REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL  APPEAL NO. 1709 OF 2007

State Bank of India & Anr. …. Appellants

Versus

M/s. Emmsons International Ltd. & Anr.          ….Respondents

JUDGMENT

R.M. Lodha, J.  

This civil appeal, by special leave, is from the judgment  

and decree of the Madhya Pradesh High Court whereby the Division  

Bench  of  that  Court  allowed  the  first  appeal  of  the  present  1st  

respondent—M/s.  Emmsons  International  Ltd.—and set  aside  the  

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judgment and decree of the trial court (First Additional District Judge,  

Bhopal) and decreed the 1st respondent’s monetary claim.

  2. Unialkem  Fertilizers  Limited—2nd respondent  in  this  

appeal  (hereinafter  referred  to  as  ‘the  buyer’)  placed  a  purchase  

order on M/s. Emmsons International Limited (hereinafter referred to  

as ‘the seller’)  for supply of 2000 MT of Syrian Rock Phosphate  at  

the rate of Rs. 2100/- per metric ton for an aggregate amount of Rs.  

43,86,411/-.  The  payment  terms  provided  ‘against  180  days  

issuance of letter of credit’. On June 18, 1997, at the request of the  

buyer, a letter of credit for Rs. 43,86,411/- was established by the  

appellant No. 1 — State Bank of India, Industrial Finance Branch,  

Bhopal (hereinafter referred to as ‘the issuing bank’)  in  favour of  

the seller;  the appellant No. 2 — State Bank of India, New Delhi  

Main  Branch,  New  Delhi  being  the  advising  Bank.  The  seller  

supplied the material vide  sale invoice, high seas delivery,  bills of  

lading, etc. and the buyer is said to have  accepted the documents.

3. The letter of credit established by the issuing bank, inter  

alia, made the following stipulations:  

“  .  .  .  .  .  .  .  .  THIS  DOCUMENTARY CREDIT  WHICH  IS  AVAILABLE  BY  NEGOTIATION  OF  

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YOUR DRAFT AT 180 DAYS FROM DESPATCH  DRAWN FOR 100.00% OF INVOICE VALUE ON  UNIALKEM FERTILIZERS LTD., E-5 PLOT NO. 4,  RAVI  SHANKAR  NAGAR,  BHOPAL,  462  016  BEARING  THE  CLAUSE  “DRAWN  UNDER  DOCUMENTARY  CREDIT  NO.  0192097  LC000087  OF  STATE  BANK  OF  INDIA,  INDUSTRIAL  FINANCE  BRANCH,  GR.  FLOOR,  L.H.O.  PREMISES,  HOSHANGABAD  ROAD,  BHOPAL – 462 011 (INDIA).” ACCOMPANIED BY  DOCUMENTS LISTED IN ATTACHED SHEET (S)  EVIDENCING  DISPATCH  OF  GOODS  AS  PER  THE ATTACHED SHEETS.

FOR  LIST  OF  REQUIRED  DOCUMENTS,  MERCHANDISE  DESCRIPTION  AND  OTHER  INSTRUCTIONS PLEASE SEE  THE ATTACHED  CONTINUATION  SHEETS  WHICH  FORM  AN  INTEGRAL PART OF THIS CREDIT.

SHIPMENT FROM   : SYRIA TO KANDLA, INDIA SHIPMENT TERMS : CIF

PARTIAL SHIPMENT  : ALLOWED TRANSSHIPMENT     : NOT ALLOWED

INSTRUCTION TO THE ADVISING BANK:     

- ALL  BANK  CHARGES  (OTHER  THAN  ISSUING  BANK  CHARGES)  ARE  FOR  ACCOUNT OF BENEFICIARY.

- DISCREPANT DOCUMENTS TO BE SENT  STRICTLY ON COLLECTION BASIS.

- ALL  DOCUMENTS  TO INDICATE L/C  NO.  0192097 LC 000087 AND DATE 18/06/97.

- NEGOTIATIONS UNDER THIS CREDIT ARE  RESTRICTED TO STATE BANK OF INDIA,  NEW DELHI, MAIN BRANCH, 11, SANSAD  MARG, POST BOX NO. 430, NEW DELHI –  110 001.

