The Karnataka Bank Ltd. v. Indian Bank

IN THE HIGH COURT OF JUDICATURE OF MADRASDATED: 08.08.2008CORAM:THE HONOURABLE MR. JUSTICE G.RAJASURIAA.S.No.446 of 1999 The Karnataka Bank Ltd.,Oppanakara Street, Coimbatore 641 001rep. by its Deputy Regional Manager. ..Appellant/1st Defendant ..vs..

Indian Bank, Mylapore Branch, 21, North Mada St, Madras-600 004 rep. by Sri B. Natarajan, Asst. General Manager ..1stRespondent/Plaintiff2. M/s. Gomes Associates, 255, Navratna Buildings, Coimbatore-641 002 Proprietor Mr. H. Gomes3. M/s. Ra-VELTRONICS No.5, North Mada Street, Mylapore, Madras - 600 004 rep. by Power of Attorney ..Respondents 2 & 3/ V.K.K. Dasan. Defendants 2 & 3Appeal filed under Section 96 of the C.P.C. against the judgmentand decree of the learned XVII Asst. City Civil Judge, Madras made inOS No.6845 of 1996 dated 30.04.1997.For Appellant : Mr.C.T.Selvam For R1 and R2 : No appearanceFor R3 : Mr.R.Vijaya Raghavan JUDGMENT This appeal is focussed as against the judgment and decree dated30.04.1997 passed by the learned XVII Asst. City Civil Judge, Madrasin OS No.6845 of 1996. For convenience sake, the parties are https://hcservices.ecourts.gov.in/hcservices/ referred to here under according to their litigative status beforethe trial Court.

Heard both sides.

Niggard and bereft of details, the case of the plaintiff asstood exposited from the averments in the plaint would run thus: The plaintiff is the Bank which was approached by the thirddefendant for grant of certain loan facilities, including Billspurchase facilities. Consequently, the former sanctioned the same infavour of the latter who started availing the facilities. In respectof the bills drawn by the third defendant on second defendant, thefirst defendant Bank, viz., M/s Karnataka Bank Ltd. had opened Letterof Credit in favour of the plaintiff Bank at the request of thesecond defendant agreeing to honour the bills drawn by the thirddefendant on the second defendant on presentation. The firstdefendant in fact was bound to honour the bills on due presentationto it by the plaintiff Bank, if the terms of Letter of Credit werecomplied with. It was also agreed that the amount utilised under the Letter of Credit would again be available for utilisation on receiptby the negotiating Bank of the advice that the Bill already drawn bythe beneficiary had been reimbursed. Accordingly, on receipt of suchadvice, the plaintiff had been purchasing further Bills within the Letter of Credit upto Rs.2,00,000/-. The Letter of Credit itself wasrenewed for a further period of six months i.e. upto 11.01.1988 bythe first defendant, vide its letter dated 16.07.1987 and it wasagain extended upto 11.01.1989. While so, the bills to the value ofRs.1,80,175/- were returned by the first defendant unpaid, as thoughreinstatement was required for negotiating the Bills under the Letterof Credit. In fact, the first defendant even paid uptoRs.10,00,000/- without insisting for separate reinstatement advicefrom the first defendant There is no condition in the Letter of Credit that reimbursement of commitment was required to honour the Bill drawn under it after utilisation of Rs.2,00,000/-. The detailsof the invoices relating to the sum of Rs.1,80,175/- are furnishedhereunder. "1. Invoice No.2478 dated 16.6.88: Rs.28,450.002.Invoice No.2481 dated 17.6.88: Rs.29,150.003.Invoice No.2487 dated 20.6.88: Rs.32,450.

Invoice No.2488 dated 20.6.88: Rs.88,500.

