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REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 1709 OF 2007
State Bank of India & Anr. .... Appellants
Versus
M/s. Emmsons International Ltd. & Anr. ....Respondents
JUDGMENT
R.M. Lodha, J.
This civil appeal, by special leave, is from the judgment
and decree of the Madhya Pradesh High Court whereby the Division
Bench of that Court allowed the first appeal of the present 1st
respondent--M/s. Emmsons International Ltd.--and set aside the
1
judgment and decree of the trial court (First Additional District Judge,
Bhopal) and decreed the 1st respondent's monetary claim.
2. Unialkem Fertilizers Limited--2nd respondent in this
appeal (hereinafter referred to as `the buyer') placed a purchase
order on M/s. Emmsons International Limited (hereinafter referred to
as `the seller') for supply of 2000 MT of Syrian Rock Phosphate at
the rate of Rs. 2100/- per metric ton for an aggregate amount of Rs.
43,86,411/-. The payment terms provided `against 180 days
issuance of letter of credit'. On June 18, 1997, at the request of the
buyer, a letter of credit for Rs. 43,86,411/- was established by the
appellant No. 1 -- State Bank of India, Industrial Finance Branch,
Bhopal (hereinafter referred to as `the issuing bank') in favour of
the seller; the appellant No. 2 -- State Bank of India, New Delhi
Main Branch, New Delhi being the advising Bank. The seller
supplied the material vide sale invoice, high seas delivery, bills of
lading, etc. and the buyer is said to have accepted the documents.
3. The letter of credit established by the issuing bank, inter
alia, made the following stipulations:
" . . . . . . . . THIS DOCUMENTARY CREDIT
WHICH IS AVAILABLE BY NEGOTIATION OF
2
YOUR DRAFT AT 180 DAYS FROM DESPATCH
DRAWN FOR 100.00% OF INVOICE VALUE ON
UNIALKEM FERTILIZERS LTD., E-5 PLOT NO. 4,
RAVI SHANKAR NAGAR, BHOPAL, 462 016
BEARING THE CLAUSE "DRAWN UNDER
DOCUMENTARY CREDIT NO. 0192097
LC000087 OF STATE BANK OF INDIA,
INDUSTRIAL FINANCE BRANCH, GR. FLOOR,
L.H.O. PREMISES, HOSHANGABAD ROAD,
BHOPAL - 462 011 (INDIA)." ACCOMPANIED BY
DOCUMENTS LISTED IN ATTACHED SHEET (S)
EVIDENCING DISPATCH OF GOODS AS PER
THE ATTACHED SHEETS.
FOR LIST OF REQUIRED DOCUMENTS,
MERCHANDISE DESCRIPTION AND OTHER
INSTRUCTIONS PLEASE SEE THE ATTACHED
CONTINUATION SHEETS WHICH FORM AN
INTEGRAL PART OF THIS CREDIT.
SHIPMENT FROM : SYRIA TO KANDLA, INDIA
SHIPMENT TERMS : CIF
PARTIAL SHIPMENT : ALLOWED
TRANSSHIPMENT : NOT ALLOWED
INSTRUCTION TO THE ADVISING BANK:
- ALL BANK CHARGES (OTHER THAN
ISSUING BANK CHARGES) ARE FOR
ACCOUNT OF BENEFICIARY.
- DISCREPANT DOCUMENTS TO BE SENT
STRICTLY ON COLLECTION BASIS.
- ALL DOCUMENTS TO INDICATE L/C NO.
0192097 LC 000087 AND DATE 18/06/97.
- NEGOTIATIONS UNDER THIS CREDIT ARE
RESTRICTED TO STATE BANK OF INDIA,
NEW DELHI, MAIN BRANCH, 11, SANSAD
MARG, POST BOX NO. 430, NEW DELHI -
110 001.