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- EXCEPT  IN  SO  FAR  AS  OTHERWISE  EXPRESSELY  STATED  THIS  DOCUMENTARY CREDIT IS SUBJECT TO  THE  UNIFORM  CUSTOMS  AND  PRACTICES  FOR  DOCUMENTARY  CREDITS (UCP) (1993 REVISION) OF THE  INTERNATIONAL  CHAMBERS  OF  COMMERCE (PUBLICATION NO. 500)

WE  HEREBY  ENGAGE  WITH  DRAWERS  AND/OR  BONAFIDE  HOLDERS  THAT  DRAFT  DRAWN  AND  NEGOTIATED  IN  CONFORMITY  WITH THE TERMS OF THIS CREDIT WILL BE  DULY  HONOURED  ON  PRESENTATION  AND  THAT DRAFTS ACCEPTED WITHIN THE TERMS  OF THIS CREDIT WILL BE DULY HONOURED  AT MATURITY. THE AMOUNT OF EACH DRAFT  MUST  BE  ENDORSED  ON  THE  REVERSE  OF  THIS  CREDIT   BY  THE   NEGOTIATION  BANK..………”  

      (Emphasis supplied by us)

4. The terms of Letter of Credit were amended on June 23,  

1997 to the following effect :

“AT  THE  REQUEST  OF  THE  APPLICANT  UNIALKEM FERTILIZERS LTD., E-5 PLOT NO. 4,  RAVI SHANKAR NAGAR, BHOPAL – 462 016. WE  HAVE  TODAY  AMENDED  OUR  CAPTIONED  LETTER OF CREDIT AS UNDER :

FIRST  PAGE  OF  LETTER  OF  CREDIT  LINE  SECOND  TO  READ  AS  :  NEGOTIATION  OF  YOUR DRAFT AT 180 DAYS FROM THE DATE  OF DELIVERY ORDER DATED 18/06/97 INSTEAD  OF EXISTING PLEASE MAKE THE FOLLOWING  AMENDMENTS TO ATTACHED SHEET NO. 1 OF  

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L/C POINT NO. 01 TO BE DELETED POINT NO.  02 TO BE DELETED POINT NO. 04 TO READ AS  COPY  OF  CERTIFICATE  OF  SYRIAN  ORIGIN  ISSUED  BY  CHAMBER  OF  COMMERCE  INSTEAD OF EXISTING. POINT NO. 05 TO READ  AS COPY OF CERTIFICATE OF QUALITY AND  QUANTITY  ISSUED  BY  CHAMBER  OF  COMMERCE INSTEAD OF EXISITING POINT NO.  12 TO READ AS DRAFT DRAWN UNDER THIS  LETTER OF CREDIT ARE NEGOTIABLE BY THE  STATE  BANK  OF  INDIA,  MAIN  BRANCH,  NEW  DELHI  AND ORIENTAL  BANK OF COMMERCE,  OVERSEAS BANK, NEHRU PLACE, NEW DELHI  ALSO INSTEAD OF EXISTING.

ALL OTHER TERMS AND CONDITIONS REMAIN  UNCHANGED.”  

      (Emphasis supplied by us)  

5. On July 8, 1997, the issuing bank received negotiated  

documents  under  the  letter  of  credit  from  Oriental  Bank  of  

Commerce  (hereinafter  to  be  referred  as  ‘negotiating  bank’)   for  

payment.  On  that  day  itself,  the  issuing  bank  pointed  out  the  

following discrepancies to the negotiating bank :

(i) certificate from the negotiating bank mentioning all  the terms of credit have not been furnished;

(ii) the certificate of Syrian Origin is not issued by  Chamber of Commerce.

The issuing bank, thus, advised the negotiating bank to rectify the  

discrepancies within seven days of submission of documents.

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6. Thereafter,  between  July  10,  1997  and  February  7,  

1998,  the  correspondence  ensued  through  telegrams  and  letters  

between the negotiating bank and the issuing bank.  According to  

the negotiating bank, the discrepancies notified by the issuing bank  

were rectified and the documents complied  with the requirement of  

the credit.   On the other hand, the issuing bank continued to insist  

that the documents were discrepant; the documents presented were  

not acceptable to it and it was holding the documents on collection  

basis at the risk and responsibility of the negotiating bank.  

7. It was then that the seller brought an action by way of a  

summary suit for a decree in the sum of Rs. 63,74,356/- (principal  

amount of Rs. 43,86,411/- and interest of Rs. 19,87,945/-) together  

with the interest at the rate of 18 per cent per annum from the date  

of the suit to the date of decree and thereafter the interest at the  

same rate  on decretal  amount   till  realization  against  the issuing  

bank and the advising bank.  The buyer was impleaded as a formal  

party.    

