NEELKANTHA JUTE DEALERS vs Central Bank of India

FEELING aggrieved by the dismissal of the complaint filed for deficiency in rendering banking service by not honouring the letter of credit, Nilkantha Jute Dealers-complainant has filed this appeal.

THE case of the complainant-appellant is that the Central Bank of India issued a letter of credit on 1. 1. 1992 for a sum of Rs. 6,50,000 to make the payment of the invoices of the jute to be supplied to respondent No. 2. The last date for presentation of documents was fixed for 24. 3. 1992 and thereafter, it was extended to 24. 6. 1992. The appellant-complainant invoked the letter of credit. The bills were submitted on 22. 9. 1992. Out of aforesaid 8 bills, only one bill was paid and 7 bills returned by letter dated 21. 10. 1992 were received on 29. 10. 1992. They were returned on the ground that in the bills, there were some cuttings and over-writings. Within 24 hours of the receipt of the letter, on 30. 10. 1992, the appellant submitted fresh mill receipts and requested for payment but the bank refused to honour the bills on the ground that letter of credit in question expired on 24. 9. 1992. The respondent contended that said 7 bills were returned for the reason that mills receipts had been issued to a different party other than beneficiaries as per Annexure A-26, and the same were not acceptable as per letter of credit and also as per practice as contained in UCPDC (Uniform Custom and Practice the Documentary Credit ). The respondent No. 2 though made a party was not originally a party before the State Commission.

It is apparent that by majority of two members, the State Commission held that there was no deficiency as undisputed documents were honoured but alteration in the bill created doubt. Consequently, there was deficiency in service and the majority dismissed the complaint. Minority comprised of the President of the State Commission, took the view that on the basis of documents filed, it was not possible to decide the point of deficiency in an effective manner. The President of the Commission though appreciated the submission of the learned Counsel of the complainant on the ground of whimsical rejection or a deliberate delay in honouring a letter of credit created a gross deficiency in service yet held that it was not possible for the State Commission on the grounds stated above to effectively deal with the matter. The President of the State Commission virtually took the view that the matter could be dealt by Civil Court as submitted by the Counsel for the opposite party and with these observations, the President of the Commission rejected the complaint.

BEFORE proceeding further, in the light of the submissions made, it would be desirable to reproduce Article 16 (d) of UCPDC, which provides as under: "if the issuing bank decides to refuse the documents, it must give notice to that effect without delay by telecommunication or, if that is not possible, by other expeditious means, to the bank from which it received the documents (the remitting bank), or to the beneficiary, if it received the documents directly from him. Such notice must state the discrepancies in respect of which the issuing bank refuses the documents and must also state whether it is holding the documents at the disposal of, or is returning them to, the presentor (remitting bank or the beneficiary, as the case may be ). The issuing bank shall then be entitled to claim from the remitting bank refund of any reimbursement which may have been made to that bank. ".

In case, we go by the language of Clause ''d'', if the issuing bank decides to refuse the documents, it must give notice to that effect without delay by telecommunication or, if that is not possible, by other expeditious means, to the bank from which it received the documents (the remitting bank), or to the beneficiary.

THE bank issuing letter of credit in terms of Clause ''a'' of Article 16 is supposed to act on the documents which appear on their face to be in accordance with the terms and conditions of a credit. If the issuing bank considered that "they appear on their face to be in accordance with the terms and conditions of the credit, it would, on the basis of documents alone, take of such documents or to refuse without a claim that they appear on their face in accordance with the terms and conditions of the credit. " It would also be useful to refer to the judgments relating to justified refusal to honour letter of credit in terms of Clause 16 (a) on the ground that documents were fraudulent. In this regard, in I. T. C. Limited v. Debts Recovery Appellate Tribunal and Others, 1998 (2) SCC 70, Hon''ble Justices Suhas C. Sen and M. Jagannadha Rao observed in paras 20 to 23 of the judgments as under : "20. We may, illustrate this aspect-relating to "fraudulent document"-by referring to the well-known case of United City Merchants (Investments) Ltd. v. Royal Bank of Canada, decided by the House of Lords which has been referred to by this Court in the U. P. Co-op. Federation case. In that case the date 15. 12. 1976 was falsely and fraudulently entered on the bill of lading as the date on which the goods were shipped even though the goods were actually shipped on 16. 12. 1976 and the Bank which came to know about this fact refused to pay. The House of Lords held that the Bank could have justifiably refused to pay because the Bill of Lading, which was one of the documents to be presented before the Bank, was a fraudulent document. Having laid down the principle as stated above, the House of Lords however held on facts that the said false statement of the Bill of Lading was not made by the seller but was made by the shipping agent and inasmuch as the sellers were not responsible, the Bank could not refuse payment. We are referring to this case only to illustrate what could be a "fraudulent document" presented before the Bank by the sellers. We shall also refer a Little later to another case in Sztejn v. Henry Schroder Banking Corpn. which is also a case of presentation of "fraudulent documents".

