Bank of India & Ors Vs. Manganese Ore (India) Ltd.
& Anr  INSC 1263 (8 October 1996)
O R D
appeal by special leave arises from the judgment of the Division Bench of the
Bombay High Court made on October 30-31, 1979 in Appeal No.163/71.
first respondent-Manganese Ore (India) Ltd. laid the suit against the
appellant and M/s.Emmenor Export Traders, the first defendant to recover the
suit amount in the 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 a sum of Rs.1,66,191.10 as
against the first defendant. On appeal by the first respondent, the High Court reverted
the decree as against the appellant and made the appellant liable to pay over
the same. When the leave was granted by this Court, the appellant was directed
to deposit the decretal amount and the first respondent was given liberty to
withdraw the amount on furnishing adequate security to the satisfaction of the
Registrar of the High court.
question in this case is: whether the appellant is liable to honour the letters
of credit entered into between the appellant and M/s. Emmenor Export Traders?
The admitted position is that under the letters of credit a conditional
contract was entered into between the appellant and the first defendant. The
most important clauses relating thereto are as under:
l(i) and l(iii)(b). Clause 1(i) provides in respect of the documents for
it is the seller's signed commercial invoice in quadruplicate based on the
weight, sampling, analysis and moisture determined at the time of shipment,
valuing the ore at the ratio of 17 U.S. dollars converted into @ Rs.4.75 to one
U.S. dollar per dry metric Tonne of 1,000/- Kg. net dry weight, F.O.B. Vishakhapattanam,
on the basis of 40 percent Manganese with the pro rata scale for each unit of
Manganese content above or below 40 per cent down to the minimum of 39 per
cent. The clause 1(ii)(b) speaks about the certificate in triplicate from M/s,
R.G. Briggs and Co. Private Ltd. of sampling assaying and moisture, determined
at the port of shipment showing the material to conform to the following
lumpy, Indian Low grade Manganese Ore having the following chemical analysis at 105 degrees C. minimum 39 per
cent. (F.E.) Iron Maximum 8.25 per cent SIO-2 Maximum 23.00 per cent Phosphorus
minimum 0.23 per cent (All approximately)." The trial Court as well as the
High Court have recorded a finding that the quality of the goods supplied by
the first defendant to the buyers did not match the quality contracted for
under the letters of credit. The trial Court considered this aspect of the
matter and the obligation to honour the contract in paragraph 13 and concluded
I proceed to see whether, the Plaintiff had complied with both these clauses.
It is not now disputed that inboth the supplies made by the Plaintiff to the
Defendant No.1, the phosphorus was more than the agreed maximum of 0.23 and
that in one of the supplies the Manganese was below the minimum of 39 per cent.
This can be found from the documents presented by the Plaintiff to Defendant
No.2 at the time negotiations on 20th June 1966.
are exhibits 80 to 85.
81 to 84 are the certificates issued by the analyser R.V. Briggs and Co.
Exhibit 81 shows the Manganese to be 38.06 per cent and the phosphorus to be
0.240 per cent and exhibit 84 shows that the phosphorus was 0 246 per cent.
this approximation clause qualifying these percentages stated either in the
letter of credit exhibit 78 or in the agreement at exhibit 69 cannot be so read
as to allow the percentages to go below or above theagreed minimums and
maximums. The minimum and the maximum percentages shall have to be treated as
the percentages of rejection limits. The approximate percentage can be slightlyabove
the minimum agreed and slightly below the maximum agreed. This clause regarding
approximation cannot be read so as to allow a percentage below the rejection
limits. If this is allowed there will be no limit in lowering down the minimum
and the shooting up the maximum. In my opinion the minimum and maximum
percentage stated in the agreement at exhibit 68 or in the attached sheet of
letter of credit at exhibit 78, shall have to be taken as rejection
limits." Thus, the trial Court found that the first respondent had not
fulfilled the terms and conditions of the letters of credit in respect of the
quality of the goods and did not grant the decree against the appellant.
High Court also recorded the finding as under:
will thus be seen that the two shipments so far as Phosphorus was concerned,
(exceeded the maximum which was shown therein, namely, 0.23 in one case by 0.01
per cent and in the other by 0.16 per cent.
as manganese is concerned, the first was down by 0.04 per cent while in the
second consignment. it was up by 0.1 per cent. There is no dispute between the
parties about these facts. The shipments when sampled and analysed did not
confer exactly to the quality spocifications either in the agreement dated 18th
March or the letter of Credit dated 6th May is not a matter of dispute."
Having found that the shipment of the goods was not in conformity with the
quality and specification either in the agreement dated 18th march or the
letters of credit dated 6th March. The question arises: whether the appellant
has been absolved of its liability to honour the contract entered into with the
first defendant in terms of the letters of credit granted by the appellant? The
High Court has proceeded on the premise that the appellant had submitted the
bills for crediting the amount to the value of the goods supplied; it had
enclosed all the credit letters required under the agreement including the
analyst report and having accepted them, it has the duty to honour the letters
of credit. It had given credit to the account of the first respondent-plaintiff
of the amount of the value which was shipped under the letters of credit. We
think that the High Court was not right in that behalf. It is seen that letters
of credit are not irrevocable and unconditional contract entered into between
the appellant and first defendant. It is subject to the compliance of the
quality of the goods supplied by the first defendant to the plaintiff- first
respondent. In view of the undisputed and admitted position that the goods were
not of the quality conformable to either to the original agreement or the
letters of credit. as stated earlier, the appellant is not obliged to honour
the letters of credit, it being a condition precedent, namely, goods supplied
shall be of the quality in conformity with the conditions of the letters of
credit. The High Court has evaluated the quality of the goods supplied and
relied upon the last clause namely, "approximate" and held that since
the quality of the goods are approximate to the conformity of the quality, the
appellant is not absolved of its liability to honour the letters of credit
entered into between the appellant and first defendant. We think that the High
Court was not right in its conclusion. But When the parties have admitted that
the goods supplied were not of the specification and the standard required
under the letters of credit vis-a-vis the appellant and the first defendant,
the obligation to honour the letters of credit having been conditional one, the
appellant is absolved of its liability to honour the letters of credit and pay
over the value of the goods supplied by the first respondent to the first
defendant. Therefore, the view taken by the trial Court is correct and that of
the High Court is not sustainable in law. The judgment and decree of the
appellate Court stands set aside and that of the trial stands restored, namely,
the fists respondent shall seek for the payment from the first defendant. Since
the appellant was directed to deposit as per the orders of this Court, if the
amount is already withdrawn, the appellant is at liberty to recover the same
from the security furnished by the appellant. If the security is not sufficient,
it will be open to the appellant to recover the balance amount from the first
respondent in accordance with law.
appeal is accordingly allowed, but, in the circumstances, without costs.