8. The issuing bank (defendant no. 1) made an application  

for leave to defend  which was granted by the trial court. The issuing  

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bank then filed written statement justifying its action of not honouring  

the credit  on diverse  grounds,  namely;  (i)  the  certificate  of  origin  

issued by Chamber of Commerce was different from the certificate  

of origin dated March 30, 1997 issued by the supplier of the material;  

(ii)  neither  the  description  of  goods  nor  the  quantity  or  weight  

matched  with each other in the above documents; (iii) the certificate  

of origin has been issued in favour of MMTC and not in favour of the  

seller;  (iv)  at  the request  of  the negotiating bank,  the documents  

were retained by it  but only on collection basis in order to remit the  

amount after collecting the same from the buyer and (v) it has acted  

in  accord  with  Uniform  Customs  and  Practice  for  Documentary  

Credits  (for short, ‘ UCP500’).

9. On the pleadings of the parties, the trial court framed the  

following five issues :

“Issue No. 1. Whether respondent Nos. 1 & 2  have  dishonoured  the  documents relating to the “letter  of  credit”  against  the  rules  and  practice?

Issue No. 2. Whether  applicant  is  eligible  to  get  Rupees 43,86,411/-  and 18  percent interest p.a. over it from  respondent  Nos.  1  &  2  on  the  

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basis of letter of credit given by  them?

Issue No. 3. Assistance and expenses?

Issue No. 4 Whether respondent is eligible to  get  Rs.  14,258/-  as  handling/collection  fee  from  applicant?

Issue No. 5. Whether applicant has accepted  the  encashment  of  bill  and  document on collection basis?”   

It may be noted that trial court has referred to the seller  as applicant  

and  the  issuing  bank  (defendant  no.  1)  and  the  advising  bank  

(defendant no. 2) as respondent nos. 1 and 2 respectively.  

10. The  parties  tendered  oral  as  well  as  documentary  

evidence in support of their respective case.

11. The trial court after viewing the evidence and hearing the  

arguments held that the issuing bank has properly dishonoured the  

documents  relating  to  the  letter  of  credit  and  the  seller  was  not  

entitled to get any amount or interest from the issuing bank and the  

advising bank on the basis of that letter of credit. The trial court has  

also  concluded  that  seller  accepted  the  encashment  of  bill  and  

document on collection basis. In light of these findings, the trial court  

vide its decision dated February 4, 2002 dismissed the seller’s claim. 8

12. The  seller  filed  first  appeal  against  the  judgment  and  

decree of the trial court before the High Court of Madhya Pradesh.  

As noted above, the Division Bench of that Court allowed the seller’s  

appeal and granted a decree to the seller as prayed in the suit.

13. The legal position appears to be fairly well-settled that a  

draft with accompanying documents must be in strict accord with the  

letter of credit. If the documents presented comply with the terms of  

the credit, the issuing bank must honour its obligation in accordance  

with the terms of credit. In United Commercial Bank v. Bank of India  

and others1, this Court referred to  few decided cases of the English  

Courts, Halsbury’s Laws of England  and also couple of books on  

the  subject  by  eminent  authors—Davis’  Law  Relating  To  

Commercial Letters of Credit, 2nd Edn. (at page 76) and Paget’s Law  

of  Banking,  8th Edn.  (at  page  648)—and  it  was  held  that  the  

documents  tendered by the seller must comply with the terms of the  

letter  of  credit  and  that  the  banker  owes a  duty  to  the  buyer  to  

ensure  that  the  buyer’s  instructions  relative  to  the  documents  

against which the letter of credit is to be honoured are complied with.  

It was stated that the description of the goods in the relative bill of  1 (1981) 2 SCC 766

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lading must be the same as the  description in the letter of credit,  

that is,  the goods themselves must in each case be described in  

identical terms, even though the goods differently described in the  

two documents are, in fact, the same. The Court  reiterated, ‘ . . . . . .  

a bank issuing or confirming a letter of credit is not concerned with  

the underlying contract between the buyer and seller.   Duties of a  

bank under a letter of credit are created by the document itself, but  

in any case it has the power and is subject to the limitations which  

are  given  or  imposed  by  it,  in  the  absence  of  the  appropriate  

provisions in the letter of credit’.

14. Where the customer of bank instructs the bank to open a  

credit, the bank acts at its peril if it departs from the precise terms of  

the mandate.  

15. Lord Diplock in Commercial Banking Co. of Sydney Ltd.  

v. Jalsard Pty. Ltd.2 stated at page 286 of the Report that the issuing  

banker and his correspondent bank have to make decisions as to  

whether a document which has been tendered by the seller complies  

with the requirements of a credit.

2 (1973) AC 279

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16. It  needs  no  emphasis  that  a  contract  is  concluded  

between the issuing bank and the seller no sooner the bank issues  

the credit and communicates it to the seller. Under an irrevocable  

credit  the  issuing  bank  gives  an  unequivocal  and  binding  

undertaking  to  the  seller  that  it  will  pay  against  documents/bills  

drawn in compliance with the terms of credit.