3
- EXCEPT IN SO FAR AS OTHERWISE
EXPRESSELY STATED THIS
DOCUMENTARY CREDIT IS SUBJECT TO
THE UNIFORM CUSTOMS AND
PRACTICES FOR DOCUMENTARY
CREDITS (UCP) (1993 REVISION) OF THE
INTERNATIONAL CHAMBERS OF
COMMERCE (PUBLICATION NO. 500)
WE HEREBY ENGAGE WITH DRAWERS
AND/OR BONAFIDE HOLDERS THAT DRAFT
DRAWN AND NEGOTIATED IN CONFORMITY
WITH THE TERMS OF THIS CREDIT WILL BE
DULY HONOURED ON PRESENTATION AND
THAT DRAFTS ACCEPTED WITHIN THE TERMS
OF THIS CREDIT WILL BE DULY HONOURED
AT MATURITY. THE AMOUNT OF EACH DRAFT
MUST BE ENDORSED ON THE REVERSE
OF THIS CREDIT BY THE NEGOTIATION
BANK..........."
(Emphasis supplied by us)
4. The terms of Letter of Credit were amended on June 23,
1997 to the following effect :
"AT THE REQUEST OF THE APPLICANT
UNIALKEM FERTILIZERS LTD., E-5 PLOT NO. 4,
RAVI SHANKAR NAGAR, BHOPAL - 462 016. WE
HAVE TODAY AMENDED OUR CAPTIONED
LETTER OF CREDIT AS UNDER :
FIRST PAGE OF LETTER OF CREDIT LINE
SECOND TO READ AS : NEGOTIATION OF
YOUR DRAFT AT 180 DAYS FROM THE DATE
OF DELIVERY ORDER DATED 18/06/97 INSTEAD
OF EXISTING PLEASE MAKE THE FOLLOWING
AMENDMENTS TO ATTACHED SHEET NO. 1 OF
4
L/C POINT NO. 01 TO BE DELETED POINT NO.
02 TO BE DELETED POINT NO. 04 TO READ AS
COPY OF CERTIFICATE OF SYRIAN ORIGIN
ISSUED BY CHAMBER OF COMMERCE
INSTEAD OF EXISTING. POINT NO. 05 TO READ
AS COPY OF CERTIFICATE OF QUALITY AND
QUANTITY ISSUED BY CHAMBER OF
COMMERCE INSTEAD OF EXISITING POINT NO.
12 TO READ AS DRAFT DRAWN UNDER THIS
LETTER OF CREDIT ARE NEGOTIABLE BY THE
STATE BANK OF INDIA, MAIN BRANCH, NEW
DELHI AND ORIENTAL BANK OF COMMERCE,
OVERSEAS BANK, NEHRU PLACE, NEW DELHI
ALSO INSTEAD OF EXISTING.
ALL OTHER TERMS AND CONDITIONS REMAIN
UNCHANGED."
(Emphasis supplied by us)
5. On July 8, 1997, the issuing bank received negotiated
documents under the letter of credit from Oriental Bank of
Commerce (hereinafter to be referred as `negotiating bank') for
payment. On that day itself, the issuing bank pointed out the
following discrepancies to the negotiating bank :
(i) certificate from the negotiating bank mentioning all
the terms of credit have not been furnished;
(ii) the certificate of Syrian Origin is not issued by
Chamber of Commerce.
The issuing bank, thus, advised the negotiating bank to rectify the
discrepancies within seven days of submission of documents.
5
6. Thereafter, between July 10, 1997 and February 7,
1998, the correspondence ensued through telegrams and letters
between the negotiating bank and the issuing bank. According to
the negotiating bank, the discrepancies notified by the issuing bank
were rectified and the documents complied with the requirement of
the credit. On the other hand, the issuing bank continued to insist
that the documents were discrepant; the documents presented were
not acceptable to it and it was holding the documents on collection
basis at the risk and responsibility of the negotiating bank.
7. It was then that the seller brought an action by way of a
summary suit for a decree in the sum of Rs. 63,74,356/- (principal
amount of Rs. 43,86,411/- and interest of Rs. 19,87,945/-) together
with the interest at the rate of 18 per cent per annum from the date
of the suit to the date of decree and thereafter the interest at the
same rate on decretal amount till realization against the issuing
bank and the advising bank. The buyer was impleaded as a formal
party.