Likewise in the "cement Scandal case" in Etablissement Esefka International Anstalt v. Central Bank of Nigeria, Lord Denning pointed out that the shipping documents, the bills of lading, certificates , etc. were forged and were all "moonshine" and there were no such shipping vessels at all. That case is an example of forged documents.

What is necessary for the Bank to refuse payment is a case of clear "fraud" and the Bank''s knowledge as to such fraud (Bilivinter Oil S. A. v. Chase Manhattan Bank N. A. ). As pointed by Lord Denning and Lord Lane in Edward Owen, the Bank cannot refuse payment merely because according to it the claim was "dishonest" or "suspicious" or it appeared to be a sharp practice but it must be established as "fraud". Lord Ackner in United Trading Corpn. S. A. and Murray Clayton Ltd. v. Allied Arab Bank Ltd. held that the Bank could object to pay not because the demand was not "honestly" made but was made fraudulently. Waller, J. in Turkiye v. Bank of China, (LLR pp (617-618) said that the question was whether the demand for payment was "fraudulent". Mere allegations and counter allegations between the parties as to breach of contract, non-payment of advances or non-supply of machinery did not amount to fraud.

In the result we hold that an allegation of non-supply of goods by the sellers to the buyers did not by itself amount, in law, to a plea of "fraud" as understood in this branch of the law and hence by merely characterising alleged non-movement of goods as "fraud or misrepresentation. Nor is the case before us one where there is an allegation of presentation of forged or fraudulent documents.

(Emphasis supplied) From para 22, it is very much evident that Bank could not refuse payment merely because according to it the claim was "dishonest" or "suspicious" or it appears to be a sharp practice but it must be established as "fraud".

SOME allegations and counter allegations between the parties as to breach of contract, non-payment of advances or non-supply of machinery did not amount to fraud.

THERE is letter sent by State Bank of Bikaner and Jaipur to the Manager, Central Bank of India, Netaji Subhash Road, Calcutta-700001, which reads as under : This letter indicated unbusiness like approach in sending the reply about non-application of Article 16 of UCPDC; challenging the authority of the negotiating Bank and still further that letter of credit was illegally made subject to receipt of collection of payment from M/s. Ganges Mfg. Co. Ltd. Letter of credit is never dependent on such collection and clearances for payment from the persons, who provided the letter of credit. It is independent of the original contract between the person invoking the letter of credit and the purchase. It is confined between the holder of letter of credit and the bank which issued the letter of credit.

Seeing the contentions raised, documents filed, it appears as if the official of the State Bank of Bikaner and Jaipur acting at the behest of the person, who has received the goods, absented, did not dispute the receipt of goods but a bank officials favoured it. What is mentioned while returning the documents is that the letter of credit sets of documents drawn under above letter of Credit were returned on the ground of being ''defectively drawn'' and Mill receipts were originally issued to different parties other than beneficiaries. It was not the case that it was changed in the name of beneficiaries. If the Central Bank suspected the genuineness of the invoices only on the basis of suspicion, it could not have been rejected in terms of the judgment of Supreme Court. It has failed to prove either on the basis of affidavit filed by respondent No. 2 or they did not issue the receipt numbers in favour of respondents themselves by over-writing the same. If the documents sent on 17. 9. 1992 and 22. 9. 1992 were received by the Central Bank; the documents were presented in stipulated time i. e. , before 24. 9. 1992 and if all the parties were at Calcutta, they could have been easily contacted on phone or on fax, etc. instead of waiting for nearly a month before sending the letter of rejecting the documents on 21. 10. 1992.

