Decided on February 09,1970

The Indian Overseas Bank Ltd. Appellant
S.K. Ramalingam Chettiar And Anr. Respondents


M.NATESAN, J. - (1.) THESE two second appeals arise out of a suit for recovery of damages on a sale of goods through an irrevocable letter of credit. The plaintiff the first respondent in the two second appeals, is the buyer of the goods. The appellant in S.A. No. 1821 of 1964 the first defendant in. the suit, is the banker who issued the Letter of Credit and the appellant in S.A. No. 106 of 1965 the and defendant in the suit, is the seller. The plaintiff who had a permit for the purchase of brass scraps issued to him by the Government, placed an order with the 2nd defendant, a licensed importer of the controlled commodity at Calcutta, for the despatch of 7 tons 10 cwts. brass scraps from Calcutta to Kumbakonam. For payment, he applied to the first defendant -bank at its branch in Kumbakonam for opening a Letter of Credit in favour of the 2nd defendant with the consent of the latter. Under the terms of the Letter of Credit., the first defendant -bank at Calcutta is authorised to negotiate the 2nd defendant's draft at sight drawn on the plaintiff to the extent in all of Rs. 22,500 for full invoice value of 7 tons and 10 cwts. of brass scraps to be despatched from Calcutta to Kumbakonam, all shipments being made on or before 9th December, 1960 against presentation of the bill and the specified documents on or before 9th December, 1960 covering the merchandise. The documents mentioned in the said Letter of Credit are: (a) Signed commercial invoice in duplicate; (b) Complete sets of" clean on Board Railway receipt to order of the Indian Overseas Bank Ltd." (1st defendant) and marked " freight paid "; (c) Transit insurance policy or certificate of insurance including war risk for 10 per cent. over C.I.F. invoice value claims payable at Madras or Kumbakonam. The special instructions in the said Letter of Credit contain inter alia the following: Please note that Insurance should cover risks of war, marine, theft, pilferage, non -delivery, civil commotion, strikes, riots, warehouse to warehouse clause and transhipment. Exhibit A -1 is the Letter of Credit issued by the first defendant -bank. The parties originally intended the despatch of the goods through railway, and due to nonavailability of railway wagons, there was mutual agreement between the parties for the despatch of the goods by ship. There is no dispute that in the circumstances the seller had to tender complete sets of " on Board bills of lading ". Though the date for tender of the documents was originally fixed as 9th December, 1960 after several earlier extensions by Exhibit A -3 dated 2nd June, 1961 it was extended finally upto 30th July, 1961. The consignment was actually shipped from Calcutta on 12th June, 1961. Exhibit B -10 is a letter by the plaintiff to the first defendant through the Kumbakonam branch for amendment of the letter of Credit to enable carriage by ship up to Madras and from there to Kumbakonam by rail. In all the advises extending the date of credit and in Exhibit B -10 there is specific instruction that all other conditions remain unchanged. While intimating that the despatch of the goods by steamer from Calcutta to Madras should be duly insured for to 10 per cent. over the invoice value covering usual risks, including war risks, and permitting part shipments, Exhibit B -4 confirms that all other conditions remain Exhibit A -6 is the bill of lading, Exhibit A -10, the insurance policy and Exhibit A -9, the invoice. The goods had been packed in 48 drums and when to arrived six of the drums were found in damaged condition. When the entire consignment was weighed, there was a shortage of 27 cwts. 1 q. The survey dated 3rd July, 1961, showed that the shortage was due to pilferage on account damaged drums. In the bill of lading relating to the suit consignment a special note was made : "Drums old and second hand. Steamer is not responsible for the shortage or damage." The insurance policy Exhibit A -10 did not cover the risk by theft and pilferage. In these circumstances, the plaintiff laid his claim for damages against defendants 1 and 2 on two counts. Firstly, the plaintiff charged the first defendant with negligence in not insisting upon a clean bill of lading and accepting a foul bill of lading. Secondly, he charged the first defendant with a failure to scrutinise the insurance policy and to see whether it covered theft and pilferage, when the instructions were specifically for such cover. The 2nd defendent is made liable for damages for negotiating and obtaining payments on the basis of a foul bill of lading and a policy of insurance not covering the risks in terms of the Letter of Credit.
(2.) THIS is a case of c.i.f. contract with provisions for payment under an irrevocable Letter of Credit entitling the seller to negotiate and obtain payment on presentation of the documents in accordance with the instructions contained in the Letter of Credit. In such a Case the banker owes a duty to the buyer, to reject the documents which do not conform to the terms of the instructions given for the opening of Letter of Credit. It is equally well -settled that the seller, the beneficiary under the credit, must also carry out the terms of his contract with the issuing banker. If he fails to conform to the conditions and requirements under which the credit is to become available, the bark can properly refuse to honour his bill. The bank's obligation is a dull one. It engages with the seller that, if the documents tendered conform to the requirements of the Letter of Credit, it will accept the accompanying draft. At the same time the bank also engages with the principal that, if the documents do not conform to the contract in the application for Letter of Credit, it will refuse to accept the accompanying draft. A bank under a Letter of Credit is thus under a to the buyer to reject documents not in accordance with the instructions, say. a foul bill of lading or an insurance policy not in accordance with instructions. In the absence of any provision to the contrary, the policy should be one which is the usual contract of insurance in the trade in question. But, if there are special terms in the credit, it is the duty of the seller to tender a Valid policy of insurance in accordance with the terms. In Halsbury's Laws of England, Simond's Edition Volume 34, at page 185, it is said: 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 upon it for the price of the good 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 accept the bill of exchange upon tender of the documents.
(3.) IN Gutterridge's the Law of Bankers' Commercial Credits, 3rd Edition at page 68. the banker's duty is defined thus: It is, broadly speaking, the duty of the banker to scrutinise the documents tendered to him by the beneficiary under the credit or by the intermediary banker and to check them carefully with the instructions which he has received from his customer, and which, presumably, he has faithfully embodied in his credit or his credit instructions to his correspondent bank. Any default in this respect will debar him from claiming reimbursement by the customer of any amount which may be paid against the documents and will also cause him to forfeit his right to remuneration. Quoting from English Scottish and Australasian Bank v. Bank of South Africa (1922) 13 L.LL.R. 21 in Chitty on Contracts, Volume II, 22nd Edition, para. 412 at page 210 it is said: It is elementary to say that a person who establishes any reliance on a letter of credit must do so in exact compliance with its terms. It is also elementary to say that a bank is not bound or indeed entitled to honour drafts presented to it under a letter of Credit unless those drafts with the accompanying document are in strict accord with the credit as is opened. Now, the Letter of Credit, Exhibit A -1 requires complete sets of clean bill of lading. Originally, the parties contemplated transit by railway and subsequently, it was agreed that the carriage of the merchandise shall be by shipment. stated already, the bill of lading qualified the merchandise conveyed by stating drums old and second hand' 'steamer is not responsible for the shorter or damage.' There can be no doubt that this qualification makes the bill of lading an unclean one. It is well established that, even if there is no specific instruction that the bill must be a clean one, when a Credit calls for a bill of lading, it ordinary means clean bill of lading. The expression " clean bill of Lading " it not a term of art and it is generally taken to mean a bill which contains no relation as to the apparent good order and condition of the goods or packing. Gutterridge points out at page 79 that, when considering the cleanness' of a bill of lading if relation to its tender under a documentary credit, the test of cleanness' is wider, and a banker would be wrong to accept without authority a bill which was or might be prejudicial, beyond the normal to the buyer. The definition of a clean bill of lading, from the point of view of bankers, is set out in Article 18 of the Uniform Customs, and Practice for Commercial Documentary Credits and reads : customs, and Shipping documents bearing reservations as to the apparent good order and conditions of the goods and the packaging may be refused. A clean shipping document is one which bears no superimposed clauses declaring a defective condition of the goods or packaging. In British Imex Industries v. Midland Bank (1958) 1 All E.R. 264, Salmon, J., observed: The letter of credit stipulated that payment would be made against bills of lading without qualification. The plaintiffs suggest that this does not necessary mean clean bills of lading. In my judgment, when a credit calls for bills of lading, in normal circumstances it means clean bills of lading. I think that in normal circumstances the ordinary businessman who undertakes to pay against the presentation of bills of lading means clean bills of lading; and he would probably consider that that was so obvious to any other businessman that it was hardly necessary to state it.... A 'clean bill of lading 'has never been exhaustively defined, and I certainly do not propose to attempt that task now. I incline to the view, however that a clean bill of lading is one that does not contain any reservation as to the apparent good order or condition of the goods or the packing. With reference to addition in a bill of lading to the words "shipped in good condition, " either the words "weight, value and contents unknown " or "quantity and quality unknown " or both by the master or broker, in Scrutton on Charter -parties and Bills of Lading, 17th Edition, at page 155 -156 we find the following instructive passage: The insertion in addition to the first, of either or both of the last two clauses in the bill of lading by the master or broker repudiates his liability for any description of the weight or contents, etc., of the goods contained in the bill of lading; but he is bound to carry and deliver safely the goods received by him, whatever their contents or weight may be. These Clauses (shipped in good order and condition) only admit as against the shipowner that a package was shipped externally to all appearances in good condition. A mate's receipt or bill of lading which qualifies this admission is not a " clean receipt " or a "clean bill of lading." If such goods are delivered damaged the shipper must give prima facie evidence either that they were shipped in good condition internally or that the damage resulted from some cause for which the ship -owner is liable. Here, the bill of lading clearly qualified the packing and exonerates the steamer from all responsibility for shortage and damage. Whether the ship -owner could have lawfully done so is not the point. As pointed out by this Court in The Ellerman and Bucknall Steamship Co., Ltd. v. Sha Bhagajee : AIR 1961 Mad 442 , a defect in packing, if noted in a bill of lading, would render it an unclean bill, In that case, the question was as to the liability of a shipowner for non -disclosure in the bill of lading of a fact relating to the condition of the packages received by him for carriage by sea. The mate's receipt in the case which was given on delivery of the goods by the shipowner described the package as " re -used drums". The seller, evidently apprehending that the description of the package in the mate's bill if entered in the Bill of Lading would not facilitate his obtaining money under the Letter of Credit, requested the shipowner to issue clean bill of lading not mentioning that the goods were sent in "re -used drums" but merely mentioning them as drums. The shipowner acceded to the request, while safeguarding himself by obtaining a letter of indemnity from the seller. It was pointed out that, if the words " re -used drums " had been used, the apparent good order would be qualified by these words and the bill of lading would be rendered an unclean bill. In Armstrong v. Allan Bros 67 L.T. 417, there was a consignment of linseed oil which was described in the mate's receipt as being contained in "old casks ". The shipper wanted a clean receipt to be given ; but the shipowner gave only a receipt with an. endorsement that the oil was contained in " old casks ". It was held that the endorsement prevented the mate's receipt from being a clean one, notwithstanding the fact that linseed oil was stated to have been always shipped in casks seasoned by having carried petroleum, and that new casks were unfit for that purpose. This decision emphasises that, where the word " old " is used in the bill of lading or mate's receipt with reference to packing it would be an unclean bill of lading. Another instructive case is the decision in Bank Melli Iran v. Barclays Bank (1951) T.L.R. 1057, where the plaintiffs, a Persian Bank, authorised the defendants to issue a Letter of Credit for £ 40,000 representing the Value of " 100 new Chevrolet trucks " against the delivery of the documents, namely, delivery order, insurance policy, invoice and U.S.A. Government Undertaking that the trucks were new. The bank paid the amounts against the documents tendered. But the delivery order for the trucks described them as " new -good " the invoice stated them to be " in new condition ", while the certificate from the U.S.A. Government described them as " new -Good trucks ". Mc Nair J., held that none of the phrases " in new condition ", " new -Good " and " new good " was equivalent to " new " and that the documents against which the payment was made were not in accordance with the bank's mandate. In substance, the rule is that there is no room for documents which are almost the same or which will do just as well. In Bank Melli Iran's Case (1951) T.L.R. 1057, the plaintiffs, however failed as on its facts it was held that by their conduct they had ratified the defendant's acceptance of the documents tendered. Gutterridge at page 68, in the foot -note, cites Laudisi v. American Exchange, National Bank 239 N.Y. 234, as enunciating : 'The bank has the power and is subject to the limitations which are given and imposed by the customer's authority. If it keeps within the powers conferred, it is protected in the payment of the draft. If it transgresses those limitations, it pays at its peril.' In V/O. Tractors Export, Moscow v. Tarapore & Co. (1969) 82 L.W. 361 , this Court observed: When the documents are produced by the seller firm, the banker is bound to honour the Letter of Credit, so long as they are in exact compliance with the terms of the credit. But the banker can, and should, scrutinise the documents with meticulous care, to satisfy himself about this. The maxim de minimus non curat lex cannot be invoked, where the payment is made by Letter of Credit. In these circumstances, there is no doubt that the first defendant was negligent in accepting the unclean bill of lading tendered by the seller. Next, coming to the policy of insurance, the buyer had expressly asked for an insurance that would cover risks of war, marine, theft, pilferage, etc. But the insurance policy tendered does not cover theft and pilferage. The reference in the printed form of policy to perils against pirates, rovers and thieves, it is well understood in marine insurance law, would not cover theft and pilferage. Arnould's Marine Insurance, Vol. 10, at page 793, has this to say on the matter : "As to thieves, it is provided by the Rules for Construction of the Policy that the term " does not cover clandestine theft or a theft committed by any one of the ship's company, whether crew or passengers. The theft that is insured against in the policy means that which is accompanied by violence and not simple theft. " The learned author points out that it is now customary for cargo policies to contain a " theft and pilferage " clause whereby these risks are expressly covered, and that pilferage, as distinct from theft, appears to indicate a theft made in secret, and also the taking of a small part only rather than the whole. The survey report Exhibit B -17 says that the shortage of the goods is due to pilferage. Despite the instructions, the insurance policy has not covered theft or pilferage. The evidence shows that there has been no loss in transit through rail. There was an attempt by the plaintiff along with the first defendant to. make a claim on the Insurance Company. But the claim was not entertained, as there was no clause in the insurance policy covering theft or pilferage. In Yuill v. Scott Robson L.R. (1908) 1 K.B. 270, cattle were brought at Buenos Ayres c.i.f. for shipment to Durban. Under the contract the seller had to insure " against all risks ". The seller obtained a. policy which contained a warranty against " capture, seizure and detention, and the consequences thereof". Disease broke out among the cattle on the voyage. On. arrival at Durban the authorities, forbade their landing and they had to be destroyed. In an action by the buyer against the seller for breach of contract to insure " against all risks ", it was held that the buyer was entitled to damages, though the policy did not insure against the particular risk which befell the cattle and which was said to be a well -known and obvious risk in the circumstances of the case. A reference to Gutterridge would show that "all risks" policy means something more -than " all marine risks.";

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