Delhi High Court
Global Trust Bank Ltd. vs Fargo Freight Ltd., Bank Of Rajasthan ... on 17 July, 2001
Equivalent citations: AIR2002DELHI13, 94(2001)DLT623, AIR 2002 DELHI 13, (2002) 2 BANKCAS 210, (2001) 94 DLT 623, (2003) 1 BANKCLR 606
Author: Mukul Mudgal
Bench: Mukul Mudgal
ORDER Devinder Gupta, J.
1. These two appeals are being decided by a common judgment since parties are the same and common arguments were addressed.
2. In FAO (OS) No.265/2000 the appellant has prayed for setting the orders passed on 16.3.2000 and 21.7.2000 by learned Single Judge in Suit No. 1746/96. In FAO (OS) No. 268/2000, the prayer made is to set aside the order passed on 21.7.2000 by learned Single Judge in OMP No. 263/98.
3. Appellant in both the appeals is Global Trust Bank Ltd. Fargo Freight Ltd. Ireland is respondent No.1 in FAO (OS) No. 265/2000 and respondent No.3 in FAO (OS) No. 268/2000; Commodities Exchange Corporation Ltd. is respondent No.2 in both the appeals and Bank of Rajasthan Ltd. is respondent No.3 in FAO (OS) No. 265.2000 and respondent No.3 in FAO (OS) No. 268/2000. Reference is being in this judgment to the parties as are arrayed in FAO (OS) No. 265/2000.
4. Respondent No.1 a company incorporated in Ireland is engaged in the business of shipping. Respondent No.2, formerly known as Electic Exports Ltd., is a company incorporated under the Companies Act, 1956 and is engaged in the business of import/export of Foodgrain commodities etc. Respondent No.3 is the bankers of respondent No.1. On 11.3.1996 a Charter Party Agreement was entered into between respondent No.1 and respondent No.2. Under the terms of the agreement, ship of respondent No.1 was contracted to load about 14,000 MT bulk wheat belonging to respondent No.2 from Jakhau (Gujarat) on or about 15.3.1996 and to carry and discharge the same at Kuwait. It appears that on 16.3.1996 the ship arrived at Jakhau (Gujarat). After loading on 16.5.1996 the vessel sailed for Kuwait For the freight amount and demurrage, respondent No.1 raised invoice. Respondent No.2 appears to have raised some dispute but later on is alleged to have admitted its liability to respondent No.1. The appellant at the request of respondent No.2 opened Letter of Credit bearing No.CA/FLC/011/96 dated 20.5.1996 up to an aggregate amount of US $ 267,000.00 in favor of respondent No.1. The expiry date of letter of credit was submitted as 15.8.1996.
5. On 17.7.1996 suit No. 1746/96 was filed by respondent No.1 on the Original Side of this Court claiming a decree for mandatory injunction directing respondents 2 and 3 and the appellant to keep the irrevocable Letter of Credit dated 20.5.1996 alive beyond the expiry date till the disputes are settled between respondent No.1 and respondent No.2 by the Arbitral Forum culminating in a decree. Decree for temporary injunction was also claimed. Respondent No.1 alleged that it was being tricked by respondents 2 and 3 both belonging to Banguur Group of Companies, inspite of clear admission of liability by respondent No.2 of demurrage in the sum of US $ 267,000.00. It was alleged that the action of opening of irrevocable letter of credit by respondent No.2 was sufficient and demonstrates that US $ 267,000.00 were due to respondent No.1 on account of demurrage and undisputed amount but there was malafide intent on the part of respondents 2 and 3 not to honour their commitment, therefore, it was necessary to have filed a suit. On 17.7.1996 respondent No.1 invoked arbitration against respondent No.2. The said suit came up before the Court on 24.7.1996 on which date while issuing summons, an ex parte interim order of injunction was passed restraining respondents 2 and 3 directing that they and the appellant shall keep the irrevocable letter of credit, issued by the appellant in the sum of US $ 267,000.00, alive and shall not allow the same to be expired during the pendency of the suit till further orders. After hearing the parties the ex parte order of injunction was confirmed on 29.8.1996.