17. The relevant clauses of Articles 13, 14 and 19 of UCP  

500 read as under:

“Article 13.    

Standard for Examination of Documents

a Banks must examine all documents stipulated in the  Credit with reasonable care, to ascertain whether or  not  they appear,  on their  face,  to be in compliance  with  the  terms  and  conditions  of  the  Credit.  Compliance of the stipulated documents on their face  with the terms and conditions of the Credit, shall be  determined by international standard banking practice  as  reflected  in  these  Articles.   Documents  which  appear  on  their  face  to  be  inconsistent  with  one  another will be considered as not appearing on their  face  to  be  in  compliance  with  the  terms  and  conditions of the Credit.

Documents  not  stipulated  in  the  Credit  will  not  be  examined by banks.  If they receive such documents,  they shall return them to the presenter or pass them  on without responsibility.

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b The Issuing Bank, the Confirming Bank, if any, or a  Nominated  Bank  acting  on  their  behalf,  shall  each  have a reasonable time, not to exceed seven banking  days following the day of receipt of the documents, to  examine  the  documents  and  determine  whether  to  take up or  refuse the documents and to inform the  party  from  which  it  received  the  documents  accordingly.

c  . . . . . . .

Article 14.    

Discrepant Documents and Notice

a  . . . . . .  

b Upon  receipt  of  the  documents  the  Issuing  Bank  and/or  Confirming Bank, if any, or a Nominated Bank  acting on their behalf, must determine on the basis of  the documents alone whether or not they appear on  their  face to  be in  compliance  with  the terms and  conditions of the Credit.   If the documents appear on  their face not to be in compliance with the terms and  conditions of  the  Credit,  such banks may refuse to  take up the documents.

c  If  the  Issuing  Bank  determines  that  the  documents  appear on their face not to be in compliance with the  terms  and conditions  of the  Credit,  it may in its sole  

         judgement approach the Applicant for a waiver of the  discrepancy(ies).  This does not, however, extend the  period mentioned in sub. Article 13 (b).

d .  i.   . . . . . .  

ii. Such  notice must state all discrepancies in  respect  of  which  the  bank  refuses  the  documents  and  must  also  state  whether  it  is  holding the documents at the disposal of, or is  returning them to, the presenter.

iii.  . . . . . . . . 12

e If  the Issuing Bank and/or  Confirming Bank,  if  any,  fails to act in accordance with the provisions of this  Article  and/or  fails  to  hold  the  documents  at  the  disposal  of,  or  return  them   to  the  presenter,  the  Issuing Bank and/or Confirming Bank, if any, shall be  precluded from claiming that the documents are not in  compliance  with  the  terms  and  conditions  of  the  Credit.  

f . . . . . . . . . .

Article 19.  

Bank-to-Bank Reimbursement Arrangements

a  . . . . . . .

b Issuing Banks shall  not  require  a Claiming Bank to  supply a certificate of compliance with the terms and  conditions of the Credit to the Reimbursing Bank.

c . . . . . . . .

d  . . . . . .  e   . . . . . . .”

18. In light of the above legal position, we heard Mr. R.K.  

Sanghi, learned counsel for the appellants and Mr. Shyam Divan,  

learned senior counsel for the 1st respondent for some time. In the  

course of hearing, however,  it transpired that  the High Court in its  

judgment  that  runs  into  56  foolscap  pages  while  reversing  the  

judgment of the trial  court,  has not at  all  adverted to issue no. 5  

framed by the trial court nor it considered or upset the finding of the  

trial court on that issue.   

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19. Mr. Shyam Divan, learned senior counsel for the  seller -  

1st respondent fairly stated that the finding on issue no. 5 recorded  

by the trial  court  has not at all  been considered in the impugned  

judgment  although,  he  strenuously  urged  that  once  the  

discrepancies on the basis of which the issuing bank refused the  

documents were rectified and  the time allowed for encashment had  

expired, the issuing bank was obliged to honour the letter of credit  

and the case set up by the issuing bank that the seller had accepted  

the encashment of bill and document on collection basis was false  

and frivolous.  

