Case Note & Summary
The appeal by special leave arose from the judgment of the Division Bench of the Bombay High Court in Appeal No.163/71 dated October 30-31, 1979. The first respondent, Manganese Ore (India) Ltd., had filed a suit against the appellant, State Bank of India, and the first defendant, M/s. Emmenor Export Traders, to recover a sum of Rs.1,69,000 and odd. The trial court in Special Suit No.91/69, by judgment and decree dated April 30, 1971, decreed Rs.1,66,191.10 only against the first defendant and did not grant any decree against the bank. On appeal by the first respondent, the High Court reversed the decree and made the appellant bank liable to pay the amount. When leave was granted by the Supreme Court, the appellant was directed to deposit the decretal amount, and the first respondent was given liberty to withdraw it on furnishing adequate security to the satisfaction of the Registrar of the High Court. The core question was whether the appellant bank was liable to honour letters of credit entered into between the bank and the first defendant. The letters of credit contained clauses specifying the quality of manganese ore to be supplied, including a base of 40% manganese with a pro rata scale, minimum 39% manganese, and limits for iron, silica, and phosphorus. The trial court and the High Court both recorded a finding that the quality of the goods supplied did not match the contracted quality. Specifically, in both supplies the phosphorus content exceeded the agreed maximum of 0.23%, and in one supply the manganese was below the minimum of 39%. The High Court, however, held that since the bank had accepted the documents, including the analyst's certificates, and had credited the value to the first respondent's account, it was bound to honour the letters of credit, relying on the 'approximate' clause. The Supreme Court disagreed. It held that the letters of credit were not irrevocable and unconditional but were conditional contracts subject to compliance with quality specifications. Since the non-conformity of goods was undisputed and admitted, the condition precedent was not satisfied, and the bank was absolved of its liability to honour the letters of credit. The 'approximate' clause could not be read to permit deviations beyond the specified minimum and maximum percentages, which were to be treated as rejection limits. Accordingly, the Supreme Court set aside the High Court's judgment and restored the trial court's decree, meaning the first respondent had to seek payment from the first defendant. If the first respondent had already withdrawn the deposited amount, the appellant bank was at liberty to recover it from the security furnished, and if the security was insufficient, from the first respondent in accordance with law. The appeal was allowed without costs.
Headnote
A) Banking Law - Letters of Credit - Conditional Contract - Not mentioned - The letters of credit between the bank and the exporter were conditional contracts requiring goods to conform to stipulated quality specifications; since both courts found quality non-conformity admitted, the condition precedent was not fulfilled. Held that the bank was not obliged to honour the letters of credit because they were not irrevocable and unconditional, and the High Court erred in treating acceptance of documents as creating absolute liability. B) Contract Law - Interpretation of 'Approximate' Clause - Rejection Limits - Not mentioned - The 'approximate' clause qualifying the percentage specifications could not be read to allow values beyond the agreed minimum and maximum percentages, which constituted rejection limits. Held that the High Court's reliance on approximate conformity was misplaced; the bank was absolved because the goods were not of the specification and standard required under the letters of credit.
Issue of Consideration
Whether the appellant bank was liable to honour letters of credit issued to the first defendant when the goods supplied did not conform to contractual quality specifications, and whether the 'approximate' clause permitted deviations from specified minimum/maximum percentages.
Final Decision
The appeal was allowed. The judgment and decree of the High Court were set aside and the trial court's decree was restored. The first respondent was to seek payment from the first defendant. If the first respondent had already withdrawn the decretal amount deposited by the appellant, the appellant was at liberty to recover the same from the security furnished by the appellant; if the security was insufficient, it would be open to the appellant to recover the balance from the first respondent in accordance with law. The appeal was allowed without costs.
Law Points
- Letters of credit may be conditional
- bank's obligation to honour is subject to compliance with quality specifications
- where non-conformity admitted
- condition precedent not fulfilled and bank absolved
- 'approximate' clause cannot extend beyond rejection limits
- minimum and maximum percentages are rejection limits
- High Court's contrary view unsustainable