6. On 28.5.1997 an application (IA.5109/97) was filed by the appellant bank under Order 39 Rule 4 of the Code of Civil Procedure (for short "the Code") praying to vary the order passed on 24.7.1996 and confirmed on 29.8.1996 with direction to respondent No.2 to furnish security for the claim of respondent No.1 by depositing the money or through bank guarantee and that respondent No.2 be permitted to deposit in Court 63600 shares of respondent No.3 bank held by appellant as security together with amount of Rs.28.34 lakhs less the amount of Rs.1,45,102.79 due to the appellant bank towards its cost and charges. It was alleged in the application that letter of credit had been opened at the request of respondent No.2 against margin amount of Rs.28.34 lakhs and pledge of 63,600 shares of respondent No.3 bank with the undertaking by respondent No.2 to make payment of the balance amount under the said letter of credit, which stipulated the same condition and was valid up to 15.8.1996. The letter of credit was valid up to 15.8.1996 but by orders of the Court and on request of respondent No.2 letter of credit was extended and same stood extended till 15.6.1997. It was further alleged that during the validity of the letter of credit no claim at all had been made by the beneficiary. Letter of credit is a special mechanism in international trade and governed by the provisions of Uniform Customs and Practice for Documentary Credit. Article 37 of the said Practice makes it mandatory to stipulate an expiry date for presentation of documents. Presentation must also contain the documents stipulated in letter of credit to enable the issuing bank to honour its commitment. Further extension of letter of credit beyond 15.8.1996 was neither intended, nor contemplated. Transactions between the appellant and respondent No.2 was commercial one and it was in the peculiar circumstances that it was agreed upon under the said transaction that validity of the letter of credit will be only up to 15.8.1996. It was further alleged that the appellant bank was holding a sum of Rs.28,34,000/- as margin money besides pledge of 63,600 shares. Accordingly, it was prayed that shares be permitted to be deposited in Court and after deducting the amount towards charges for keeping the letter of credit alive, balance amount be permitted to be deposited and respondent No.2 be directed to furnish or deposit the money to meet the alleged claim of respondent No.1. This application was kept pending. In the meanwhile, on 14.1.1998 Foreign Award was passed by the Arbitral Tribunal at London.
7. An application was filed by respondent No.1 in this Court on 22.11.1998 under Sections 46, 48 and 49 of the Arbitration and Conciliation Act, 1996 seeking enforcement of the award of the Arbitral Tribunal. In the said application, respondents 2 and 3 were imp leaded as respondents 1 and 2 and he appellant was imp leaded as respondent No.3. It was prayed that direction be issued calling upon the respondents to pay the awarded amount in terms of the award passed by the Arbitral Forum at London.
8. Learned Single Judge on 6.10.1999 heard arguments on IA.5109/97 filed in Suit No. 1746/96. It was urged before us that on 30.10.1999 documents were presented with the appellant bank and on 3.11.1999 the appellant Bank intimated about the discrepancies in the documents. On 6.12.1999 reminder of discrepancies was given intimating the bankers of respondent No.1 that the appellant was holding the documents on the risk and responsibility of the bankers of respondent No.1. It is the case of the appellant that neither discrepancies were rectified nor the earlier letters were responded, therefore, on 8.2.2000 the appellant returned the original documents. On receipt of the documents, the bankers of respondent No.1 on 14.2.2000 returned the documents to respondent No.1 and closed the file in totality. Bankers of respondent No.1 also debited their commission and expenses to respondent No.1.
9. The case of the appellant has been that once discrepant documents were returned and were not returned back after removing discrepancies, the appellant bank under the provisions of Article 14 of of Uniform Customs and Practice for Documentary Credits was discharged from liability of whatsoever nature under the letter of credit.
