Skip to content


State Bank of India Vs. the Economic Trading Co. S.A.A. and ors. - Court Judgment

LegalCrystal Citation
SubjectCommercial
CourtKolkata High Court
Decided On
Case NumberA.F.O.D. No. 259 of 1969
Judge
Reported inAIR1975Cal145
ActsContract Act, 1872 - Section 124; ;Code of Civil Procedure (CPC) , 1908 - Order 7, Rule 7
AppellantState Bank of India
RespondentThe Economic Trading Co. S.A.A. and ors.
Appellant AdvocateS. Roy Chowdhury, ;Tapas Banerjee and ;N.D. Roy, Advs.
Respondent AdvocateSome Nath Chatterjee and ;Aninda Mitter, Advs.
Cases ReferredGajanan Moreshwar Parelkar v. Moreshwar Madan Mantri
Excerpt:
- .....of india ltd. v. surajbalaram sethi. (19701 74 cal wn 991. the division bench observed that a bank guarantee had a dual aspect. it was not merely a contract between the bank and the beneficiary of the guarantees, it was also a security given to the beneficiary by a third party. in seeking to enforce the bank guarantee the beneficiary of the guarantee, in effect, sought to realise the security furnished by the third party and the third party had,therefore, locus standi to challenge the enforcement of the guarantee. the courts were slow to interfere with the operationof, according to the division bench, letter of credit not merely on the ground of their importance in international trade but also on the ground that under the terms and conditions of the contract the beneficiary who was.....
Judgment:

Sabyasachi Mukharji, J.

1. This appeal arises out of an order of A. K. Basu, J., dated the 3rd June, 1969, in Suit No. 2643 of 1967. In order to appreciate the dispute in this appeal it is necessary to refer briefly to certain facts. On the 10th August, 1967, there was a contract between the Economic Trading Co., defendant No. 1 in this suit who was the buyer and Messrs. Lohia Jute Press Private Limited who was the plaintiff-seller for purchase of 27,12,900 pieces of polythene bags at Rs. 270/- per 100 bags, f. o. b., Calcutta the total value being Rs. 73,24,830.00. In the said contract there was a guarantee clause which stated as follows:

'The sellers to provide letter of guarantee for 20% of the face value of the goods sold in favour of the consignees within three weeks from date through an Authorised Egyptian Bank. The Letter of guarantee should be valid for claims to be filed by the Buyers or consignees within three months of the expiry date of L/C. This letter of guarantee should be unconditionally payable on demand.' The plaintiff requested the State Bank of India on the 25th August, 1967, for a packing credit loan and performance guarantee for Rs. 14,65,000/-. It further stipulated that the guarantee should be given in favour of Alexandria Bank of Cairo, which was the defendant No. 3 in the suit before the expiry of two weeks of the contract which fell on the 29th August, 1967. As per terms of the contract the guarantee should be valid upto the 31st May, 1968. The said instructions are contained in the letter dated the 25th August, 1967. which appears at page 26 of the Paper Book. On the 29th August, 1967, a letter of indemnity and/of counter guarantee was given by the plaintiff to the State Bank of India. The said letter of counter guarantee at page 60 of the Paper Book states as follows:--