THE word ''telecommunication'' is specifically mentioned in the rule. The Central Bank of India could be contacted on phone. The officer of the Central Bank of India was at Calcutta but Neelkantha Jute Dealers was not at Calcutta. The manufacturing company limited was having its branch office at Calcutta. The State Bank of Bikaner and Jaipur had its office at 14, N. S. Road, Calcutta to whom the letter dated 21. 10. 1992 was addressed. There was definitely deficiency in the aforesaid circumstances. The bank could not be allowed to take advantage of its own wrong that had not following the terms of UCPDC particularly clause (d) Regulation 16. The Central Bank of India was surely deficient in rendering service for not following Section 16 (d) of UCPDC and delaying the matter unnecessarily by rejecting the claim not on account of fraud, but on unreasonable and irrelevant grounds, not germane to Section 16 (d) of UCPDC.

SUPPOSING additional documents were received on 24. 9. 1992, they were within time in terms of extended period for the bill receipts were not latter on 24. 9. 1992. The initial letter on credit was issued on 1. 3. 1992 for a period of 90 days. Since it was extended by six months the period would come to an end on 30. 9. 1992. There was no need of extension of time. If the respondent claimed that documents were filed after the date then we would only say that the respondent want to take advantage of their own wrongs committed by bank''s officials. Such an action of the part of the official of Central Bank of India could not be approved. In the light of above, simply alleging alterations in the documents i. e. , the mill receipts about acceptance of the goods by the Ganges Mfg. Co. Ltd. and in absence of any allegation about submitted documents, being fraudulent, the Central Bank could not refuse to honour the letter of credit. Supposing, the Central Bank Manager had any doubt, it is not its case that the Bank contacted the Ganges Mfg. Co. Ltd or the complainant on phone or by sending fax, etc. , as was expected from the Bank. Thus, there was deficiency in rendering banking service by showing utter lack of promptness in this regard, leading to subsequent problems. Supposing the documents were filed late even then since the time was not essence of the contract, in view of extension twice and clearance of one of the eight invoices by the respondent itself and judgment referred to herein after, the bank should not have refused to honour the Letter of Credit on presentation of the document. In a case of letter of credit in Arosan Enterprises Ltd. v. Union of India and Another, VIII (1999) SLT 104=iv (1999) CLT 341 (SC)=1999 (9) SCC 449, the question of extension of time was considered in paras 14 and 15, and the following observations were made: "14. Incidentally the law is well settled on this score on which no further dilation is required in this judgment to the effect that when the contract itself provides for extension of time, the same cannot be termed to be the essence of the contract and default however, in such a case does not make the contract voidable either. It becomes voidable provided the matter in issue can be brought within the ambit of the first para of Section 55 and it is only in that event that the Government would be entitled to claim damages and not otherwise.

In Pollock and Mulla''s Indian Contract and Specific Relief Act, three types of cases have been very lucidly discussed, where time can be termed to be the essence of the contract: "1. Where the parties have expressly stipulated in their contract that the time fixed for performance must be exactly complied with. 2. Where the circumstances of the contract or the nature of the subject matter indicate that the fixed date must be exactly complied with and 3. Where time was not originally of the essence of the contract, but one party has been guilty of undue delay, the other party may give notice requiring contract to be performed within reasonable time and what is reasonable time is dependent on the nature of the transaction and on proper reading of the contract in its entirety. "

(Emphasis Supplied)

SEEING the correspondence exchanged and documentary evidence on record, it is undisputed fact that the time of letter of credit was extended and the last extension was given vide letter dated 7. 7. 1992 of Central Bank of India in following words : "we have been instructed by our valued constituents named above to amend the captioned Letter of Credit as under: 1. Mill Receipt must be dated not later than 24. 9. 1992. 2. Presentation of documents for negotiation must be made within 24. 9. 1992. All other terms and conditions of the Letter of Credit remain unaltered. There amendments constitute integral part of original Letter of Credit and as such the advice should be attached there. "

IF we see the nature of the transaction, coupled with extensions of time twice and clearance of one of the eight bills, it becomes evident that for all practical purposes the time was not taken to be essence of the contract, to justify refusal to honour the Letter of Credit by making payment on presentation of the document. As regards the plea that matter should be referred to the Civil Court for decision in terms of judgment in CCI Chambers Co-op. Hsg. Society Ltd. v. Development Credit Bank Ltd. , III (2003) CPJ 9 (SC)=v (2003) SLT 185, we feel that the appeal should be allowed and in terms of receipts and documents produced the respondent-Central Bank of India is directed to pay Rs. 6,64,000. 64 with interest @ 12% w. e. f. 30. 10. 1992 with cost of Rs. 5,000. Appeal allowed.