10. On 16.3.2000 the application of the appellant bank seeking variation, as was sought in IA.5109/97 was dismissed.
11. On 21.7.2000 two separate orders were passed. I\One as passed in OMP.263/98 and the other was passed in Suit No. 1746/96, which read:-
"Interim orders dated March 16, 2000 have not been appealed against. A foreign award had been passed which has already been made rule of the court. In OMP.269/1998,. I have directed the Global Trust Bank Limited to make payment in the sum of Letter of Credit.
Nothing further survives int eh suit and it is dismissed leaving the parties to bear their respective costs."
12. The order passed on 21.7.2000 is under challenge in the appeals and it is the appellant's case that a compilation of documents was tendered on behalf of respondent No.1 before learned Single Judge in OMP.263/98. These were handed over in Court and on the same day learned Single Judge passed the impugned order. The documents also included a letter dated 14.2.2000, which letter was not in possession of the appellant. It was neither addressed to the appellant nor a copy thereof was sent to the appellant. The appellant was still unaware of its contents. Learned counsel for the appellant had also not been able to scrutinise a bunch of about 100 documents, which were tendered in court on 21.7.2000, when final order was passed. Subsequently after going through the documents it came to the notice of the appellant bank that in fact discrepancies in the documents and also been accepted by the bankers of respondent No.1 and for this reason the discrepant documents were in turn returned to the agents of respondent No.1. It was claimed that under Article 14(e) of the UCP, 500 had the bankers of respondent No.1 made payment to respondent No.1, the appellant bank was bound to remit the amount to the bankers of respondent No.1. Since no payment had been made by the bankers of respondent No.1 under the letter of credit, which had already lapsed the appellant was not liable to pay the amount under the Letter of Credit.
13. By the impugned order dated 21.7.2000 passed in OMP. 263/98 learned Single Judge observed that since foreign award had already been made rule of Court by order dated 20.8.1999 and since respondent No.1 in its petition was seeking court's assistance towards effecting recoveries against the award, a duty was cast on Courts to extend full assistance and ensure maximum and optimism enforcement of the award. Accordingly, it was directed that respondents 2 and 3 and the appellant jointly and severally make payment to respondent No.1. It was further directed that since Irrevocable Standby Letter of Credit had been issued by the appellant, the appellant should make payment within four weeks to respondent No.1. By the same order it was observed that since no other assets were known to respondent No.1 from which recovery could be made, the petition of respondent No.1 was dismissed with liberty reserved to approach the Court again.
14. The narration of events will not be complete in case reference is not made to an order passed on 20.8.1999. On that day the application of respondent No.1 filed under Sections 46, 47 and 49 of the Arbitration and Conciliation Act, 1996 came up before the Court for consideration. It was observed that as no objections had been filed by any of the parties to the Arbitral Award dated 14.1.1998 in proceedings between respondents 1 and 2 made by the Arbitral Forum of London, the scope of inquiry, as envisaged in Section 49 of the Arbitration and Conciliation Act, 1996 require that suo moto enquiry be carried out by the Court, if foreign award is to be enforced. Being satisfied that the subject matter of dispute between respondents 1 and 2 was capable of settlement by arbitration under Indian Statutes and that the enforcement of the award would not be contrary to public policy and there being no allegation that the award has been induced or affected by fraud or coercion, learned Single Judge recorded his satisfaction that the award is enforceable and consequently directed decree to be drawn in terms of the award.
15. Latter part of the above order, in our view, is not in consonance with the provisions of the Act and the ratio of decision of Supreme Court in M/s. Fuerst Day Lawson Ltd. v. Jindal Exports Ltd. CA No.3594 of 2001 (arising out of S.L.P. (Civil) No.6841 of 2000) decided on 4.5.2001.
16. During the course of hearing on 20.8.1999 when the aforementioned question cropped up before learned Single Judge as to the liability of the appellant to make payment pursuant to the letter of credit, learned counsel for the appellant had urged that the letter of credit on which reliance was being placed had expired on 15.8.1996 and, therefore, the appellant was not bound to make payment against document. Learned Single Judge observed:-
"that is the matter, which will be dealt with subsequently."