'In consideration of your having at the request of Lohia Jute Press Pvt. Ltd., Calcutta-7, (hereinafter referred to as the Company) agreed to execute a Letter of Guarantee (as per copy annexed hereto) for Rs. 14,64,966/- (Rupees Fourteen lacs sixty-four thousand nine hundred sixty-six only) in favour of Egyptian Chemical Industries (KIMA) S. A. E., Cairo, (hereinafter referred to as the Beneficiary) we hereby agree and declare that the company will hold harmless and indemnify the Bank against and will pay to the Bank on demand at Calcutta the amount of all costs, claims, demands, damages, losses, and expenses which may be made against or sustained by the Bank or for which the Bank may become liable by reason of the Bank having given and signed the said Guarantee or otherwise in connection therewith. And the company also agrees to pay to the Bank at its Calcutta Local Head Office forthwith on demand any amount which the Bank may be called upon to pay under the said Guarantee (and whether the Bank shall have paid any such amount or not) plus all costs and charges which may be incurred by the Bank or become payable in connection with the fulfilment of the terms of the said Guarantee.' On the 29th August, 1967, the State Bank of India cabled to Bank of Alexandria at the request of the plaintiff asking the said Bank to execute an unconditional guarantee for Rs. 14,64,966/- in favour of the defendant No. 2 representing 20 per cent, f. o. b. value of the goods. A copy of the said cable appears at page 63 of the Paper Book which is in the following terms:--'At request Lohia Jute Press Private Limited Calcutta please execute your unconditional guarantee for Rs. 14,64,966/-half of Indian Rupees 2929932 favouring Egyptian Chemical Industries (KIMA) S. A. E. Cairo representing 20% F. O. B. value of goods viz., Rs. 73,24,830/- for supply of 27,12,900 Polythene Coated Hessian Bags at rate Rs. 270/- per 100 bags F. O. B. Calcutta in terms contract dated 10th August 1967. signed at Cairo stop we understand Egyptian buyers have established relative credit for Rupees 73,24,830/- in favour Indian Suppliers through your intermediary stop proposed guarantee will be operative for three months from expiry date of said letter of credit viz., 31st May, 1968 and payable on demand in writing to you by Beneficiary stop kindly contact KIMA Cairo immediately and issue required guarantee in form acceptable to Beneficiaries but ensuring our liability does not exceed amount indicated and guarantee bears a definite expiry date to confirm our regulations mailing us three copies of guarantee executed stop we indemnify you stop letter follows.'

On the 3rd September. 1967, a letter of credit for Rs. 73,25,000/- was opened in favour of the plaintiff by the defendant No. 3 at the instance of defendant No. 2. On the 4th September, 1967, there was a letter of undertaking by the Bank of Alexandria for Rs. 14,64,966/- in favour of the buyer Egyptian Chemical Indus-tries, the defendant No. 2 on first demand notwithstanding 'any contestation'. This was valid upto the 31st May, 1968. On the 20th November, 1967. the State Bank of India debited the plaintiff for Rupees 11,072.88 being the commission and stamp duty claimed by the Bank of Alexandria. Thereafter, it appears that there was an alleged breach by the plaintiff in supplying the goods. It is the case of the foreign buyer that the quality of the goods meant to be supplied and inspected by surveyor Messrs. Norman, Stewart & Co. was not according to specification. Therefore, the foreign buyer purported to cancel the contract. The said repudiation, however, is denied and disputed by the plaintiff. The plaintiff alleges that the jute bags were manufactured according to specification and the foreign buyer defendants Nos. 1 and 2 were wrongfully purporting to cancel the contract of the said goods. There was a telegram received by the State Bank of India from the Bank of Alexandria on the 28th November, 1967, whereunder the said State Bank was informed by the Bank of Alexandria that the beneficiaries had requested implementation of the letter of undertaking and to remit cover thereof in compliance of guarantee terms. The State Bank of India was asked to remit the amount for the purpose of paying the foreign buyer. On the 28th November. 1967, that is, on the same date the plaintiff filed a suit against the defendants Nos. 1, 2 and 3. The State Bank of India, however, was not made a party to the said suit. In the plaint the plaintiff alleges that the purported cancellation and/or repudiation of the contract by the defendants Nos. 1 and 2 were wrongful and in the premises, under the terms of the guarantee the Bank of Alexandria was not entitled to pay to the foreign buyer the amount claimed and asked for an injunction against the defendants Nos. 1 and 2 from claiming or receiving any money under the letter of guarantee and/or undertaking dated the 4th September. 1967 and also claimed an injunction against the Bank of Alexandria from making any payment on account of the defendants Nos. 1 and 2 for the said sum of money. The plaintiff also claimed a decree of Rs. 9,45,000/- on account of alleged damages suffered due to the breach of the contract or enquiry into such damages.

