"I realise that some of my criticisms may be mistaken; but to refuse to criticize judgements for fear of being mistaken is to abandon criticism altogether... If any of my criticisms are found to be correct, the cause is served; and if any are found to be incorrect the very process of finding out my mistakes must lead to the discovery of the right reasons, or better reasons than I have been able to give, and the cause is served just as well."

-Mr. HM Seervai, Preface to the 1st ed., Constitutional Law of India.

Thursday, August 25, 2011

Proferas Nihil Ultra Quam Quod Necessarium Est: SBI v Emmsons International

Civil Appeal 1709/ 2007
Date: 18 August 2011
Court: Supreme Court of India
Bench: Aftab Alam & RM Lodha,

Unialkem Fertilizers Ltd. (Unialkem) placed a purchase order on Emmsons Intl. Ltd. (Emmsons) for supply of 2000 MT of Syrian Rock Phosphate (SRP) for a consideration of Rs. 43,86,411/-. According to the Purchase Order, payment was to be made “against 180 days issuance of letter of credit”. Consequently, a letter of credit (LoC) for Rs. 43,86,411 was established by Unialkem’s bank, State Bank of India (SBI or Issuing Bank) for the benefit of Emmsons. The letter of credit was subject to the Uniform Customs and Practices for Documentary Credits (UCP) (1993 Revision).

The LoC provided for the following documents to be submitted for honouring the LoC:

  1. Certificate of Syrian origin issued by the Chamber of Commerce
  2. Copy of Certificate Of Quality And Quantity issued by Chamber of Commerce
Emmsons supplied the material and Unialkem accepted the documents pertaining to the sale such as the sale invoice, bills of lading and so on. The sale was a high seas sale. When Emmsons submitted the documents through its bank, Oriental Bank of Commerce (Negotiating Bank), SBI pointed out that there were the following discrepancies in the documents submitted:

  1. Certificate from the negotiating bank mentioning all the terms of credit have not been furnished.
  2. The certificate of Syrian origin is not issued by the Chamber of Commerce.
Consequently, SBI advised the Negotiating Bank to rectify the discrepancies within Seven days from the date of submission of documents. The defects, according to the Negotiating Bank, were rectified and resubmitted. SBI disagreed that they were rectified. Correspondence ensued between both the banks for more than nine months.

Ultimately, Emmsons filed a summary suit for a decree of Rs. 43,86,411 and interest. In its written statement, SBI pointed out defects in the documents and contended that it had acted in due compliance with the Uniform Customs and Practices for Documentary Credits. The trial court framed five issues and, after considering the evidence, decided in favour of SBI. Ultimately, the Division Bench of the High Court held in favour of Emmsons.

SBI appealed to the Supreme Court. The Supreme Court, after considering the judgement of the Division Bench, held that since the Division Bench did not consider the trial court’s finding on the fifth issue, the impugned judgement suffered from grave error. After supporting its point with decided cases [Santosh Hazari v Purushottam Tiwari, Madhukar v Sangram, H.K.N. Swami v. Irshad Basith (2005) 10 SCC 243, Basith Jagannath v. Arulappa (2005) 12 SCC 303] the court set aside the impugned judgement and restored the first appeal for re-hearing.

There is nothing special about this to necessitate a separate post. But what is notable is that in the decision, the Supreme Court went on to analyse the legal position on rejection of documents. The court cited several decisions, quoted several provisions of the Uniform Customs and Practices for Documentary Credits- UCP 500 and analysed the “fairly well-settled” legal position. If the court was ordering re-hearing of the appeal on a totally different ground, why analyse the legal position on the right of the Issuing bank to insist on strict compliance of the terms of the LoC? Courts have the bad habit of dealing with aspects unnecessary for the disposal of the case. The court could have just stuck to the ground of lack of consideration by the Division Bench of the High Court of the fifth issue and could have dismissed the appeal on the said ground. This is not an one-off instance. In one of our previous posts, we had mentioned a case where the Delhi High Court unnecessarily dealt with facts on performance of the contract when the court had to decide merely on the maintainability of the suit in view of the arbitration clause contained in the contract.

We’ll look at the law on the right of the Issuing Bank (here, SBI) to insist on strict compliance by the Negotiating Bank or the Seller of the terms of LoC in another post. Meanwhile check out the following interesting article on the subject: Ronald J Mann, The Role of Letters of Credit in Payment Transactions, 99 Michigan Law Review 2494 (2000).

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