17. Learned counsel for respondent No.1 then sought permission of the Court to enable respondent No.1 to apply to Reserve Bank of India for grant of permission to make remittance against the letter of credit. Making reference to the order passed in Suit No.1746/96 while deciding applications under Order 39 Rules 1 and 2 and Order 39 Rule 4 of the Code, learned Single Judge observed that it would be in the interest of justice to permit respondent No.1 to apply to Reserve Bank of India for clearance. Four weeks time was allowed to respondent No.1 to apply for permission. Further observing that in case permission is granted, respondent No.1 will forward the same to the appellant for certification, as envisaged in the letter of credit. The Court further observed:-
"If an when the permission from the Reserve Bank of India is forthcoming, the extent of the liability of respondent No.3 (appellant herein) in terms of and against the subject Letter of credit would fall for adjudication."
18. In the light of aforementioned factual back drop arguments were heard. On behalf of the appellant Mr. P.Chidambaram and Mr. G.L. Sanghi made their submissions. On behalf of respondent No.1, Mr. C.A. Sundaram made his submissions.
19. It was urged on behalf of the appellant that the appellant not being a party to the Arbitral Award, it was not within the competence of the Court in these proceedings, which were to seek enforcement the award, a deemed decree, to compel the appellant to make payment. In any case if the appellant was compelled to make payment, it was but necessary for the Court to have adjudicated upon the rights and liabilities of the parties including the effect of letter of credit having expired on 15.8.1996. It was urged that on 21.7.2000 for the first time respondent No.1 tendered in Court a bunch of papers along with letter dated 14.2.2000 and learned Judge also proceeded to pass his order on the same day. Learned Judge proceeded to go into all aspects. The appellants were not aware of the nature of the documents. Only when the file was inspected after the order had been passed that the appellant acquired knowledge about the sequence of events. It was urged that once discrepancies had bene pointed out in the letter of credit, the Court was not required thereafter to adjudicate upon it. Letter of credit was not a bank guarantee. Letter of credit is not a security unlike some other instruments. It is only a conditional undertaking. Learned Single Judge proceeded as if it was an undertaking to make payment. The validity of letter of credit expired on 15.8.1996. In any case it had come to an end on 14.2.2000. The Court could not have thereafter adjudicated upon it. An interim order of the Court directing letter of credit to be kept open pending suit or proceedings is only interim in nature. Such an order cannot re-write contract between the parties. The question whether the appellant bank was or not liable under letter of credit was an important question, which was not adjudicated upon by Court, though the order says that this point had been raised by the appellant and had also been noticed by the Court in the earlier order dated 20.8.1999 but had not been adjudicated upon even in the final order.
20. On behalf of the respondent, Mr. Sundram vehemently contended that the letter of credit was given as a security and not for services to be rendered. By an order passed on 24.7.1996 the validity of letter of credit was directed to be extended. Ex part order was confirmed on 29.8.1996. This order was challenged by respondent No.2 in appeal, which was withdrawn on 12.3.1998 since, int he meanwhile, the Arbitral Tribunal had passed its award. No appeal was filed by the others. Application for vacation of the order of injunction was fled by the appellant, which was decided on 16.3.2000. Pursuant to the order, which was passed on 28.8.1999, respondent No.1 approached the Reserve Bank of India on 2.9.1999. The Reserve Bank of India's letter dated 23.9.1999 was also referred to. The approval was granted by the Reserve Bank of India on 23.9.1999. It is urged that on 6.10.1999 when arguments were addressed in IA.5109/97 all these documents were taken note of by the Court and for that reason the order was announced on 16.3.2000. It was further urged that the act of the appellant in not challenging interim orders passed from time to time estopps the appellant from challenging the said orders by which it was directed that the amount to the extent to which letter of credit was opened be made available for the benefit of respondent No.1. As such it was not necessary for respondent No.1 to have initiated separate proceedings for enforcement since letter of credit being security can be enforced in these proceedings.