Invoice No.2489 dated 20.6.88: Rs. 1,625.00 -------------- Rs.1,80,175.00 -------------- "4. In the Demand Drafts issued by the first defendant, detailsof the relevant bills purchased were found incorporated and hence the https://hcservices.ecourts.gov.in/hcservices/ Demand Drafts themselves were treated as advices. After issuingnotice, the plaintiff filed the suit as against defendants 1 and 3. Defendants 2 and 3 remained ex parte.5. Per contra, the first defendant filed the written statementraising various pleas, the gist and kernel of them would run thus: The Letter of Credit should be interpreted strictly. The amountutilised under the Letter of Credit would again be available forutilisation on receipt by the negotiating Bank of the advice that thebill already drawn by the beneficiary had been reimbursed. Theplaintiff was aware of the pre-requisite as contemplated in the Letter of Credit. The mere issuance of Demand Draft by the firstdefendant by itself would not constitute "advice" as contemplated inthe Letter of Credit. The renewal of the Letter of Credit would notin any way enable the plaintiff to wriggle out of the conditionsimposed in the Letter of Credit. The first defendant did not honourthe bills to the tune of Rs.10,00,000/- in ignoring the conditions inthe Letter of Credit. Accordingly, the first defendant prayed forthe dismissal of the suit.

The trial Court framed the relevant issues. During trial, onthe side of the plaintiff, P.W.1 was examined and Exs.A1 to A11 weremarked. On the side of the defendants, D.W.1 was examined and Exs.B1and B2 were marked.

Ultimately, the trial Court decreed the suit directing thedefendants 1 to 3 to pay jointly and severally the suit amount with18.5% interest per annum with quarterly rests. Being aggrieved byand dissatisfied with the judgment and decree of the trial Court, thefirst defendant Bank preferred this appeal on various grounds, thepith and marrow of them would run thus:i) The judgment and decree of the trial Court isagainst law and weight of evidence.ii) The trial Court failed to consider the conditionsas found set out in the Letter of Credit.iii) The Letter of Credit would unambiguouslyhighlight that only on receipt of advice from the firstdefendant, the plaintiff should further honour the bills.iv) The limit of Rs.2,00,000/- as contemplated in the Letter of Credit was not considered by the trial Court.v) The expectation of the trial Court that the firstdefendant on seeing the bills Exs.A3 to A7 should have paidthe amount concerned to the plaintiff Bank was wrong and https://hcservices.ecourts.gov.in/hcservices/ contrary to the terms and conditions of the Letter of Credit. Accordingly, the first defendant prayed for setting aside thejudgment and decree of the trial Court passed as against it.

The points for consideration are as to: (i) whether the plaintiff was justified in honouring the billsforwarded to it by the third defendant, even though the plaintiff hadnot received from the first defendant the advice as contemplatedunder Ex.A1 the Letter of Credit?(ii) Whether the business practice pleaded by the plaintiff thatthe first defendant honoured the earlier bills upto Rs.10,00,000/-without insisting for any pre condition has been proved?(iii) Whether there is any infirmity in the judgment and decreeof the trial Court?Heard the learned counsel for the appellant/first defendant andthe learned counsel for the respondent/third defendant.POINT 1 AND 2:These two points are taken together for discussion as they areinter-linked and inter-woven with each other.

The learned counsel for the appellant/first defendant woulddraw the attention of this Court to the last paragraph of Ex.A1 - the Letter of Credit and develop his argument to the effect that ex facieand prima facie it is clear that the plaintiff Bank ought not to havehonoured the bills at its own whims and fancies without gettingadvice from the first defendant as contemplated in the Letter of Credit. For better appreciation, I would like to extract hereunderthe last paragraph of Ex.A1, which would run thus: "The amount utilised under this credit shall beagain available for utilisation only on receipt by thenogitating Bank/Branch of the advice that the billalready drawn by the beneficiary has been reimbursed bythe buyer. "

A bare perusal of it would spotlight and highlight that oncebills to the tune of Rs.2,00,000/- were honoured by the plaintiff andgot the said amount from the first defendant, the plaintiff shouldnot further honour the bills without getting advice from the firstdefendant to the effect that the bill already drawn by thebeneficiary has been paid by buyer. Here the term 'Negotiating Bank'would refer to the plaintiff Bank. The third defendant is the https://hcservices.ecourts.gov.in/hcservices/ beneficiary. The second defendants is the buyer. Accordingly ifviewed, the facts as set out in the plaint would clearly demonstratethat the first defendant Bank cannot be mulcted with liability to paythe suit unless the plaintiff Bank could prove that it receivedadvice as contemplated under Ex.A1 from the first defendant. Indubitably and undoubtedly, admittedly and unassailably, theplaintiff without getting the advice as contemplated in Ex.A1 hashonoured the bills concerned sent by the beneficiary, for which theplaintiff tries to take umbrage under the so called business practicethat on earlier occasion accounts upto Rs.10,00,000/- were paid bythe first defendant to the plaintiff without any demur or insistingfor any advice.

