S. Kandappa Pillai vs State Bank of India

Varadarajan, J.—The Plaintiff who succeeded in the trial Court, but failed in the lower Appellate Court is the Appellant before me. The suit

was for recovery of a sum of Rs. 3,937.15 as damages on account of negligence on the part of the Respondent Bank in not realising the monies

due to the Appellant on a bill of exchange exhibit A-1 drawn by him under a letter of credit opened by the Mercantile Bank, Columbo branch on

behalf of the foreign buyer of garlic There was a contract between the foreign buyer Vijaya Mercantile Company, Colombo and the Appellant for

the supply of garlic by the Appellant. The letter of credit ''was opened by the foreign buyer and thereafter the Appellant despatched the garlic on

13th November 1967. The Appellant prepared bills of exchange for part of the amount covered by the letter of credit and he presented the bills of

exchange with the necessary documents to the Respondent bank on 14th November 1967. According to the Appellant, there is a custom whereby

the Respondent bank should have examined the documents immediately and pointed out then and there the mistake, if any, for . correction and for

immediate credit being given to the Appellant for the amount mentioned in the bill. The Appellant''s case is that on 24th November 1967 the

Respondent wrote to him saying that some corrections had to be made in the documents submitted by him and the corrections were made on the

same day. But in the meanwhile devaluation of the pound took place on 19th November 1967 and consequently under the letter of credit which is

for payment in pounds, the Appellant got a lesser amount, namely less the suit amount, The suit was therefore filed for the recovery of that amount.

The defence was that the Respondent was not aware of the advice exhibit A-7, dated 17th October 1967 of the Mercantile Bank, Colombo to

the Appellant about the opening of a letter of credit that the Respondent is only an intermediary bank and that it was not liable to pay the amount

immediately to the Appellant. The further contention was that there was no agreement between the Mercantile Bank Ltd., Colombo and the

Respondent bank to reimburse the Respondent bank whatever money that may be paid by the Respondent bank on the basis of the letter/of credit

and that all that the Respondent promised was only to collect the bills of exchange and not to make an out-right payment. The Respondent further

contended that it informed the Appellant''s agent when be brought the bills and documents that they would only collect the money and not make an

out-right payment. The trial Court found that the Respondent bank had received the letter like exhibit A-8, dated 20th October 1967 regarding

reimbursement agreement between the Mercantile Bank, Colombo and the Respondent bank and that the Respondent was bound to look into the

bills and documents immediately. The trial Court further found that there were some irregularities and mistakes which in the opinion of that Court

were minor and could be rectified and that the delay in getting the irregularities and the mistakes rectified only on 24th November 1967 was due to

the Respondents negligence in sending the bills for collection without proper scrutiny, contrary to the instructions given in the letter of credit. The

learned District Munsif further found that the bills were not landed over to the Respondent for collection and that the loss due to the devaluation of

the pound was caused on account of the negligence on the part of the Respondent bank. On these findings, the learned District Munsif devred the

suit as prayed for with costs.'' But on appeal, the learned Sub-ordinate Judge observed that the Appellant has not proved that the Respondent

bank had confirmed the letter of credit issued by the Mercantile Bank, Colombo and held that in the absence of such confirmation, there was no

liability or undertaking on the part of the Respondent bank to give credit for the bill amount without sending it for collection. - The learned

subordinate Judge further found that the custom pleaded by the Appellant had not been proved and dismissed the suit with costs. Hence the

second appeal.

The points arising for consideration in the second appeal are:

Whether the custom pleaded by the Appellant is true, and;

Whether there was confirmation of the letter of credit and the Respondent bank who is an intermediary bank was bound to negotiate the bill and

nuke immediate payment and is liable for the difference arising out on account of the devaluation of the pound.

The Appellant had alleged in paragraph 8 of the plaint that the documents should have been scrutinised and any irregularities in the same should

have been rectified then and there as customarily done for immediate negotiation. The Respondent had contended in paragraph 7 of the written

statement that it has no duty to scrutinise the regularity or ortherwise of documents presented by the customers and it was only the responsibility of

the Appellant. Thus there is a denial of the custom pleaded by the Appellant. The Supreme Court has observed in Thakur Gokalchand Vs. Parvin

Kumari, that:

A custom, in order to be binding, must derive its force from the fact that by long usage it has obtained the force of law, but the English rule that ""a

custom, in order that it may be legal and binding, must have been used so long that the memory of man runneth not to the contrary"" should not be

strictly applied to the Indian conditions. All that is necessary to prove is that the usage has been acted upon in practice for such a long period and

with such invariability as to show that it has, by common consent been submitted to as the established governing rule of a particular locality.