21. We have given our due consideration to the submissions made at the bar. Admittedly, the appellant was not a party to the Arbitral Award and the decree does not envisage payment to be made by the appellant. For all intends and purposes the appellant is a third party to the decree. The first question for our consideration is that whether decree could be enforced in the same execution proceedings against a third party, not being party tot he decree. Before that question is taken up for consideration, we have to see the nature of letter of credit. Letter of credit as commonly understood confers authority upon the person to whom it is addressed to advance money or furnish goods on the credit of the writer. It is in the nature of negotiable instrument, and is a letter whereby a person requests another to advance money or give credit to a third person and promises to repay person making advancement. A letter of credit has been defined as an offer by a bank or other financial institutions to be hound to person to whom it is directed, when accepted and acted on by him according to its stipulations and is in substance an authority to him to draw on the bank in accordance with the terms stated and a promise by the bank to accept and pay bills or drafts so drawn.
22. A Division Bench of Madras High Court in Ellerman and Bucknall Steampship Co. Ltd. v. Sha Bhagajee Sonmull and others noticed features of letter of credit and held that a letter of credit involves a mandate by the constituent (buyer) and an undertaking by a banker to meet drafts drawn under the credit by the beneficiary of the credit (e.g.the seller) in accordance with the conditions laid down therein. It was further held that there is ordinarily no privity between the buyer and the paying (intermediary bank).
23. Being a third party, the method and manner in which such third party like the appellant can be compelled to make payment would be akin to the principles as laid down in the Code of Civil Procedure for enforcing recover against a garnishee. Rule 46 of Order 21 lays down the procedure for attachment of debt, share and other property, not in possession of judgment debtor. Position of respondent No.2 in the award, which is now a deemed decree is that of a judgment debtor and that of respondent No.1 is that of the decree holder. The appellant is a third party. Rule 46 of Order 21 reads:-
"Attachment of debt, share and other property not in possession of judgment debtor- (1) in the case of -
(a) a debt not secured by a negotiable instrument,
(b) a share in the capital of a corporation,
(c) other movable property not in the possession of the judgment debtor, except property deposited in, or in the custody of, any Court, the attachment shall be made by a written order prohibiting -
(i) in the case of debt, the credit or from recovering the debt and the debtor from making payment thereof untill the further order of the Court;
(ii) in the case of the share, the person in whose name the share may be standing from transferring the same or receiving any dividend thereon;
(iii) in the case of the other movable property except as aforesaid, the person in possession of the same from giving it over to the judgment debtor.
(2) A copy of such order shall be affixed on some conspicuous part of the court house, and another copy shall be sent in the case of the debt, to the debtor, in the case of the share, to the proper officer of the corporation, and, in the case of other movable property (except as aforesaid), to the person in possession of the same.
(3) A debtor prohibited under clause (i) of sub-rule (1) may pay the amount of his debt into Court, and such payment shall discharge him as effectually as payment to the party entitled to receive the same."
24.The Code of Civil Procedure (Amendment) Act, 1976 has inserted Rules 46-A to 46-I as regards the manner and method of taking out garnishee proceedings. Prior to amendment, opinion expressed by various High Courts was that the Court had no power to compel a garnishee to pay debt in Court and in case a garnishee on appearance denied the debt, it was duty of the Court to enquire that if debt was due and when garnishee was held liable to pay, except on certain contingencies, it was not permissible to call upon him to pay the amount into Court. The object of newly inserted Rule 46A is to render the debt due by the debtor of the judgment debtor available in execution to the decree holder and not to drive him to a suit. Rule 46A of Order 21 reads:-
"46A. Notice to garnishee- The Court may in the case of a debt (other than a debt secured by a mortgage or a charge) which has been attached under rule 46, upon the application of the attaching creditor, issue notice to the garnishee liable to pay such debt, calling upon him either to pay into Court the debt due from him to the judgment debtor or so much thereof as may be sufficient to satisfy the decree and costs of execution, or to appear and show cause why he should not do so.