20. Having regard to the controversy set up by the parties in  

the course of trial, in our view,  it cannot be said that issue no. 5 is  

immaterial  or  finding  of  the  trial  court  on  that  issue  is  

inconsequential. The High Court was hearing the first appeal and,  

as a first appellate court it ought to have considered and addressed  

itself  to  all  the  issues  of  fact  and  law  before  setting  aside  the  

judgment of the trial court.  The judgment of the High Court suffers  

from a grave error as it ignored and overlooked the finding of the trial  

court on issue no. 5 that the seller accepted the encashment of bill  

and document on collection basis.  The High Court was required to  14

address itself to issue no. 5 which surely had  bearing on the final  

outcome of the case.  

21. In Santosh Hazari v. Purushottam Tiwari (Deceased) by  

L.Rs.3, this Court held (at pages 188-189) as under :    

“……..The appellate court has jurisdiction to reverse  or affirm the findings of the trial court. First appeal is  a valuable right of the parties and unless restricted  by law, the whole case is therein open for rehearing  both on questions of fact and law. The judgment of  the  appellate  court  must,  therefore,  reflect  its  conscious application of  mind and record findings  supported  by  reasons,  on  all  the  issues  arising  along with the contentions put forth, and pressed by  the  parties  for  decision  of  the  appellate  court.  …  while reversing a finding of fact the appellate court  must come into close quarters with the reasoning  assigned by the trial court and then assign its own  reasons for arriving at a different finding. This would  satisfy the court hearing a further appeal that  the  first  appellate  court  had  discharged  the  duty  expected of it……”

22. The above view has been followed by a 3-Judge Bench  

decision  of  this  Court  in  Madhukar  and  Others v.  Sangram and  

Others4,   wherein  it  was  reiterated  that  sitting  as  a  court  of  first  

appeal, it is  the duty of the High Court to deal with all the issues and  

the evidence led by the parties before recording its findings.   

3 (2001) 3 SCC 179 4 (2001) 4 SCC 756

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23. In the case of H.K.N. Swami v. Irshad Basith (Dead) by  

LRs.5, this Court (at pages 243-244) stated  as under :

“The first appeal has to be decided on facts as well  as on law. In the first appeal parties have the right  to be heard both on questions of law as also on  facts  and  the  first  appellate  court  is  required  to  address itself to all issues and decide the case by  giving reasons.  Unfortunately,  the High Court,  in  the  present  case  has  not  recorded  any  finding  either  on  facts  or  on  law.  Sitting  as  the  first  appellate court it was the duty of the High Court to  deal with all the issues and the evidence led by the  parties  before  recording  the  finding  regarding  title………”.

24. Again  in  Jagannath v.  Arulappa  and  Another6 while  

considering the scope of Section 96 of the Code of Civil Procedure,  

1908,  this Court  (at pages 303-304) observed as follows :

“2. A  court  of  first  appeal  can  reappreciate  the  entire evidence and come to a different conclusion.  In the present case, we find that the High Court  has not adverted to many of the findings which had  been  recorded  by  the  trial  court.  For  instance,  while dismissing the suits filed by the respondents,  the trial  court had recorded a finding on Issue 5  that  the  defendant-appellant  had  taken  actual  possession  of  the  suit  properties  in  Execution  Petition No. 137 of 1980 arising out of OS No. 224  of  1978.  Without  reversing this  finding,  the High  Court simply allowed the appeals and decreed the  suits  filed  by  the  plaintiff-respondents  in  toto.  Similarly, there are other issues on which findings  recorded by the trial court have not been set aside  

5 (2005) 10 SCC 243 6 (2005) 12 SCC 303

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by  the  High  Court.  The  points  involved  in  the  appeals before the High Court required a deeper  consideration of the findings recorded by the trial  court as well as the evidence and the pleadings on  record.”

25. The  decided  cases  of  this  Court  in  Jagannath6  and  

H.K.N. Swami5  were noticed by this Court in a later decision in the  

case of Chinthamani Ammal v. Nandagopal Gounder and Another7.

26. In  our  view,  the   High  Court  failed  to  follow  the  

fundamental  rule  governing  the  exercise  of  its  jurisdiction  under  

Section 96 of the Code of Civil Procedure, 1908 that where the first  

appellate court reverses the judgment of the trial court, it is required  

to consider  all  the issues of law and fact.   This flaw vitiates the  

entire judgment of the High Court. The judgment of the High Court,  

therefore, cannot be sustained.

27. For the above reasons, we accept the appeal, set aside  

the impugned judgment of the High Court and restore First Appeal  

No. 225 of 2002 for re-hearing and fresh decision. All  contentions of  

the parties are kept open to be agitated at the time of the hearing of  

the first appeal. No order as to costs. 7 (2007) 4 SCC 163

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  …………………….J.            (Aftab Alam)

           .………………….. J.           (R.M. Lodha)  

NEW DELHI. AUGUST  18, 2011.

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