The Appellant should therefore prove the custom pleaded by him strictly as required by law. On the side of the Appellant, his representative who

went to the Respondent bank for presenting the Bill exhibit A-1 and the documents exhibits A- (sic) o A-5 has been examined. On the side of the

Respondent D.Ws. 1 and 2 who were employees of the intermediary bank have been examined. P.W. 1 has stated in his evidence that the

Respondent bank should have given credit to the Appellant immediately after getting the defects if any in the letter of credit rectified. D.W. 1 a

grade I Officer of the Respondent bank, who was a clerk in the receiving department at the relevant time, has deposed about the procedure

followed in the Respondent bank when documents of title are presented in the bank. He has stated that the party will prepare the documents of title

and present them to the bank with the letter of credit and that the bank will look into those papers and see if the terms of the letter of credit are

strictly complied with as soon as the letter of credit and the documents are presented in the bank. There is no other evidence regarding the alleged

custom. Thus, there is no evidence to show that by long usage, the practice of examining the letter of credit and the documents immediately after

they are presented in the bank, has obtained the force of law, and that it has been submitted to as the established governing rule of the intermediary

banks. Therefore I agree with the learned Subordinate Judge and find that the Appellant has not established the custom pleaded in the plaint.

Though the Respondent has denied the receipt of the advice regarding the opening of the letter of credit, it has been admitted during the trial that

the advice exhibit A-7, dated 17th October 1967 had been receive by the Respondent bank and transmitted to the Appellant. The words Permit

negotiation through State Bank, Tuticorin are found in exhibit A-7. Therefore it is clear that the fact that the letter of credit had been opened had

been communicated by the issuing bank name by the Mercantile Bank, Colombo to the Appellant through the Respondent bank. Exhibit A-8 the

letter of the Mercantile Bank, Madras to the Appellant with an endorsement, dated 23rd October 1967 of the Respondent bank refers to the letter

of credit with which we are concerned in this appeal and says Our Colombo branch-Confirmed Credit No. 110/2591 � 3127. The learned

Counsel for the Appellant submitted that confirmation of the letter of credit by the Respondent bank must be inferred from the words etc.,

Confirmed Credit No. 110/2591 � 3127 found in, exhibit A-8. At page 664 of Sheldon''s practice and law of Banking, Tenth edition, we find

the following passage in Article 3.

An irrevocable credit may be advised to a beneficiary through another bank without engagement on the part of that other bank (the advising bank),

but when an issuing, bank authories another bank to confirm its irrevocable credit and the latter does so, such confirmation constitutes a definite

undertaking on the part of the confirming bank either that the provisions for payment or acceptance will be duly fulfilled or, in the case of a credit

available by negotiation of drafts that the confirming bank will negotiate drafts without recourse to drawer.

Therefore it is clear that there will be a definite undertaking on the part of the beneficiary or intermediary only when that bank confirms its

irrevocable credit. At page 636 of Paget''s Law of Banking, Eighth edition, it is stated thus:

An irrevocable credit is confirmed if to it is added the ''confirmation'' of another banker, by which that banker also binds himself irrevocably.

D.W. 2 a Field Officer of the Respondent bank dealing with the bills of exchange and maintaining the necessary registers has stated in his evidence

that the bank will note on the letter of credit itself if it confirms the same. At peges 646 and 647 of the same text it is stated that:

the contract between the intermediary banker and the beneficiary depends upon the terms in which the former''s promise to pay is couched; it

becomes binding, in the case of a confirmed credit, that is, an irrevocable credit which has been confirmed by the intermediary banker, as soon as

it is commumcated to the beneficiary.