2. After the suit was filed on an application by the plaintiff an order was made by A. N. Sen, J. granting injunction restraining the defendants nos. 1 and 2 from receiving or claiming any money and also the defendant no. 3, the Bank of Alexandria from making any payment pursuant to the said letter of guarantee. The said order appears at page 30 of the Paper Book. It must be mentioned thatwe are not concerned with the validity or propriety of the said order. The said order remains and is binding on the defendants and the said order has not been appealed from. The suit is still pending. On the 29th November, 1967, the Solicitor for the plaintiff intimated the aforesaid order to the State Bank of India. Thereafter on the 4th December, 1967, the plaintiff filed this petition and took out the notice of motion dated the 4th December, 1967, praying inter alia, that the State Bank of India be added as defendant to the suit and an injunction be issued restraining the State Bank of India and its servants from making any payment to the Bank of Alexandria. On an application being made an interim order was made by A. N. Sen, J., on the 4th December, 1967, granting an injunction restraining the State Bank of India from making any payment. The State Bank of India on the 5th December, 1967, accordingly wrote to the Bank of Alexandria that in view of the injunction they were unable to remit cover under the guarantee regarding the letter of credit and also informed the Bank of Alexandria that they should not pay the amount to the foreign buyer. On the same date a letter was received by the State Bank of India wherein it was asserted that according to Egyptian law as well as in the terms of the guarantee the Bank of Alexandria should pay the value thereof to the beneficiary on demand notwithstanding any contestation on the part of the seller. Therefore, the State Bank of India was requested by the Bank of Alexandria to remit the amount to them. The said letter appears at page 66 of the Paper Book. On the 2nd February, 1968. the State Bank of India again wrote that as the Bank of Alexandria was aware of the order of the Calcutta High Court, they were not in a position to make payment in their favour. After affidavits were filed the application ultimately came up for hearing on the 3rd June. 1969, and was disposed of by the order dated the 3rd June, 1969. The said order provided that this Court made no order pursuant to the notice of motion except that the plaintiff-company was absolved from the due undertaking which was given for obtaining the interim injunction. The State Bank of India was, further, directed within a fortnight to deposit a sum of Rupees 12,00,000/- out of the guaranteed amount with the Registrar. Original Side of this Court and it was further directed that the same be held by the said Registrar until further orders of this Court and the liability for the amount of the commission should be decided later on and in the first instance the plaintiff-company should pay the amount for depositing the said sum with the Registrar and the order provided that upon depositing the saidsum of Rs. 12,00,000/- with the said Registrar the State Bank of India would be exonerated from its liability in respect of that sum. From this order this appeal has been preferred by the State Bank of India and we are concerned with the propriety and validity of the order mentioned hereinbefore.

