be decreed in favour of the plaintiff as against
defendants Nos. 2 to 6 together with interest at 19.5 per cent. per annum with quarterly rests. In other words, that application was based on the
right of the appellants for a decree against the seventh defendant in the event of their suffering a decree at the hands of the plaintiff. This again is
based on the contention that the appellants who had not acted in variance with the terms of the letter of credit of the seventh defendant being the
issuing bank are bound to pay the bills duly drawn under their credit. The counter-affidavits were filed by the seventh defendant as well as the
plaintiff in the said Application No. 608 of 1987. The said application came to be disposed of along with the suit. This is precisely the reason why
there are two original side appeals, one against the suit in C. S. No. 338 of 1981 and the other against the order in Application No. 608 of 1989,
dated November 18, 1989.
We will now refer to the findings of the learned single judge in the suit as well as in Application No. 338 of 1981. Before that it is also
necessary to notice the issues framed in the suit, which are as follows :
Whether the suit is not maintainable for the reasons stated in paragraph 2 of the written statement ?
Whether the plaintiff is a holder in due course of the bills negotiated ?
Was the plaintiff acting as the agent of the defendants in negotiating the documentary bills ?
Whether the bills in question were negotiated by the plaintiffs and whether the plaintiffs have been made any payments towards the same ?
Was there a concluded contract between the parties on September 9, 1977, in respect of financial facilities ?
Whether there is a valid and binding equitable mortgage in respect of the property described in the B Schedule of the plaint ?
Whether the plaintiffs are estopped from making the claim in view of the alleged representation made in paragraph 12 of the written statement ?
Whether the plaintiff''s remedy is to have recourse on Algemene Bank alone ?
Is the guarantee executed by the defendants restricted and limited to a specified amount ?
Whether the plaintiff is entitled to interest at the rate of 19.5 per cent. per annum compounded quarterly ? and
What are the rights of the plaintiff under the letter of indemnity and whether they are entitled to the mortgage decree as well as a personal
decree ?
Subsequently, the following additional issues were also framed :
Whether this court has no jurisdiction to try the suit as contended by the seventh defendant ? and
Whether the claim as against the seventh defendant is barred by limitation ?
On the first issue relating to the maintainability of the suit, the learned single judge gave verdict in favour of the plaintiff. This issue has not been
questioned before us. On the issue relating to the contract between the parties and the validity of the equitable mortgage, the learned single judge
found in favour of the plaintiff. This again is not questioned before us. Issue No. 4 has also been found in favour of the plaintiff and there is no
dispute about this issue as well. Issues Nos. 2 and 3 were also found in favour of the plaintiff and there is a dispute with reference to this finding
and we will advert to the same at a later stage. Issues Nos. 7 and 8 are the issues which are hotly contested before us. They were also found in
favour of the plaintiff by the learned single judge. On issue No. 10, the learned single judge agreed with the plaintiff that the rate of interest was
chargeable at 19.5 per cent. compounded quarterly. This issue again is contested before us. The first additional issue does not concern us because
no arguments were advanced in that behalf. But the second additional issue relating to bar of limitation which was held in favour of the seventh
defendant is again contested before us.
On the contested issues, we will now refer to the relevant finding''s of the learned single judge. After going through exhibits P-1 to P-3 as well
as the statement of accounts relating to the documentary bill of credit. Exhibits P-59 and P-60, the learned single judge found that the bank had in
fact extended the facility to the first defendant and the first defendant had also drawn bills and they were negotiated by the plaintiff-bank. The
seventh defendant, viz., the issuing bank did not make payment against the three bills, which were marked as exhibits D-2 to D-4. The plaintiff was
entitled to have recourse to defendants Nos. 1 to 6. It was the clear finding of the learned single judge that the said three bills had been given by
the first defendant to the plaintiff under the discounting facility and the plaintiff had also paid the money due under the bills by giving credit to the
first defendant. The argument that the three bills were not in the possession of the plaintiff and, therefore, they cannot be considered as holders in
due course of the bills, was rejected by the learned single judge. In this connection, the learned single judge has referred to sections 8 and 9 of the
Negotiable Instruments Act and certain passages in Benjamin On Sale of Goods. The ultimate conclusion of the learned single judge is as follows :
Having regard to the bills discounting facility granted by the plaintiff to the first defendant and having regard to the evidence, it is clear that the
plaintiff is a holder in due course of the bills negotiated and the plaintiff was acting as agent of the first defendant for negotiating documentary bills.