8. The issuing bank (defendant no. 1) made an application
for leave to defend which was granted by the trial court. The issuing
6
bank then filed written statement justifying its action of not honouring
the credit on diverse grounds, namely; (i) the certificate of origin
issued by Chamber of Commerce was different from the certificate
of origin dated March 30, 1997 issued by the supplier of the material;
(ii) neither the description of goods nor the quantity or weight
matched with each other in the above documents; (iii) the certificate
of origin has been issued in favour of MMTC and not in favour of the
seller; (iv) at the request of the negotiating bank, the documents
were retained by it but only on collection basis in order to remit the
amount after collecting the same from the buyer and (v) it has acted
in accord with Uniform Customs and Practice for Documentary
Credits (for short, ` UCP500').
9. On the pleadings of the parties, the trial court framed the
following five issues :
"Issue No. 1. Whether respondent Nos. 1 & 2
have dishonoured the
documents relating to the "letter
of credit" against the rules and
practice?
Issue No. 2. Whether applicant is eligible to
get Rupees 43,86,411/- and 18
percent interest p.a. over it from
respondent Nos. 1 & 2 on the
7
basis of letter of credit given by
them?
Issue No. 3. Assistance and expenses?
Issue No. 4 Whether respondent is eligible to
get Rs. 14,258/- as
handling/collection fee from
applicant?
Issue No. 5. Whether applicant has accepted
the encashment of bill and
document on collection basis?"
It may be noted that trial court has referred to the seller as applicant
and the issuing bank (defendant no. 1) and the advising bank
(defendant no. 2) as respondent nos. 1 and 2 respectively.
10. The parties tendered oral as well as documentary
evidence in support of their respective case.
11. The trial court after viewing the evidence and hearing the
arguments held that the issuing bank has properly dishonoured the
documents relating to the letter of credit and the seller was not
entitled to get any amount or interest from the issuing bank and the
advising bank on the basis of that letter of credit. The trial court has
also concluded that seller accepted the encashment of bill and
document on collection basis. In light of these findings, the trial court
vide its decision dated February 4, 2002 dismissed the seller's claim.
8
12. The seller filed first appeal against the judgment and
decree of the trial court before the High Court of Madhya Pradesh.
As noted above, the Division Bench of that Court allowed the seller's
appeal and granted a decree to the seller as prayed in the suit.
13. The legal position appears to be fairly well-settled that a
draft with accompanying documents must be in strict accord with the
letter of credit. If the documents presented comply with the terms of
the credit, the issuing bank must honour its obligation in accordance
with the terms of credit. In United Commercial Bank v. Bank of India
and others1, this Court referred to few decided cases of the English
Courts, Halsbury's Laws of England and also couple of books on
the subject by eminent authors--Davis' Law Relating To
Commercial Letters of Credit, 2nd Edn. (at page 76) and Paget's Law
of Banking, 8th Edn. (at page 648)--and it was held that the
documents tendered by the seller must comply with the terms of the
letter of credit and that the banker owes a duty to the buyer to
ensure that the buyer's instructions relative to the documents
against which the letter of credit is to be honoured are complied with.
It was stated that the description of the goods in the relative bill of
1 (1981) 2 SCC 766
9
lading must be the same as the description in the letter of credit,
that is, the goods themselves must in each case be described in
identical terms, even though the goods differently described in the
two documents are, in fact, the same. The Court reiterated, ` . . . . . .
a bank issuing or confirming a letter of credit is not concerned with
the underlying contract between the buyer and seller. Duties of a
bank under a letter of credit are created by the document itself, but
in any case it has the power and is subject to the limitations which
are given or imposed by it, in the absence of the appropriate
provisions in the letter of credit'.
14. Where the customer of bank instructs the bank to open a
credit, the bank acts at its peril if it departs from the precise terms of
the mandate.
15. Lord Diplock in Commercial Banking Co. of Sydney Ltd.
v. Jalsard Pty. Ltd.2 stated at page 286 of the Report that the issuing
banker and his correspondent bank have to make decisions as to
whether a document which has been tendered by the seller complies
with the requirements of a credit.
2 (1973) AC 279
10
16. It needs no emphasis that a contract is concluded
between the issuing bank and the seller no sooner the bank issues
the credit and communicates it to the seller. Under an irrevocable
credit the issuing bank gives an unequivocal and binding
undertaking to the seller that it will pay against documents/bills
drawn in compliance with the terms of credit.
17. The relevant clauses of Articles 13, 14 and 19 of UCP
500 read as under:
"Article 13.
Standard for Examination of Documents
a Banks must examine all documents stipulated in the
Credit with reasonable care, to ascertain whether or
not they appear, on their face, to be in compliance
with the terms and conditions of the Credit.
Compliance of the stipulated documents on their face
with the terms and conditions of the Credit, shall be
determined by international standard banking practice
as reflected in these Articles. Documents which
appear on their face to be inconsistent with one
another will be considered as not appearing on their
face to be in compliance with the terms and
conditions of the Credit.
Documents not stipulated in the Credit will not be
examined by banks. If they receive such documents,
they shall return them to the presenter or pass them
on without responsibility.
11
b The Issuing Bank, the Confirming Bank, if any, or a
Nominated Bank acting on their behalf, shall each
have a reasonable time, not to exceed seven banking
days following the day of receipt of the documents, to
examine the documents and determine whether to
take up or refuse the documents and to inform the
party from which it received the documents
accordingly.
c . . . . . . .
Article 14.
Discrepant Documents and Notice
a . . . . . .
b Upon receipt of the documents the Issuing Bank
and/or Confirming Bank, if any, or a Nominated Bank
acting on their behalf, must determine on the basis of
the documents alone whether or not they appear on
their face to be in compliance with the terms and
conditions of the Credit. If the documents appear on
their face not to be in compliance with the terms and
conditions of the Credit, such banks may refuse to
take up the documents.
c If the Issuing Bank determines that the documents
appear on their face not to be in compliance with the
terms and conditions of the Credit, it may in its sole
judgement approach the Applicant for a waiver of the
discrepancy(ies). This does not, however, extend the
period mentioned in sub. Article 13 (b).
d . i. . . . . . .
ii. Such notice must state all discrepancies in
respect of which the bank refuses the
documents and must also state whether it is
holding the documents at the disposal of, or is
returning them to, the presenter.
iii. . . . . . . . .
12
e If the Issuing Bank and/or Confirming Bank, if any,
fails to act in accordance with the provisions of this
Article and/or fails to hold the documents at the
disposal of, or return them to the presenter, the
Issuing Bank and/or Confirming Bank, if any, shall be
precluded from claiming that the documents are not in
compliance with the terms and conditions of the
Credit.
f . . . . . . . . . .
Article 19.
Bank-to-Bank Reimbursement Arrangements
a . . . . . . .
b Issuing Banks shall not require a Claiming Bank to
supply a certificate of compliance with the terms and
conditions of the Credit to the Reimbursing Bank.
c . . . . . . . .
d . . . . . .
e . . . . . . ."
18. In light of the above legal position, we heard Mr. R.K.
Sanghi, learned counsel for the appellants and Mr. Shyam Divan,
learned senior counsel for the 1st respondent for some time. In the
course of hearing, however, it transpired that the High Court in its
judgment that runs into 56 foolscap pages while reversing the
judgment of the trial court, has not at all adverted to issue no. 5
framed by the trial court nor it considered or upset the finding of the
trial court on that issue.
13
19. Mr. Shyam Divan, learned senior counsel for the seller -
1st respondent fairly stated that the finding on issue no. 5 recorded
by the trial court has not at all been considered in the impugned
judgment although, he strenuously urged that once the
discrepancies on the basis of which the issuing bank refused the
documents were rectified and the time allowed for encashment had
expired, the issuing bank was obliged to honour the letter of credit
and the case set up by the issuing bank that the seller had accepted
the encashment of bill and document on collection basis was false
and frivolous.