3. In this appeal two points require consideration -- one is that the impugned order was made against the State Bank pf India directing the State Bank of India to deposit the amount of Rupees 12,00,000/- without adding the State Bank of India as a party to the proceeding, and whether the order passed was valid and legal. In this appeal it is necessary, however, first, to determine, whether the impugned order could have been passed at all or not. On behalf of the State Bank of India it was urged that there was an unconditional obligation to pay 'without contestation' by the Bank of Alexandria at the instance of the State Bank of India which was on the instruction of the plaintiff. Therefore in accordance with the practice of the international trade and in accordance with the obligation of the international trade the State Bank of India should not be restrained from honouring the said obligation entered into with the Bank of Alexandria. It was, next, submitted that the State Bank of India had given an undertaking to the Bank of Alexandria to pay without contestation or without protest. It was, then, submitted that there was an indemnity given by the State Bank of India to the Bank of Alexandria. Therefore, as a result of this indemnity the Bank of Alexandria was entitled to enforce the obligation of payment and in the premises such an order should not be passed which would hamper the international reputation and credit of the State Bank of India. Lastly, it was urged that there was an obligation or undertaking by the guarantee of instruction of the plaintiff to indemnify and make payment to the State Bank of India by the plaintiff by a letter dated the 29th August. 1967. Therefore, the impugned order was illegal and not in accordance with the law. In support of this contention reliance mainly was placed on a decision of the Supreme Court in the case of Tarapore and Co., Madras v. Tractors Export, Moscow, : [1969]2SCR920 . There what had happened was that in pursuance of a contract with a Russian firm for supply of machinery, an Indian firm opened a confirmed, irrevocable and divisible letter of credit with a Bank in favour of the Russian firm. In a suit by the Indian firm alleging that the machinery supplied was not upto the contract, the Supreme Court held that in that suit the Court would not be justified in granting temporary injunction restraining theBank as well as the Russian firm from taking any further steps in pursuance of the letter of credit. The Supreme Court allowing the appeal expressed the view that an irrevocable letter of credit had a definite implication. It was a mechanism of great importance in international trade. Any inference with that mechanism was bound to have serious repercussions on the international trade. Except under very exceptional circumstances, the courts should not interfere with that mechanism. The Supreme Court further observed that opening of a confirmed letter of credit constituted a bargain between the banker and the vendor of the goods which imposed upon the banker an absolute obligation to pay irrespective of any dispute there might be between the parties as to whether the goods were upto contract or not. A vendor of goods selling against a confirmed letter of credit was selling under the assurance that nothing would prevent him from receiving the price. If the buyer had an enforceable claim that adjustment must be made by way of refund by the seller and not by the way of retention by the buyer. The letter of credit was independent of and unqualified by the contract of sale or underlying transaction. The autonomy of an irrevocable letter of credit was entitled to protection. In these circumstances, the Supreme Court, interfered with the injunction granted by the trial Court. It has to be mentioned that in that case there was an irrevocable letter of credit the operation of which was being restrained by way of injunction. In the instant case the obligation between the State Bank of India and the Bank of Alexandria or the obligation between the plaintiff and the State Bank of India does not arise under any irrevocable letter of credit. The importance of irrevocable letter of credit being mechanism of international trade was emphasised by the Supreme Court because of special relationship between the banker and the customer. That principle will not apply to contract or letter of guarantee given by a banker to a bank. That distinction has been clearly brought out in the bench decision of this Court in the case of The Minerals and Metals Trading Corporation of India Ltd. v. Surajbalaram Sethi. (19701 74 Cal WN 991. The Division Bench observed that a bank guarantee had a dual aspect. It was not merely a contract between the Bank and the beneficiary of the guarantees, it was also a security given to the beneficiary by a third party. In seeking to enforce the bank guarantee the beneficiary of the guarantee, in effect, sought to realise the security furnished by the third party and the third party had,therefore, locus standi to challenge the enforcement of the guarantee. The courts were slow to interfere with the operationof, according to the Division Bench, letter of credit not merely on the ground of their importance in international trade but also on the ground that under the terms and conditions of the contract the beneficiary who was often the seller was assured of payment by the bank once he had complied with the terms and conditions of the letter of credit irrespective of his non-compliance with the terms of thecontract into which he had entered with the buyer or in other words on the ground of autonomy of the letter of credit. The Division Bench made it clear that the distinction between an irrevocable letter of credit and a bank guarantee was not merely one of function, namely, that the former was important for international trade and the latter for internal trade. The more important point of distinction was the autonomy of an irrevocable letter of credit and the dependence of a bank guarantee on a contract between the beneficiary of the guarantee and a third party. Payment under an irrevocable letter of credit did not depend on the performance of obligations on the part of the seller except those which the letter of credit expressly imposed. There the obligation was of the bank to the beneficiary. No third party came into the picture. In the case of a bank guarantee, however, by definition the third party was always on the scene. Unless there was some act of omission or commission on the part of the third party, payment under a bank guarantee did not become due. In other words, a bank guarantee did not enjoy the autonomy of an irrevocable letter of credit. In the case of a guarantee there was always the question of a contingency on the occurrence of which the guarantee became enforceable. A bank guarantee like any other contract was no more or no less than what the parties had made it. Payment under a bank guarantee like payment under a letter of credit became due only on compliance with the terms on which the bank was to pay under the respective documents.

4. In instant case before us, counsel for the State Bank of India, placed reliance on the use of the expression 'we indemnify you', in the telegram dated the 29th August, 1967, which is at page 63 of the Paper Book. Apart from the aforesaid expression used thereunder we are not aware of the terms and conditions therein, if any, under which the indemnity, if any. was granted by the State Bank of India to the Bank of Alexandria. The scope and effect of an indemnity is dealt with under the provisions of Section 124 of the Indian Contract Act which provides as follows:--

'A contract by which one party promises to save the other from loss causedto him by the conduct of the promisor himself, or by the conduct of any other person, is called a 'contract of indemnity'.'

