Back
2008 Supreme(Mad) 2863
High Court of Judicature at Madras
THE HONOURABLE MR. JUSTICE G. RAJASURIA
The Karnataka Bank Ltd. Oppanakara Street
Versus
Indian Bank Mylapore Branch & Others
A.S.No.446 of 1999
Decided on : 08-08-2008
For the Appellant :C.T. Selvam, Advocate.
For the Respondents:R3, R. Vijaya Raghavan, Advocate.
The central legal point established in the judgment is the strict interpretation of the terms and conditions in the Letter of Credit, emphasizing the absolute obligation of the banker to pay only upon exact compliance with the terms of the credit.
Headnote:
Letter of Credit - Banking - [1981 SC 1426] - The court discussed the nature of the contractual obligations flowing from a banker’s letter of irrevocable credit and emphasized the strict interpretation of the terms and conditions in the Letter of Credit. The judgment and decree of the trial Court as against the first defendant was set aside based on the interpretation of the Letter of Credit.
Fact of the Case:
The plaintiff, a bank, sanctioned loan facilities to the third defendant and opened a Letter of Credit in favor of the plaintiff at the request of the second defendant. The first defendant failed to honor the bills drawn by the third defendant, leading to a lawsuit.
Finding of the Court:
The trial Court decreed the suit in favor of the plaintiff, but the appellate court set aside the judgment and decree of the trial Court as against the first defendant based on the interpretation of the Letter of Credit.
Issues: The issues included whether the plaintiff was justified in honoring the bills without receiving advice from the first defendant as per the Letter of Credit, and whether the business practice pleaded by the plaintiff was proven.
Ratio Decidendi: The court emphasized the strict interpretation of the terms and conditions in the Letter of Credit and held that the first defendant was not liable to pay the suit amount without the plaintiff proving receipt of advice as contemplated in the Letter of Credit.
Final Decision: The judgment and decree of the trial Court as against the first defendant was set aside, and the appeal was allowed with cost.
This appeal is focussed as against the judgment and decree dated 30.04.1997 passed by the learned XVII Asst. City Civil Judge, Madras in OS No.6845 of 1996. For convenience sake, the parties are referred to here under according to their litigative status before the trial Court.
2. Heard both sides.
3. Niggard and bereft of details, the case of the plaintiff as stood exposited from the averments in the plaint would run thus:
The plaintiff is the Bank which was approached by the third defendant for grant of certain loan facilities, including Bills purchase facilities. Consequently, the former sanctioned the same in favour of the latter who started availing the facilities. In respect of the bills drawn by the third defendant on second defendant, the first defendant Bank, viz., M/s Karnataka Bank Ltd. had opened Letter of Credit in favour of the plaintiff Bank at the request of the second defendant agreeing to honour the bills drawn by the third defendant on the second defendant on presentation. The first defendant in fact was bound to honour the bills on due presentation to it by the plaintiff Bank, if the terms of Letter of Credit were complied with. It was also agreed that the amount utilized under the Letter of Credit would again be available for utilization on receipt by the negotiating Bank of the advice that the Bill already drawn by the beneficiary had been reimbursed. Accordingly, on receipt of such advice, the plaintiff had been purchasing further Bills within the Letter of Credit upto Rs.2,00,000/-. The Letter of Credit itself was renewed for a further period of six months i.e. upto 11.01.1988 by the first defendant, vide its letter dated 16.07.1987 and it was again extended upto 11.01.1989. While so, the bills to the value of Rs.1,80,175/- were returned by the first defendant unpaid, as though reinstatement was required for negotiating the Bills under the Letter of Credit. In fact, the first defendant even paid upto Rs.10,00,000/- without insisting for separate reinstatement advice from 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 utilization of Rs.2,00,000/-. The details of the invoices relating to the sum of Rs.1,80,175/- are furnished hereunder.
“1. Invoice No.2478 dated 16. 88 : Rs.28,450.00
2. Invoice No.2481 dated 16. 88 : Rs.29,150.00
3. Invoice No.2487 dated 20.6.88 : Rs.32,450.00
4. Invoice No.2488 dated 20.6.88 : Rs.88,500.00
5. 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, details of the relevant bills purchased were found incorporated and hence the Demand Drafts themselves were treated as advices. After issuing notice, 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 statement raising various pleas, the gist and kernel of them would run thus:
The Letter of Credit should be interpreted strictly. The amount utilized under the Letter of Credit would again be available for utilization on receipt by the negotiating Bank of the advice that the bill already drawn by the beneficiary had been reimbursed. The plaintiff was aware of the pre-requisite as contemplated in the Letter of Credit. The mere issuance of Demand Draft by the first defendant by itself would not constitute "advice" as contemplated in the Letter of Credit. The renewal of the Letter of Credit would not in any way enable the plaintiff to wriggle out of the conditions imposed in the Letter of Credit. The first defendant did not honour the bills to the tune of Rs.10,00,000/- in ignoring the conditions in the Letter of Credit. Accordingly, the first defendant prayed for the dismissal of the suit.
6. The trial Court framed the relevant issues. During trial, on the side of the plaintiff, P.W.1 was examined and Exs.A1 to A11 were marked. On