Thus, I find issues Nos. 2 and 3 in favour of the plaintiff . . .
With reference to exhibits P-1 to P-3, the learned judge finds that the plaintiff-bank had a lien on all securities to the credit of the first
defendant and it was extended to all drafts or bills discounted with or purchased by the plaintiff-bank. On the question whether the plaintiff-bank
had negotiated the bills ""under reserve"" or not, the learned judge had adverted to the two letters said to have been written by the plaintiff-bank,
viz., exhibits P-30 and P-32, dated May 16, 1979, and May 31, 1979. If these two letters are acceptable as true and genuine, then there could be
no doubt that the plaintiff-bank had accepted the bills ""under reserve"". But these two letters are stoutly denied by defendants No. 1 to 6 as not
having been received by them. There is a serious question to be considered as to whether these letters were in fact written by the plaintiff and
whether they could be accepted as true and correct. The learned single judge has come to a conclusion that there was unsatisfactory evidence with
regard to exhibits P-30 and P-32 and, therefore, held that the plaintiff could not rely on and refer to those two documents. But the learned judge
felt that the rejection of those two documents did not conclude the matter, as if there was other evidence to suggest that the plaintiff-bank had a
right of recourse against defendants Nos. 1 to 6. We will refer to these questions, after noticing the arguments of learned counsel. The learned
judge then relied on the judgment of the Privy Council in M.A. Sasoon and Sons v. International Banking Corporation 53 MLJ 42 and held that
the plaintiff had pleaded an express contract stating that there was an understanding that if the bills were not paid, the first defendant would be
debited with the amount of the bill. For this purpose, the learned judge relied on exhibit P-2, the general letter of indemnity. So far as the alleged
amendment to the contract pleaded by defendants Nos. 1 to 6, the learned judge found that the said information were given to the plaintiff-bank
only after the date of expiry of the letter of credit. Further, the letter of credit itself was never amended regarding the additional quantity asked for.
There was also no evidence that the alleged amendments were brought to the notice of the seventh defendant. It is under these circumstances that
issues Nos. 7 and 8 were found in favour of the plaintiff. On the question of limitation, the learned judge found that the letter of credit had expired
on May 31, 1979, and the goods had been sold and proceeds remitted to the plaintiff in August, 1980, whereas, the seventh defendant was
impleaded as a party only in the year 1984. Therefore, the suit as against the seventh defendant was clearly barred by limitation.
Before us, Mr. T. Raghavan, learned counsel for the appellants argues the case of the appellants in the following manner :
(i) The first respondent/plaintiff negotiated the suit bills knowing that they were in terms of the letters of credit and at no point of time indicated that
they were negotiating the bill ""under reserve"".
(ii) In any event, the alleged defects in the bills were not latent and, therefore, it is not open to the first respondent-bank to turn around and claim
back the amounts only because the seventh defendant refused to honour the bills.
(iii) The first respondent/plaintiff is not a holder in due course of the suit bills.
(iv) Are the suit bills covered by the documents marked as exhibits P-1 to P-3 ?
(v) Is the plaintiff/respondent entitled to claim interest at the rate of 19.5 per cent. per annum compounded quarterly ; and
(vi) Are the appellants entitled to have a decree against the seventh defendant/second respondent in a sum of Rs. 11,99,805.18 with interest at
19.5 per cent. compounded quarterly.
Points Nos. 1 to 4.--Much stress has been laid on the attitude of the first respondent-bank in negotiating the bills without reserving a right to
recourse. In other words, the foremost contention of the appellants is that the bills were not negotiated ""under reserve"". The alternative contention
is that the question of over shipment was a patent defect, even if it is assumed to be a defect. Therefore, under Article 8(g) of the Uniform Customs
and Practice for Documentary Credits (1974) (hereinafter referred to as ""the Uniform Customs""), the first respondent-bank cannot escape liability.