Learned counsel for the appellant/D1 would convincingly andand correctly argue that absolutely there is no iota or modicum ofevidence to exemplify such business practice prevailed between theplaintiff and the first defendant. In the absence of any such proof, the trial Court was wrong in paragraph No.8 of its judgment injumping to the conclusion that the first defendant was liable tohonour the demand of the plaintiff. Not even the statement ofaccounts were filed so as to demonstrate that on earlier occasions, the first defendant waived the terms and conditions of the Letter of Credit relating to "advice". At the end of paragraph 8, the trialCourt erroneously held as though absolutely there was no stipulationin the Letter of Credit relating to advice from the first defendantbeing sent to the plaintiff before honouring the bills. It istherefore explicitly and obviously clear that the trial Court fellinto error in reading and understanding the terms and conditions ofthe Letter of Credit.

The learned counsel for the appellant/D1 cited the decisionof the Hon'ble Supreme Court reported in 1981 SC 1426 [UnitedCommercial Bank v. Bank of India and others]. An excerpt from itwould run thus: "28. The nature of the contractual obligationsflowing from a banker’s letter of irrevocable creditand more particularly, the rights of the seller as theaccredited party or beneficiary of the credit, againstthe issuing and drawee bank was dealt with by this Court in Tarapore & Co., Madras v. Tractors Export, Moscow, 1969 2 SCR : (AIR 1970 SC 891). It was heldthat the opening of a confirmed letter of creditconstitutes a bargain between the banker and theseller of the goods which imposes on the banker anabsolute obligation to pay. It was, however, pointedout relying on a passage in "Chalmers’ Bills of Exchange" that it can hardly be overemphasised that

the banker is not bound or entitled to honour thebills of exchange drawn by the seller unless they, and https://hcservices.ecourts.gov.in/hcservices/ such accompanying documents as may be requiredthereunder, are in exact compliance with the terms ofthe credit

. Such documents must be scrutinised withmeticulous care. If the seller has complied with theterms of the letter of credit, however, there is anabsolute obligation upon the banker to payirrespective of any disputes there may be between thebuyer and the seller as to whether the goods are up tocontract or not. The court relied upon the twodecisions in Hamzeh Malas & Sons v. British ImexIndustries Ltd (1958) 2 QB 127 and Urguhart Lindsay &Co. Ltd. v. Eastern bank Ltd., (1922) 1 KB 318 andobserved at p. 930 of the Report, that the refusal ofthe bank to honour the bills of exchange drawn by theseller on presentation of the proper documentsconstituted a repudiation of the contract as a whole, and the sellers were entitled to damages arising fromsuch a breach. "

The learned counsel for the appellant relied upon the saidparagraph 28, so as to highlight that terms and conditions in the Letter of Credit should be understood strictly and there should notbe any liberal interpretation. Accordingly if viewed, it is crystalclear from the last paragraph of Letter of Credit that the amountonce utilised under the letter of credit upto two lakhs once againthe facility would be available only on receipt of advice from thefirst defendant by the negotiating Bank/the plaintiff. Hence, in thisview of the matter I would like to adjudge that both the issues infavour of the appellant/first defendant as against the defendants 2and 3. In view of the above ratiocination, the judgment and decreeof the trial Court as against the first defendant only is liable tobe set aside and accordingly, the same is set aside.

The learned counsel for the plaintiff would make anextempore submission to the effect that at the time of granting stayin this appeal, the first defendant was directed to pay the cost ofthe suit to the respondent 1, which was also duly paid and that theappellant/D1 might be permitted to recover it from the plaintiff. Icould see considerable force in the argument of the learned counselfor the plaintiff and a direction to that effect also shall beincorporated in the decree of this Court. Accordingly, this appealis allowed with cost.sd/-Asst. Registrar/true copy/Sub Asst. Registrargms https://hcservices.ecourts.gov.in/hcservices/ To The XVII Asst. City Civil Judge, Madras. Copy to: The Section Officer, V.R. Section, High Court, Madras.+ 1 c.c. to Mr. R. Kolanchinathan, Advocate. S.R.No.43993.A.S.No.446 of 1999GGK (CO)GSK 29.07.2009.