'Letter Of Credit' Is Independent Of And Unqualified By The Contract Of Sale Or Underlying Transactions : Supreme Court

The Supreme Court observed that a letter of credit is independent of and unqualified by the contract of sale or underlying transactions.

The court observed thus in a judgment delivered in an appeal filed against the order passed by National Consumer Disputes Redressal Commission

Bawa Paulins Pvt. Ltd. entered into a contract with County Seat Stores, New York for export of two hundred and thirty-four (234) packages of MN's 100% CTN Twill messenger bags for a total invoice value of US$ 31,920 (equivalent to Rs.13,79,901/- approximately). The mode of payment was agreed to be through Letter of Credit against the Forwarder Cargo Receipt ("FCR", for short). For the said purpose, the consignee appointed Bank of Bostons as the purchaser's bank through which the Letter of Credit was opened .

Immediately after shipping the goods through UPS Freight Services (India) Pvt. Ltd., the Bawa presented the documents including the FCR to its bank viz Canara Bank for negotiating with the Bank of Boston to release the payment against the Letter of Credit. The Bank of Boston informed the Canara Bank that the Letter of Credit could not be honoured on account of discrepancies in the FCR. They further stated that they had approached Consignee for approval to pay the sale consideration but it was not willing to honour such request. As Bawa Paulins neither got the goods back nor did they get any payment in respect of the said goods, they approached the State Consumer Disputes Redressal Commission seeking compensation from UPS Freight Services (India) Pvt. Ltd. and others. The commission allowed the complaint and directed the opposite parties to pay Rs.13,79,901/-  towards the loss suffered, Rs.50,000/- (Rupees Fifty Thousand) towards compensation for mental agony and harassment and Rs.10,000/- (Rupees Ten Thousand) towards cost of litigation. In appeal, the NCDRC reduced the compensation to Rs.10,000/- only along with an interest at the rate of 9% per annum from the date of filing the complaint till the date of payment.

In appeal, the Apex Court bench noted that in international transactions, letter of credit is used as a mode of ensuring payment and performance of the contractual terms. The bench made the following observations regarding letter of credit:

"A letter of credit is a document issued by a bank (issuing bank) on behalf of a party (applicant) in favour of another party (beneficiary) under which, the issuing bank undertakes to pay to the beneficiary, certain sums of money subject to compliance of the terms and conditions of the letter of credit. In an international transaction, the beneficiary is the seller who requests the applicant (buyer) to furnish a letter of credit from any bank which is recognized worldwide (issuing bank). The letter of credit is issued in favour of a beneficiary on the request of an applicant after furnishing securities as may be demanded by the issuing bank. A seller can ask the issuing bank to honour the letter of credit to his own bank (confirming bank) within a certain maturity date. The seller is required to produce certain documents regarding proof of delivery of goods, commercial invoice, bill of lading, insurance documents etc. before the confirming bank. On scrutiny the confirming bank would ask for advice of the issuing bank to confirm whether the documents produced by the beneficiary is compliant to the terms and conditions of the letter of credit. Once the issuing bank confirms the document, the confirming bank is obligated to pay to the beneficiary on demand, the credit amount and in turn recover the same from the issuing bank. "

"In Hindustan Steel Workers Construction Ltd. V G.S. Atwal & Co. (Engineers) (P) Ltd. [ (1995) 6 SCC 76] this Court held that a letter of credit is independent of and unqualified by the contract of sale or underlying transactions. The autonomy of an irrevocable LOC is entitled to protection and as a rule, courts refrain from interfering with that autonomy. If courts interfere in such transactions, it would be prone to misuse by the applicant party to gain undue advantage leaving the issuing bank at peril in the international financial mark".

The court, taking note of the factual aspects of the case, observed that there was deficiency in rendering services by the opposite parties and therefore, the National Commission ought not have reduced the compensation. 

"The National Commission in the impugned order has held that it is an admitted position that a mistake was committed by the respondent No.1 while issuing the FCR to the appellant. The State Commission has based its decision on the said reasoning. When it is admitted that a mistake was committed by the respondent No.1, it is not correct to say that the said mistake was not noticed by the appellant while forwarding the documents to its bank and that the appellant should have been more vigilant. It would be incorrect to now say that the appellant should have exercised due diligence in that regard. The National Commission has categorically held that there was deficiency in rendering services by the respondent No.1, therefore, the National Commission ought not have reduced the compensation payable to the appellant herein.", the court observed while allowing the appeal and restoring SCDRC order.

Case details

Bawa Paulins Pvt. Ltd. vs UPS Freight Services (India) Pvt. Ltd. | 2022 LiveLaw (SC) 938 | SLP(C) 16722 of 2015 | 10 Nov 2022 | Justices BR Gavai and BV Nagarathna

Counsel: Adv Rajiv Garg for appellant , Adv Sudhanshu S. Choudhari , Adv Vikas Kumar for respondents

Headnotes

Letter of Credit - A letter of credit is independent of and unqualified by the contract of sale or underlying transactions - Referred to Hindustan Steel Workers Construction Ltd. V G.S. Atwal & Co. (Engineers) (P) Ltd. [ (1995) 6 SCC 76].

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