In Article 3 at page 664, it is stated thus:

An irrevocable credit is a definite undertaking on the part of an issuing bank and constitutes the engagement of that bank to the beneficiary or, as

the case may be, to the beneficiary and bona fide holders of drafts drawn and/or documents presented thereunder, that the provisions for payment

acceptance or negotiation contained in the credit will be duly fulfilled, provided that all the terms and conditions of the credit are complied with.

In the Law of Bankers"" Commercial Credits by Gutteridge Fourth edition (1968), it is stated at page 15:

The confusion which at one time existed between the terms'' ''irrevocable'' and ''confirmed'', and between ''revocable'' and ''unconfirmed'' has

today, in practice, been cleared. If the issuing banker uses an intermediary banker, he may ask him to confirm, or merely to advice, his irrevocable

credit; in the former case the intermediary banker excepts a direct obligation to the beneficiary and the credit is then a confirmed irrevocable credit;

otherwise the credit is unconfirmed.

At pages 65 and 66 of Gutteridge it is stated:

The relationship between issuing and intermediary bankers and between the intermediary banker and the beneficiary must clearly depend upon

what the intermediary banker is called upon to do. In the case of irrevocable credits the intermediary banker may also be authorised not merely to

advice the credit to the seller but also to confirm it. In certain cases, Chiefly in the Eastern trade, the employment of the intermediary banker may

take the form of an authority to negotiate drafts drawn on the buyer by the seller, and such authority may either be revocable or irrevocable.... As

between the issuing banker and the intermediary banker the relationship is, unless otherwise agreed, that of principal and agent, so that when the

intermediary banker has fully complied with his mandate he has a right to reimbursement....

The intermediary banker may be asked:

(a) merely to advise the credit to the beneficiary, in which case he usually makes it clear that he undertakes no responsibility in the matter ;

(b) to confirm the credit, in which case he virtually makes it his own ;

(c) to negotiate drafts drawn either on the, buyer or on the issuing banker.

At page 67 is stated that:

Confirmation means the acceptance of a direct contractual obligation such as in the case of the credit itself and should be given only at the request

of the issuing banker. Sometimes a beneficiary may ask for the confirmation of a hitherto unconfirmed credit : to agree might deprive the

intermediary banker of his normal right to recover from the issuing banker. Where the intermediary banker has himself confirmed the credit and

negotiated the seller''s drafts on the issuing banker he has no right of recourse against the seller (except possibly for money paid under mistake of

fact) or subsequent endorsers. A contrary ruling would result in circuity of action, because in the event of non payment of the draft followed by an

action by the intermediary banker against the drawer or endorser the Defendant would be in a position to plead a setoff or to counter-claim for an

equivalent amount.... The paramount consideration is, as a rule either the express agreement of the parties or an agreement to be implied from their

conduct.

There would have been no obligation on the Respondent-intermediary bank to negotiate the bill and made immediate payment if there was no

confirmation of the letter of credit. From the texts and the evidence referred to above, it is clear that confirmation is made by the intermediary bank

on the letter of credit itself. The original letter of credit has not been produced in the present case and only a copy exhibit A-6 has been produced.

There is no endorsement on exhibit A-6 to show that there was any confirmation of the letter of credit by the Respondent bank. The original must

be available with the Respondent bank. But the Appellant has not caused the production of the same by issuing a notice to the Respondent for its

production. Under the circumstances, it is not possible to infer from the words Our Colombo- Confirmed Credit No. 110/2591 � 3127 found in

exhibit A-8 that the Respondent bank must have confirmed the letter of credit and that it was only in view of the confirmation that the Mercantile

Bank, Colombo would have stated so in exhibit A-8. The Appellant has thus failed to establish that the Respondent has confirmed the letter of

credit and had thereby undertaken an irrevocable obligation to negotiate the bill and make immediate payment. The Respondent was therefore not

liable to immediately negotiate the bill and make the payment. As the Appellant has not established the custom pleaded in the plaint, it cannot be

stated that the loss which arose to the Appellant by reason of the devaluation of the pound between the date of the presentation of the bill, viz.,

14th November 1967 and the return of the bill on 24th November 1967 for rectification, was occasioned by any negligence on the part of the

Respondent bank. There is therefore no error in the judgment of the lower Appellate Court. The Second appeal is therefore dismissed, but, in the

circumtances of the case, without costs. No leave.