To meet the above argument, the first respondent-bank relied on exhibits P-30 and P-32. If these two letters are proved then, certainly, the first
respondent-bank was entitled to have recourse to the appellants, but if exhibits P-30 and P-32 are not proved, the question still remains whether
under the other documents executed by the appellants, the plaintiff-bank has reserved a right to recourse in the event of the bill not being honoured
by the issuing bank (seventh defendant). We will first advert to exhibit P-30 and P-32 and see how far they can be relied upon by the first
respondent. Exhibit P-30 is dated May 16, 1979, and bears reference No. HBO/473. It says that the bill for � 11340 negotiated under the
letter of credit No. DC 10399 was being negotiated ""under reserve"" for the following discrepancies : The discrepancy is 100 per cent. over
shipment under style H 1014. This letter is in reply to the bill of exchange dated May 15, 1979, drawn on the seventh defendant issuing bank.
Similarly, exhibit P-32 is a letter, dated June 1, 1979, bearing reference No. HBO/570 in relation to bills 1428 and 1429 for � 24975 and for
� 12015. It is stated that the bills were being negotiated under reserve for the following discrepancies :
L/C expired ;
Over shipment of goods under styles No. 78028, H 1030 and Twill 3 ;
Insurance policy does not cover 20 per cent. above CIF ;
Colour of fabrics shown as light brown instead of beige ;
Non-presentation of copy of letter addressed to Hillingdon ; and
Non-presentation of cable regarding import licence ;
Exhibit P-34 is an important letter written by the appellants to the first respondent-bank, wherein they stated that they had not overshipped any
goods to the foreign buyer and that the shipment is strictly in accordance with the letter of credit. In the reference column, the appellants also
referred to a letter of the bank in HBO/MU/173, dated September 19, 1979. According to the first respondent-bank, this is only a reference to
their letter No. HBO/473, dated May 16, 1979. The learned single judge says that the reference may be to a cable exhibit P-33 received from the
seventh defendant issuing bank by the appellants. The cable refers to the dishonour of the bills due to the overshipment of the goods. But, we are
of the opinion that the reference in the appellant''s letter, dated June 22, 1979 (exhibit P-34), could not be a reference to exhibit P-33 cable. The
contents of the cable and the date of the cable suggest that the letter, dated June 22, 1979, was not written with reference to the said cable. On the
other hand, the letter, dated June 22, 1979, specifically refers to ""your above letter"". It is also not pointed out by the appellants that there was any
other letter between the two dates indicating that the reference to HBO/MU/173, dated September 19, 1979, could be a reference to such other
letter. It is for the appellants to explain their own letter, exhibit P-34, dated June 22, 1979. It is, therefore, hard to believe that the bank never
wrote a letter, like exhibit P-30, dated May 16, 1979, whereunder, they make it clear that they were negotiating ""under reserve"". The subsequent
correspondence also suggests that this letter should have been written in the normal course of business. Mr. T. Raghavan, learned counsel for the
appellant refers to another aspect of the case to show that the first respondent was never negotiating ""under reserve"". Reference is then made to
exhibits D-5 and D-6. Exhibit D-5, is dated May 16, 1979, and exhibit D-6 is dated June 1, 1979, and they relate to the negotiation of the suit
bills. There is a separate column in these two documents which runs as follows :
Please remit the proceeds to us by means of a rupee draft on Madras quoting our bill reference number.
Credit the proceeds after payment to our account in your books under advice to this office . . .
The bill has been negotiated under reserve for the following reasons :
Below the above column there are four lines left blank for giving the reasons for negotiating the bills under reserve.
In both exhibits D-5 and D-6 these columns are left blank. Similarly, there is a column which says ""Please advise us whether we may release
the reserve"". Even this column is left blank in both the documents. Therefore, it is argued on behalf of the appellants that the first respondent had at
no point of time thought of negotiating the bills ""under reserve"". The further argument is that since the bills were in strict conformity with the letter of
credit, the first respondent-bank had made clean payments and there was no question of their having a recourse to the appellants when the seventh
defendant failed to honour the bills.
We do not think that the argument advanced on behalf of the appellants in this regard can be accepted. The first respondent-bank was armed
with several documents executed by the appellants to safeguard their interests. A premier bank of the country cannot be assumed to have made
such mistakes in making payments without safeguarding their own interest, which in reality means public interest. In this connection, we will later on
refer to exhibits P-1 to P-3, which really indemnify the bank with reference to the bank''s negotiating for and on behalf of the appellants the various
documentary bills entrusted to them under the letter of credit. Further if exhibit P-30 and exhibit P-32 are true there was no need to fill up the
columns in exhibit D-5 and exhibit D-6.
The next argument of Mr. T. Raghavan, learned counsel for the appellants to support his case that the bank was negotiating without any
reserve is based on the subsequent correspondence, where the first respondent-bank had been fighting with the seventh defendant for payment on
the ground that the appellants had exported only in terms of the letter of credit. This has been explained by Mr. Kasthuri Rangan learned counsel
for the first respondent-bank by stating that as the agent of the appellants, the bank tried to save the appellants and also made their best efforts to
get payment from the seventh defendant. Therefore, they were reflecting in their correspondence the explanations offered by the appellants in
respect of the correctness of the export. We are of the opinion that the bank was only discharging its duty, while supporting the appellants to the
extent possible. But that cannot be taken to mean that the bank had accepted the appellants'' case and were negotiating the bills without reserve. It
has got to be remembered that it is the primary duty of the appellants, as exporters to prove to the satisfaction of the court that their export was
strictly in accordance with the letter of credit and that, therefore, they are rightly entitled to payment. If that is so, the foreign buyer and the issuing
bank should be satisfied with the export made by the appellants and it is for the appellants to explain the defects, if any, in the manner and method
of export. One basic mistake that businessmen in this country make relates to the failure to conform to the terms and conditions of a contract
strictly. On many occasions, people take things for granted and argue that minor discrepancies should be overlooked. May be it happens in this
country. But, when it comes to dealing with foreign businessmen, one has to be very careful about the terms of the contract. In this very case, the
letter referred to and relied on by the appellants from the State Trading Corporation, suggesting that no amendment of the letter of credit was
necessary in relation to certain cable advices, increasing the total pieces of export, would go to prove that the original letter of credit as amended
on many occasions did not provide for the increase in the total number of textile goods exported by the appellants. The appellants are only relying
on the opinion of the State Trading Corporation stating that the amendment of the letter of credit was not necessary. One cannot expect the foreign
buyer and the issuing bank to accept the said opinion of the State Trading Corporation. In law, it is absolutely necessary that the appellants should
have insisted on the letter of credit being amended suitably, enabling them to increase the total number of pieces of shirts exported by them. After
all the main issue is between the exporter and the foreign buyer. The first respondent-bank is only a negotiating bank and the seventh defendant
bank is the issuing bank and the banks should act only on the basis of the documents submitted to them. If the contract between the appellants as
exporters and the foreign buyers has not been properly complied with by one or either of the parties, it is for them to act against each other and
settle their claims in accordance with law and facts. With this basic principle in the back of our minds, let us now proceed to analyse the
documentary evidence relating to the allegation of over shipment and other defects in the bills. The letter of credit issued and established by the
seventh defendant is marked as exhibit D-1. The appellants placed emphasis on the following lines :
Cable from Algemene Bank Netherland NV Manchester confirming that the Department of Trade have issued an import licence. This credit must
not be negotiated by any bank unless this cable is presented together with the other documents stipulated.
In the continuation sheet the various styles of garments to be exported and the total number of pieces in each style are clearly mentioned. The
colour of the garments also is specified in the said continuation sheet. If we now see the bills of exchange containing the invoices, we can easily
notice the discrepancy between the letter of credit and the invoices. For instance under style Twill 3-fabric H 1014 + 1,800 pieces had been
exported, whereas the letter of credit (continuation sheet) specifies only 900 pieces. This relates to boys'' handloom cotton shirts. There is also
difference in the colour of shirts. The letter of credit mentions white beige, khaki and sand. The invoice mentions sand, white, khaki, gray and L.
brown. Similarly there is also a difference in the men''s cotton woven shirts. Instead of 6,000, 9,000 pieces had been sent and there is also
difference in the colour. The argument of Mr. T. Raghavan, learned counsel for the appellants is that the import licence was issued by the
Department of Trade on the provision of the advance certificate issued by the Apparels Export Promotion Council. The advance certificate, dated
April 27, 1979, permitted the export of 27,000 pieces of men''s shirts and 9,000 of boys'' shirts. As per the telex dated February 27, 1979, and
revised orders, dated March 2, 1979, and March 19, 1979, the import licence was issued by the Department of Trade for the above quantities.
The contention of the appellants is that they had in all only exported 27,000 pieces of men''s shirts and 9,000 pieces of boys'' shirts. Therefore,
there is no question of any overshipment. There is a lacuna in the argument of the appellants. The quantity mentioned in the letter of credit and the
continuation letter does not specify anything more than what is contained in the said letters. If the appellants sought for exporting more, they should
have sought for amendment of the letter of credit. In fact, there is evidence to show that the letter of credit was amended several times in regard to
several other matters, but the appellants did not take care to have the quantity amended to justify their export of more number of pieces. Exhibit D-
34 which is a letter written by the State Trading Corporation to the appellants clearly proves that there was a discussion regarding the amendment
of the letter of credit only after the event. Exhibit D-34, dated July 24, 1979, starts by saying that the appellants had discussions with the STC,
referring to the plaint of the first respondent-bank and the seventh defendant bank that the bills had not been accepted due to the over shipment of
goods. The State Trading Corporation of India then refers to the cable advice from the opening bank making a specific reference to the letter of
credit No. DC-10399 and the same relates to the import licence being granted for 27,000 pieces of mens'' shirts and 9,000 pieces of boys'' shirts.
Therefore, the State Trading Corporation of India proceeds to say that ""there does not appear to be any necessity for a separate amendment to
the letter of credit, indicating quantities as per the revised order signed by the buyer, i.e., Hillingdon Shirt Company"". This statement of the State
Trading Corporation of India, as relied on by the appellants cannot bind the first respondent, the seventh defendant or the foreign buyers. This is
precisely the reason why we had stated that the businessmen in this country do not take care to conform to the specifications and do not pay
attention to minute details. There is also a dispute regarding the revised orders, having been issued by the foreign buyers. There is also an allegation
that the alleged agreement was subsequent to the letters of credit. We are not concerned with that because we are only concerned with the
question whether the disputed bills are strictly in accordance with the letters of credit and the continuation letter. In our opinion, therefore, the
contention of the appellants that they had not over-shipped the goods and that such over shipment is not covered by the letters of credit, cannot be
accepted. Further, it is at this juncture, that we must notice the absence of the foreign buyer as a party to the suit. We must remind over selves that
the seventh defendant had taken a specific plea that the foreign buyer is a necessary party to the suit. That contention of the seventh defendant is
vindicated at this juncture. In the absence of the foreign buyer, it is certainly not possible to come to a conclusion whether they had agreed to
purchase the additional quantities exported by the appellants. We have, therefore, no hesitation in holding that the appellants have not proved that
there was no over shipment or there was no discrepancy between the letters of credit and the suit bills.
The next contention of Mr. T. Raghavan, learned counsel for the appellants is that even assuming that there was over shipment ,such over
shipment was patent on the face of the documents. If in spite of such patent defects, the first respondent had negotiated the bills, they are estopped
from having any recourse to the appellants. For this purpose, reliance is placed on Article 8(g) of the Uniform Customs, which reads as follows :
If the remitting bank draws the attention of the issuing bank to any irregularities in the documents or advises such bank that it has paid, accepted
or negotiated under reserve or against a guarantee in respect of such irregularities, the issuing bank shall not thereby be relieved from any of its
obligations under this article. Such guarantee or reserve concerns only the relations between the remitting bank and the beneficiary.
We have carefully perused Article 8 of the Uniform Customs and we do not find anything to support the case of the appellants. Article 8(a)
says that in documentary credit operations, all parties concerned deal in documents and not in goods. Article 8(b) refers to negotiation against
documents which appear on their face to be in accordance with the terms and conditions of a credit. Article 8(c) says that if it is not on the face of
it in accordance with the terms and conditions, the bank must determine, on the basis of the documents alone, whether the claim has got to be
honoured. Clauses (d), (e) and (f) of Article 8 are not relevant for our purpose. Clause (g) of Article 8, on which reliance is placed by the
appellants, says that if the remitting bank draws the attention of the issuing bank with reference to any irregularity in the documents and also informs
the issuing bank that the remitting bank had paid, accepted or negotiated the documents ""under reserve"" or against a guarantee in respect of such
irregularities, the issuing bank shall not be relieved from its obligations under Article 8. This particular clause only means that the issuing bank is not
bound by the guarantee or reservations made by the remitting bank with its beneficiary. That does not mean that the issuing bank automatically
becomes obliged or liable to honour the bills. There are other articles which say that the payment can be made only if the terms and conditions of
the credit are complied with. For instance Article 3(a) says that an irrevocable credit constitutes a definite undertaking of the issuing bank,
provided that the terms and conditions of the credit are complied with. Article 7 is as follows :
Banks 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 not appearing on their
face to be in accordance with the terms and conditions of the credit.
In fact, we have gone through the entire articles of the Uniform Customs and we do not find anything to support the case of the appellants.
We will next discuss the question whether the documents were held by the first respondent-bank as holder in due course. We can discuss this
issue along with documents exhibits P-1 to P-3, which are sought to be explained away by the appellants by stating that the first respondent-bank
cannot fall back upon these documents to buttress their case. We do not think that the stand of the appellant is correct. The learned trial judge has
explained each and every one of the documents and for the purpose of cogency, we also will briefly refer to them. Exhibit P-1 is the general letter
(March 22, 1977) of hypothecation executed by the appellants and it also applied to the bills of exchange purchased or negotiated by the first
respondent-bank. Exhibit P-1 letter also authorises the first respondent-bank to make arrangement for payment of freight, for insurance and for
warehousing. Exhibit P-2 (March 22, 1977) is the letter of indemnity, which categorically states that it relates to the first respondent-bank
negotiating for the payments from time to time, documentary bills under letters of credit and/or without letters of credit. Under exhibit P-2 letters,
the appellants have clearly undertaken to help the first respondent-bank and indemnify them at all times against any loss or damage caused/suffered
by the first respondent-bank on account of negotiating the documents. Exhibit P-3 is a guarantee bond (March 22, 1977) executed by the
appellants in and by which they undertook jointly and severally to indemnify the bank for all and every sum of money which shall be owing to the
bank in respect of or arising out of non-payment from any cause of any of the hills, or drafts discounted by the bank. Section 8 of the Negotiable
Instruments Act defines ""holder"". Section 9 of the Act defines a ""holder in due course"". We are clearly of the opinion that the first respondent-bank
falls within the said definition ""holder in due course"". The argument that the three bills concerned in the suit were with the seventh defendant-bank
and not with the first respondent-bank does not improve the case of the appellants. A reference to Benjamin on Sale of Goods (II edition) at page
1198 paragraph 2230 shows that the relationship between the banker and the seller is that of a holder of a draft and its drawer, respectively. In
fact, the banker who purchases the seller''s draft combines the roles of a discounting banker and of a collecting banker. His contract with the seller
is, therefore, governed by the principles applicable to the case of discounting and collection of negotiable instrument. To the same effect is the
passage (at page No. 77) (VII edition) of The Law of Bankers Commercial Credits by H.C. Gutteridge and Maurice Megrah. Article 12 of the
Uniform Customs is very much in favour of the banks, both the first respondent and the seventh defendant.
We are impressed by the arguments of Mr. Kasturi Rangan, learned counsel for the first respondent-bank, when he says that the fact that the
first respondent-bank had fought with the seventh defendant-bank to release the payments on the three bills only shows that they had acted in good
faith to help an Indian customer. That attitude cannot be taken advantage of by the appellants to fasten liability on them in respect of the suit bills.
There are sufficient documents filed in this case which safeguard the interest of the first respondent-bank in one way or the other. The plea of the
appellants that the first respondent-bank cannot rely upon exhibit P-1 to P-3 for the purpose of realising the suit amounts, cannot be accepted.
One of the earliest decisions on the liability of a drawer of the bill of exchange to reimburse the holder for value on dishonour by the acceptor is
the Privy Council decision in M.A. Sasoon and Sons v. International Banking Corporation 53 MLJ 42. The headnote in the said case succinctly
summarises the ratio of the said decision :
Drawers of bills of exchange who discount them with a bank are bound, in case of dishonour by the acceptors, to compensate the holder for value
(that is the bank), unless they (the drawers) can show that, when they discounted the bills, they bargained that the transaction should be without
recourse. To relieve the drawers from their liability and to limit the bank''s prima facie right of recourse against themselves (the drawers), they must
show some contract with the bank to that effect, or some breach of contract or of duty on their (the bank''s) part which would have the effect in
law ...
The following passage has also some relevance to the facts of the present case :
If the confirmed credit was modified this, it was not for the discounting bank to make guesses or to run risks, but for the drawers to say what their
wishes were. Their Lordships cannot say that the conduct of the International Banking Corporation was unreasonable under the circumstances.
The ultimate ruling of the Privy Council is contained in the following"" passage :
The appellants are not in a position to show that when they discounted these drafts, they bargained that the transaction should be without
recourse, and in order to qualify their direction, given by the letters, D/A and to limit the respondents'' prima facie right of recourse against
themselves, they must show some contract with them to that effect, or some breach of contract or of duty on their part, which would have that
effect in law. ...
It is needless to point out that the appellants before us have neither pleaded nor proved any such contract against a prima facie right of
recourse available to the first respondent-bank. We may also refer to a passage in the Law of Bankers'' Commercial Credits (VII edition) by H.C.
Gutteridge and Maurice Megrah (page No. 196). The following passage supports the plea of the first respondent-bank :
Payment against indemnity should permit of no doubt if the indemnity is in writing and contains the terms of the agreement between the parties ; the
payment is the consideration for this extra credit contract between the tenderer and the tenderee. If, however, payment is made under reserve
which is not submitted to writing, there is no room for dispute as to what the parties meant. In effect, the paying bank should assert that he makes
the payment notwithstanding his right and duty to reject the documents, but that he is willing to see, if his customer, the applicant, for the credit will
accept the documents in spite of the alleged irregularities and that if not, the party accepting payment under reserve will promptly repay, with
interest. It is obvious that the contract were better reduced to writing.
It is not necessary to set out the other decisions, except the one which is directly on the point. In Kayner (J.H.) and Co. Ltd. v. Hambro''s
Bank Ltd. [1943] 13 Comp Cas 151 (CA), a bank received instructions from a customer (in this case the foreign buyer) to open a confirmed
credit in favour of the plaintiffs (in this case the Indian customer-appellants) covering a cargo of coromandel groundnuts. The bank opened the
credit and notified the plaintiffs that it was available against invoice and bills of lading"" for coromandel groundnuts. The plaintiffs presented bills of
lading for machine shelled groundnut kernels accompanied by an invoice for coromandel groundnuts. The bank refused payment and the plaintiffs
sued them for breach of the undertaking in the letter of credit. Though the trial judge accepted the plaintiffs'' case, the Appellate Bench reversed the
said findings. The Appellate Bench observed that 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 traders for whose dealings he may issue letters of credit. Goddard L. J., observed as follows
:
I protest against the view that a bank is to be deemed affected by knowledge of the trade of its various customers, but, quite apart from that, even
if the bank did know of this trade practice by which ''coromandel groundnuts'' can be described as machine shelled groundnut kernels, I do not
think that would be conclusive of the case.
The learned judge proceeded to express his view in a more direct manner by making the following observations :
It does not matter whether the terms imposed by the person who requires the bank to open the credit seem reasonable or unreasonable. The
bank is not concerned with that. If it accepts the mandate to open the credit, it must do exactly what its customer requires it to do. If the customer
says : I require a bill of lading ''for coromandel groundnuts'', the bank is not justified, in my judgment, in paying against a bill of lading for anything
except coromandel groundnuts, and it is no answer to say : ''You know perfectly well that ""machine-shelled groundnuts"" kernels are the same as
coromandel groundnuts''. For all the bank knows, its customer may have a particular reason for wanting ''coromandel groundnuts'' in the bill of
lading.
Our discussion as above and the reference to the various decisions and the well known passages in H.C. Gutteridge''s Law of Bankers''
Commercial Credits leads us to the conclusion that the first four points argued by Mr. T. Raghavan, learned counsel for the appellants do not
deserve acceptance. Consequently, we hold against the appellants on the first four points raised before us, while dealing with the arguments of Mr.
T. Raghavan.
We may now take up the question of interest charged at the rate of 19.5 per cent. per annum. We must remember that we are dealing with a
premier bank like the State Bank of India, which is the first respondent before us. In the plaint filed by the first respondent reference is made to all
the documents executed by the appellants and the right of the first respondent to charge interest at the rate of 19.5 per cent. per annum,
compounded quarterly. It is also pleaded that the said rate is the current rate of interest payable to the first respondent-bank and, therefore, under
the suit transactions, they are entitled to charge interest at the very same rate till the date of realisation. It has to be remembered that the suit
transaction is purely a commercial transaction and the contract between the parties justifies the levy at the above rate, viz., 19.5 per cent per
annum compounded quarterly. Learned counsel for the appellants refers to exhibit P-14, a promissory note executed by the appellants and others
in favour of the first respondent-bank wherein only 11.5 per cent. rate of interest is charged. Similarly, the agreement for cash credit also refers to
only 11.5 per cent. per annum interest on the daily balance and 18 per cent. per annum on certain balances remaining unpaid. Further, reference is
made to Section 34 of the Code of Civil Procedure. A discretion is given to the court to levy interest from the date of the suit till the date of the
decree. Though the learned judge has not discussed this aspect of the case elaborately, we are convinced that the bank cannot be denied interest
at the rate of 19.5 per cent. per annum compounded quarterly. In this connection, the proviso to Section 34 of the CPC supports the case of the
first respondent-bank. Point No. 5 urged by the appellants also fails.
The last important question to be decided is whether the appellants have a right to get a decree against the seventh defendant (second
respondent) bank under Order 5 of the Original Side Rules read with Order 6, Rule 8A of the Code of Civil Procedure. As against this claim of
the appellants, Mr. D. Dulip Singh, learned counsel for the second respondent-bank brings to our notice Order 1, Rule 10(5) of the Code of Civil
Procedure. That sub-rule says that subject to the provisions of the Indian Limitation Act, 1877, the proceedings as against any person added as
defendant shall be deemed to have begun only on the service of the summons. Section 21 of the Limitation Act says that as against an impleaded
defendant, a suit shall be deemed to have been instituted, when he was made a party. Under Order 8A, Sub-rule (2) of the Code of Civil
Procedure, the third party shall, as from the time of the service upon him of the notice, be deemed to be a party to the action with the same rights in
respect of his defence against any claim made against him and otherwise as if he had been duly sued in the ordinary way by the defendant.
Therefore, irrespective of the merits of the case, the suit as against the seventh defendant is barred by limitation. We have already referred to the
admitted facts. They are : the validity of the letter of credit expired on May 51, 1979, the subject goods were sold and the sale proceeds remitted
to the first respondent-bank in August, 1980, and the seventh defendant was impleaded in the suit only in the year 1984. The trial court has clearly
observed that the seventh defendant will be at liberty to raise the question of limitation in his written statement. Therefore, there is no escape from
the defence of the seventh defendant that the claim as against them is barred by limitation. But, the argument of Mr. T. Raghavan is that the
execution for a claim under Order 8A of the CPC arises only when a decree is passed against the appellants. It is only from that date onwards that
the appellants get an execution to sue the seventh defendant for contribution or by way of indemnity against the seventh defendant. We are of the
opinion that on the facts of the case, only the seventh defendant was impleaded at a later stage at the instance of the appellants by way of a court
order without any notice to the seventh defendant. Further, at the time of issuing notice to the seventh defendant, it was made clear that they could
raise the plea of limitation. In any event, if the appellants are seeking to make a claim only on the basis of the decree passed against them, then
there should be a proper pleading and a case has got to be made out for the application of Order 8A of the Code of Civil Procedure. In other
words, there must be an arrangement or a contract between the appellants and the seventh defendant (second respondent) to the effect that in the
event of the first respondent-bank obtaining a decree against the appellants, the seventh defendant (second respondent) will indemnify the
appellants. There was no such contract and on the facts of the case there could also be no such arrangement or agreement between the parties. In
our opinion, the resort to Order 8A of the CPC itself is illegal and unwarranted on the facts of the case. The seventh defendant is the issuing bank,
which opened the letter of credit. The first respondent-bank is the negotiating bank and the appellants are the drawers of the bills of exchange. We
have already found that the first respondent negotiated the bills of exchange drawn by the appellants ""under reserve"" and under contracts to
indemnify the negotiating bank. But the issuing bank dishonoured the bills on the ground that the bills did not conform to the letter of credit. We
have already held that the bills did not in fact, conform to the letter of credit. Therefore, there is absolutely no question of the issuing bank, viz., the
seventh defendant contributing or indemnifying the appellants as against the suit filed by the bank by way of recourse. The whole exercise under
Order 8A seems to be an afterthought by the appellants to clutch at some straw in the act of their drowning. Learned counsel for the appellants on
more than one occasion argued that the first respondent-bank has to blame itself for the mistake of negotiating the bills. We are of the opinion that
the appellants have themselves to blame for not conforming to the letter of credit and in any event, in not amending the letter of credit, as per the
alleged revised contract with the foreign buyer. Consequently, the sixth point, the plea of the appellant for a decree against the seventh
defendant/second respondent also fails.
In fine all the points raised by the appellants are rejected and the original side appeals are dismissed. However, there will be no order as to
costs.