The section in its terms is dependent upon the obligation which arises on the loss caused to the party to be indemnified. The loss may. however, be caused not by actual payment but otherwise and that was recognised by several decisions of Calcutta and Bombay. Reference in this connection may be made to the decisions of this Court in the case of Osman Jamal & Song Ltd, v. Gopal Purshottam, AIR 1929 Cal. 208, in the case of Chand Bibi v. Santoshkumar Pal. AIR 1933 Cal 641 and in the case of Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri, AIR 1942 Bom 302. But in all these cases the cases were decided upon the terms and conditions of the indemnity. In the instant case as mentioned hereinbefore we are not aware of the terms and conditions of the indemnity. In this case, therefore, the indemnity, must be for the loss to be caused by the conduct of the other party. In this case the facts have, again, to be viewed in the light that there is already an injunction against the Bank of Alexandria as well as against the foreign buyer restraining them from receiving any money. That injunction was issued by this Court. The order of injunction has not been varied, or vacated. Therefore, lawfully so long as order of this Court stands restraining the Bank of Alexandria from making any payment or the foreign buyer from receiving any payment, any payment to be made or attempted to be made would be in violation of the order of A N. Sen J., dated the 28th November, 1967, as mentioned hereinbefore and that order is binding on the Bank of Alexandria until it is set aside or lawfully declared not binding. It would, therefore, be not correct to say that so long as that order stands, the Bank of Alexandria would be under an obligation to pay without contestation the amount agreed to be paid under a letter of credit to the foreign buyer. The unilateral assertion of the Bank of Alexandria that under the Egyptian Law they were under an obligation to pay without contestation would not be decisive of the matter. In a case of this nature the question always arises as to what is the proper law of the contract and the unilateral assertion of the party that under the Egyptian law they were under an obligation to pay where there is already a lawful injunction granted by this Court--cannot in our opinion be conclusive of the matter. It would not be right to say that any order made in aid and/or in furtherance of that order would be illegal. An order to prevent circumvention of that order by indirect method would not beillegal. Counsel for the appellant stressed a great deal on international credit and reputation. International credit, however, cannot and should not be sought by such dubious process of permitting circumvention of the lawful order passed by this Court. In the aforesaid view of the matter in the facts and circumstances of the case we are, therefore, of the opinion that the same hind of order restraining the State Bank of India from making any payment to the Bank of Alexandria so that the order made by A. N. Sen, J., on the 28th November. 1967, may not be defeated, would not be improper, invalid or illegal, but would be on the contrary quite justified.

5. The questions, however, remain as mentioned hereinbefore, whether the order should have been passed in the manner passed against the State Bank of India and whether the State Bank of India not being a party to the proceeding and not being added to the proceeding should have been bound by such an order. The notice of motion and the petition sought addition of the State Bank of India as a party. It is well settled that no order could be passed, except in very special circumstances, and the present case does not come within such special circumstances, against party who is not a party to the proceeding. Therefore, from that point of view the impugned order is irregular and improper. The notice of motion dated the 4th December. 1967, asked for addition of the State Bank of India as a party to the suit in order that an injunction against it might be granted. The impugned order dated the 3rd June, 1969, has not added the State Bank of India as a party. The plaintiff being the respondent No. 1 to this appeal has not preferred any appeal therefrom. But in view of the provision of Rule 33, Order 41 of the Code of Civil Procedure and in view of the fact that the State Bank of India was sought to be added by the notice of motion, we are of the opinion that in the facts and circumstances of the case the State Bank of India should be added as a party to the suit. We are, however, of the opinion that there is no justification to direct the State Bank of India to deposit the money with the Registrar, Original Side of this Court. In the aforesaid circumstances, the order dated the 3rd June, 1969. should be modified by directing that the State Bank of India be added as a party to the suit and the cause title and the plaint be amended as indicated in red in the petition in support of this notice of motion dated the 4th December, 1967. Leave is given, to the plaintiff to re-verify the plaint within a fortnight of signing of this order and fresh writ of summons should also be issued to the State Bank of India. We further direct that the order of deposit to the StateBank of India be modified to the extent that there will be an injunction restraining the State Bank of India from making any payment to the Bank of Alexandria, defendant No. 3 or any other person in respect of or in connection with the letter of guarantee or undertaking dated the 4th September, 1967. furnished by the Bank of Alexandria in favour of defendant No. 2. The order dated the 3rd June, 1969, is modified and varied to the extent indicated above. If any money has already been deposited by the State Bank of India pursuant to the order made by the trial Court, the same should be returned back to the State Bank of India.

6. The appeal is, therefore, disposed of on the terms mentioned above. Costs of the appeal costs in the suit Certified for two counsel.

Janah, J.

7. I agree.


Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //