M/s. Shree Pharmaceuticals and Others vs Matraco Machinnon Import and Export and Others

S.K. Seth, J.—This first appeal is directed against the Judgment and Decree dated 20-12-1999 passed by the 12th Additional District Judge, Indore in C.S. No. 81-B/93. By the impugned Judgment and decree, the suit was partly decreed against Defendant No. 1 only for the principal sum of Rs. 96,000/- together with interest @12% pa. As against other defendants the suit was dismissed. Herein the essential facts are as under. The suit was brought by appellants, a firm based at Indore (hereinafter referred to as the "Indian Firm"). Under an import Licence the Indian Firm had placed an order with defendant No. 1 (hereafter referred to as "German Firm") for supply of 400 Kg of L-Ephedrine HCL @ DM 60 per Kg CIF Air. The Indian firm opened an irrevocable Letter of Credit with the State Bank of Indore (Defendant No. 9) for the entire value of the merchandise i.e. 400 Kg of L-Ephedrine HCL in favour of the German Firm negotiable against documents of title through the DRESDNER Bank, West Germany (defendant No. 8). Under the said letter of credit, the State Bank of Indore on the advice of defendant No. 8 paid DM 26,400 (wrongly mentioned in the impugned judgment as 24,000 DM) to the beneficiary. According to appellants, the merchandise (cargo) was later on recalled from the carrier and the goods were never shipped to the Indian Firm although value of the goods under the CIF contract was remitted to the vendor (equivalent to Rs. 96,000/- in Indian currency), as stated above. Indian firm, therefore instituted a suit against the consignor German Firm, its local agent, carrier and their agent, Insurance Company which issued the marine insurance; advising Bank as well as the issuing Bank of the letter of credit claiming Rs. 96,000/- the value of goods; Rs. 22,000/- interest thereon and Rs. 1,00,000/- as damages towards the loss of business. Thus the appellant claimed decree for total sum of Rs. 2,18,000/- jointly or severally against defendants together with future interest @ 24% pa.

It may be mentioned that the suit was filed under Order 33 CPC in forma pauperis.

The issuing Bank i.e. State Bank of Indore, alone contested the application to sue in forma pauperis and thereafter the suit.

The issuing Bank in its written statement denied the plaintiffs'' claim and submitted that it paid the amount to order on the advice of the consignor''s Bank upon presentation of clean set of Airway Bill and other documents of title. According to contesting Bank it acted throughout in accordance with the terms and conditions of LOC and the "Uniform Customs and Practice for Documentary Credits (1974 Revised International Chamber of Commerce Publication No. 299), as such no claim would lie or be maintainable against the Bank and the suit was liable to be dismissed with costs. The Bank had also raised the plea about the territorial jurisdiction of the Court but it seems that it was not pressed into service as no issue regarding plea was framed and tried by the trial Court.

With the facts, which are not disputed parties went to trial and adduced evidence. The trial Court framed only two issues which are reproduced below for ready reference:-

On the first issue, trial Court after considering the entire evidence that has come on record (which it is not necessary for us to discuss in detail, in view of the undisputed facts) found against the appellants and held that Plaintiffs'' firm failed to prove that the respondent No. 9 committed any breach of the letter of credit. It was found that Bank duly discharged its obligation under the Letter Of Credit without fault and the Bank was in no way liable for the relief claimed in the suit. Trial Court, while arriving at this finding, has fully discussed the oral as well documentary evidence. And we are not, after hearing arguments and going through the record, persuaded to upset these findings.

The first question that arises for our consideration is that did the issuing Bank i.e. respondent no. 9 commit an illegality in making payment under the letter of credit especially when the shipment was recalled by the vendor of merchandise? Another facet of the argument was that the documents of title (Airway Bill) was not negotiable and issuing Bank ignoring this specific remark in Ex. P-9 negotiated the documents, therefore, the Bank was liable to refund the amount debited from the Indian Firm''s account.

The law relating to Letter of credit is well settled. In the instant case, the letter of credit was issued in favour of seller in another country at the instance of the buyer-Indian Firm. The Issuing Bank paid after due verification and checking of documents of title when presented for encashment. From the record, it is clear that an irrevocable letter of Credit was issued by the respondent No. 9. After hearing arguments, it seems that entire purpose of filing of this appeal and the focus is to get a decree against the issuing Bank-respondent No. 9 and that is why the claim in this appeal was scaled down to recovery of the price of undelivered merchandise (Rs. 96,000/-) and claim for damages was given up.

An irrevocable letter of credit is a definite undertaking on the part of issuing Bank to the beneficiary or, as the case may be, the beneficiary and bonafide holder of drafts drawn and/or document presented thereunder that the provision for payment, acceptance or negotiation contained in the letter of credit will be duly fulfilled, provided that all the terms and conditions of the credit are complied with. The ambit and scope of letter of credit was considered by their Lordships of the Supreme Court in Tarapore and Co. Vs. V/O Tractoroexport and Another, and it was held that:-

Opening of letter of credit constitutes a bargain between the Banker and the vendor of the goods, which imposes upon the Banker an absolute obligation to pay, irrespective of any dispute there may be between the parties as to whether goods are upto contract or not. A vendor of goods selling against a confirmed letter of credit is selling under an assurance that nothing will prevent him from receiving the price. If the buyer has enforceable claim that adjustment must be made by way of refund by the seller.

Their Lordships held:-

The scope of an irrevocable letter of credit is explained thus in Halsbury''s Laws of England (Vol. 34, Paragraph 319 at Page 185):

It is often made a condition of a mercantile contract that the buyer shall pay for the goods by means of a confirmed credit, and it is then the duty of the buyer to procure his Bank, known as the issuing or originating Bank, to issue an irrevocable credit in favour of the seller by which the Bank undertakes to the seller, either directly or through another Bank in the seller''s country known as the correspondent or negotiating Bank, to accept drafts drawn up on it for the price of the goods, against tender by the seller of the shipping documents. The contractual relationship between the issuing Bank and the buyer is defined by the terms of the agreement between them under which the letter opening the credit is issued; and as between the seller and the Bank, the issue of the credit duly notified to the seller creates a new contractual nexus and renders the Bank directly liable to the seller to pay the purchase price or to accept the bill of exchange upon tender of the documents. The contract thus created between the seller and the Bank is separate from although ancillary to, the original contract between the buyer and the seller, by reason of the Bank''s undertaking to the seller, which is absolute. Thus the Bank is not entitled to rely upon terms of the contract between the buyer and the seller which might permit the buyer to reject the goods and to refuse payment therefore; and, conversely, the buyer is not entitled to an injunction restraining the seller from dealing with the letter of credit if the goods are defective.

Thus it is clear that the issuing Bank i.e. respondent No. 9 was required to pay to German Firm on production of complete set of clean Airway Bill along with the drafts. Upon production of clean set of documents particularised in the letter of credit the amount was remitted to the vendor of goods and as such no illegality was committed by the issuing Bank. What applies to absolute obligation to such bill of exchange notwithstanding any dispute between the seller and buyer of goods as stated above, equally applies to non-delivery of goods. The buyer has a remedy against the seller of goods and not against the Banker, unless it is pleaded and proved by adequate evidence that the Banker while meeting its obligation acted contrary to terms and conditions or on unclean bill of lading. This is not the plaintiffs'' case either before this Court or the trial Court.

Now we come to the other aspect of argument, i.e. the contesting Bank negotiated the documents of title though it was not negotiable. On the face of it, argument seems attractive but on deep probe it is found of no merit and substance. From the pleadings and evidence on record, it is clear that the documents of title were not negotiated in favour of any third party. Negotiation of bill of exchange has definite connotation and meaning. Section 14 of the Negotiable Instruments Act, 1881 defines "negotiation" to mean the transfer of right, title and interest of the holder of a negotiable instrument, so as to give the transferee a good title, if he (transferee) is holder in due course. In case of negotiable instrument payable to order, negotiation of the instrument takes place by indorsement of the holder''s signature on the instrument and by delivery to indorse or the person to whom it is handed over. In case of a negotiable instrument payable to bearer, negotiation takes place by mere delivery without any indorsement. The remark ''not negotiable'' on the Ex. P-9 made it non-negotiable like any crossed Cheque. That means instrument is payable to order and not to any third person. In case in hand, the documents of title were not negotiated or indorsed to any third party to confer any right, title and interest on that party. It was paid to order of the consignor of goods. Therefore, it cannot be said that instrument was negotiated in favour of a third party. In view of above discussion this argument also fails and is rejected.

Hence the appellants have failed to make out any case against the contesting Bank as well as the advising Bank, as rightly held so by the trial Court. The whole fa�ade of submissions is something like flogging a dead horse.

We now come to a consideration of the question of liability of respondents other than respondent No. 9. In view of what has been discussed above, the question boils down to non-delivery of the contracted goods and effect thereof. This being so, the carriers and insurers would go out of the net as there was no cause of action against the defendant No. 3 to 8, leaving aside the vendor defendant No. 1 and his local agent defendant no. 2, and its partners.

It may here be mentioned that the plaintiff firm categorically given up any claim what so ever against defendant No. 2 in the trial Court, hence defendant No. 2 goes scot free. Nothing to the contrary was urged in this appeal.

The case against defendant No. 1 was wrongly proceeded by the trial Court, for the reasons: pursuant to the notice in respect of pauperism application, the attempt to serve the same was infructuous and the record shows that Counsel General Of India in West Germany vide his Memo dated 6th June, 1989 informed the trial Court that inquiries made from the ''Chamber of Commerce, Hamburg'' revealed that the defendant No. 1 firm stood dissolved as back as 1984 due to lack of assets. Memo dated 20th July 1989 from the said consulate in Germany to the trial Court further shows that the defendant No. 1 went into liquidation as informed by the "Chamber of Commerce, Hamburg" and plaintiffs were aware of this fact as the record shows. Inspite of all this information and material available on record, the plaintiff took no further steps in the matter of the defendant No. 1 and it is matter of regret, that the trial Court made no attempt to prevent this gross abuse of process of law. This being so, the decree against dissolved firm is not sustainable unless the plaintiff took further steps in the light of dissolution. And hence the decree must be set aside even though there is no appeal against it by the defendant No. 1. It is obvious that the defendant No. 1 in Germany has no notice of the decree. (The powers of the appellate Court are plenary and coextensive with that of the trial Court).

Since the claim in suit against the defendant No. 1 is held unsustainable, it follows that the local agent of the defendant No. 1, viz. defendant No. 2 also cannot be held responsible.

In the result, the plaintiff is not entitled to any relief in this appeal which accordingly stands dismissed with the modification that the decree against defendant No. 1 is also set aside.

Plaintiffs shall bear their costs throughout as well as the costs of contesting Bank-defendant No. 9.

It is further directed that the Court fee payable on plaint in the forma pauperis suit shall be borne by the plaintiffs in view of provisions of Order 33 Rule 11 CPC. The trial Court is directed to take further necessary steps in matter as per law.

Counsel''s fee Rs. 5,000/- if certified. Ordered accordingly.