(2) An application under sub-rule (1) shall be made on affidavit verifying the facts alleged and stating that in the belief of the deponent, the garnishee is indebted to the judgment debtor.
(3) Where the garnishee pays in the Court the amount due from him to the judgment debtor or so much thereof as is sufficient to satisfy the decree and the coasts of the execution, the Court may direct that the amount may be paid to the decree holder towards satisfaction of the decree and costs of the execution."
25. It would be seen a from bare perusal of the rule that it applies not only to a debt other than a debt secured by a mortgage or a charge, which has been attached under Rule 46 of Order 21 but also to a debt under a negotiable instrument. The foundation of a garnishee proceedings is an attachment under rule 46(1) of Order 21 of the Code. At the most it can be said that orders, which were passed in Suit No. 1746/96 are akin to attachment proceedings under which by operation of various interim orders the appellant had bene directed to keep the letter of credit alive. But the question is that whether mere attachment would entitle and enable the Court to otherwise make a direction for the payment of the amount, without adjudicating upon the case set up by appellant that for various reasons it is not liable to pay the amount. It has also been noticed above that the appellant is seriously disputing its liability under the letter of credit to pay. Rule 46B of Order 21 of the Code says that when the garnishee does not forthwith pay into Court the amount due form him and fails to appear and show cause in answer to the notice, the Court may order the garnishee to comply with the terms of such notice. Rule 46C of Order 21 lays down the procedure when the garnishee disputes indebtedness to the judgment debtor or alleges that the debt is not an attachable debt. The Court must order an issue t be raised and tried. Even if there is a reasonable doubt the matter should be tried. The granishee is required to make out a prima facie case before an issue as to his liability may be ordered to be raised; In other words he would disclose facts from which a reasonable inference may be drawn that there is a valid dispute as to his alleged liability.
26. On the same analogy, as contained in Rule 46C of Order 21, in our view, there must be an adjudication by the Court, once the appellant had disputed its liability to pay, which in terms of the order dated 26.8.1995 the learned Single Judge had stated that same will be dealt with subsequently. The said liability, in our view, is not adjudicated upon by learned Single Judge even in the final order passed on 21.7.2000. We need not go into various other questions raised before us in these appeals by learned counsel for the parties since, in our view, the appellant, who was third party to the decree could not straightaway be called upon to make payment of the amount under the terms of the letter of credit without adjudication. The appellant, in our view had raised serious questions of law and fact, which ought to have been adjudicated upon only on framing of issues and by affording opportunity to the parties to lead evidence. That exercise having not been undertaken by learned Single Judge, which otherwise on the basis of the earlier order ought to have been undertaken. Even the documents produced before learned Single Judge on 21.7.2000 without affording opportunity to the appellant to controvert the same could not have been relied upon. Since rights and liabilities of the appellant and respondent No.1 has not been adjudicated,m the impugned order is liable to be set aside.
27. Consequently,k we allow the appeal, set aside the impugned orders in so far as the same direct the appellant to make payment of the amount of award passed in favor of respondent No.1 against respondent No.2. Suit No. 1746/96 had already been dismissed. The parties accordingly will put in appearance before learned Single Judge in OMP.No.263/98 on 20.8.2001. Learned Single Judge will now proceed to adjudicate in accordance with the procedure laid down in rule 46C of Order 21 C.P.C. upon the questions as regards liability of the appellant, if any, to make payment in these proceedings for the amount of award under the aforesaid letter of credit.
Devinder Gupta, J.
28. By a common judgment passed in FAO(OS) No.265/2000, this appeal stands allowed.
29. A copy of judgment passed in FAO(OS). 265/2000 be placed on the record of this appeal by the Registry. For details judgment, see FAO(OS). 265/2000.