20. Having regard to the controversy set up by the parties in
the course of trial, in our view, it cannot be said that issue no. 5 is
immaterial or finding of the trial court on that issue is
inconsequential. The High Court was hearing the first appeal and,
as a first appellate court it ought to have considered and addressed
itself to all the issues of fact and law before setting aside the
judgment of the trial court. The judgment of the High Court suffers
from a grave error as it ignored and overlooked the finding of the trial
court on issue no. 5 that the seller accepted the encashment of bill
and document on collection basis. The High Court was required to
14
address itself to issue no. 5 which surely had bearing on the final
outcome of the case.
21. In Santosh Hazari v. Purushottam Tiwari (Deceased) by
L.Rs.3, this Court held (at pages 188-189) as under :
"........The appellate court has jurisdiction to reverse
or affirm the findings of the trial court. First appeal is
a valuable right of the parties and unless restricted
by law, the whole case is therein open for rehearing
both on questions of fact and law. The judgment of
the appellate court must, therefore, reflect its
conscious application of mind and record findings
supported by reasons, on all the issues arising
along with the contentions put forth, and pressed by
the parties for decision of the appellate court. ...
while reversing a finding of fact the appellate court
must come into close quarters with the reasoning
assigned by the trial court and then assign its own
reasons for arriving at a different finding. This would
satisfy the court hearing a further appeal that the
first appellate court had discharged the duty
expected of it......"
22. The above view has been followed by a 3-Judge Bench
decision of this Court in Madhukar and Others v. Sangram and
Others4, wherein it was reiterated that sitting as a court of first
appeal, it is the duty of the High Court to deal with all the issues and
the evidence led by the parties before recording its findings.
3 (2001) 3 SCC 179
4 (2001) 4 SCC 756
15
23. In the case of H.K.N. Swami v. Irshad Basith (Dead) by
LRs.5, this Court (at pages 243-244) stated as under :
"The first appeal has to be decided on facts as well
as on law. In the first appeal parties have the right
to be heard both on questions of law as also on
facts and the first appellate court is required to
address itself to all issues and decide the case by
giving reasons. Unfortunately, the High Court, in
the present case has not recorded any finding
either on facts or on law. Sitting as the first
appellate court it was the duty of the High Court to
deal with all the issues and the evidence led by the
parties before recording the finding regarding
title.........".
24. Again in Jagannath v. Arulappa and Another6 while
considering the scope of Section 96 of the Code of Civil Procedure,
1908, this Court (at pages 303-304) observed as follows :
"2. A court of first appeal can reappreciate the
entire evidence and come to a different conclusion.
In the present case, we find that the High Court
has not adverted to many of the findings which had
been recorded by the trial court. For instance,
while dismissing the suits filed by the respondents,
the trial court had recorded a finding on Issue 5
that the defendant-appellant had taken actual
possession of the suit properties in Execution
Petition No. 137 of 1980 arising out of OS No. 224
of 1978. Without reversing this finding, the High
Court simply allowed the appeals and decreed the
suits filed by the plaintiff-respondents in toto.
Similarly, there are other issues on which findings
recorded by the trial court have not been set aside
5 (2005) 10 SCC 243
6 (2005) 12 SCC 303
16
by the High Court. The points involved in the
appeals before the High Court required a deeper
consideration of the findings recorded by the trial
court as well as the evidence and the pleadings on
record."
25. The decided cases of this Court in Jagannath6 and
H.K.N. Swami5 were noticed by this Court in a later decision in the
case of Chinthamani Ammal v. Nandagopal Gounder and Another7.
26. In our view, the High Court failed to follow the
fundamental rule governing the exercise of its jurisdiction under
Section 96 of the Code of Civil Procedure, 1908 that where the first
appellate court reverses the judgment of the trial court, it is required
to consider all the issues of law and fact. This flaw vitiates the
entire judgment of the High Court. The judgment of the High Court,
therefore, cannot be sustained.
27. For the above reasons, we accept the appeal, set aside
the impugned judgment of the High Court and restore First Appeal
No. 225 of 2002 for re-hearing and fresh decision. All contentions of
the parties are kept open to be agitated at the time of the hearing of
the first appeal. No order as to costs.
7 (2007) 4 SCC 163
17
.........................J.
(Aftab Alam)
........................ J.
(R.M. Lodha)
NEW DELHI.
AUGUST 18, 2011. 18
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