Holding

A bank is not obliged to honour a letter of credit if the underlying goods fail to satisfy the quality conditions expressly stipulated, as the LC is conditional on such compliance.

Summary

The plaintiff, Manganese Ore (India) Ltd., sued State Bank of India (SBI) and an exporter for payment under letters of credit (LC) issued by SBI. The trial court held SBI not liable because the ore supplied did not meet the quality specifications stipulated in the LC, but the High Court reversed this, holding SBI liable. On appeal, the Supreme Court examined the LC clauses, noting that the contract was conditional on the goods conforming to specified manganese and phosphorus content. Evidence showed the ore fell short of the minimum manganese and exceeded the maximum phosphorus limits, breaching the LC terms. The Court concluded that when the condition precedent—conformity of goods—is not satisfied, the bank is absolved of the duty to honour the LC. Consequently, the High Court judgment was set aside and the trial court's decision restored, directing the plaintiff to seek payment from the buyer.

Issues considered

Whether a bank is liable to honour a letter of credit when the seller's goods do not meet the quality specifications stipulated in the LC.
Whether the conditional nature of the LC absolves the bank from liability upon non‑compliance by the seller.

Subjects

letters of creditbank liabilityconditional contractquality specificationsrejection limitsapproximation clausecommercial transaction

Judgment

A STATE BANK OF INDIA AND ORS.
v.
MANGANESE ORE (INDIA) LTD. AND ANR.

OCTOBER 8, 1996

B [K. RAMASWAMY AND G.B. PATTANAIK, JJ.)

Banking,.·

Letters of credit-Non-conipliance with terms and conditions by
C seller-Bank's liability co honour the letters of credit-Respondent-seller com-
pany filed a suit for recovery of money against the buyer and the bank as the
two defendants had entered into letters of credit-Trial Court decreed the suit
as against buyer only holding that quality of goods supplied by the seller did
not match the quality of goods contracted under the letters of credit-High
Court reversed the decree as against the Bank and held it liable to pay the
D decretal amount-Held, when the parties have admitted that the goods sup-
plied were not of a specification and standard required under the letters of
credit vis-a-vis the Bank and the buyer, the obligation to honour the letters of
credit having been conditional one, the Bank is absolved of its liability to
honour the letters of credit and pay over the value of goods supplied by the
E plaintiff to buyer company-Judgement and decree of High Court set aside
and that of the trial court is restored-Plaintiff shall seek for payment from
the buyer company.

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1717 of
1980.
F
From the Judgment and Order dated 31.10.79 of the Bombay High
Court in A. No.163 of 1971.

Sanjay Kapur, Yashank Adhyaru and M.K Michael for the Appel-
lants.
G
A.K. Sanghi for the Respondents.

The following Order of the Court was delivered :

This appeal by special leave arises from the judgment of the Division
H Bench of the Bombay High Court made on October 30-31, 1979 in Appeal
310
STA1EBANKOFINDIAv.MANGANESEORE(l)LTD. 311

No. 163/71. A
The first respondent-Manganese Ore {India) Ltd. laid the suit
against the appellant and M/s. Emmenor Export Traders, the first defen-
dant 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. B
On appeal by the first respondent, the High Court reversed 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 C
the Registrar of the High Court.

The 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 D
defendant. The most important clauses relating thereto are as under :

"Clauses l{i) and l{iii){b). Clause l{i) provides in respect of the
documents for negotiations. Firstly, it is the seller's signed com-
mercial invoice in quadruplicate based on the weight, sampling, E
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 per cent Manganese
/ with the pro rota scale for each unit of Manganese content above
or below 40 per cent down to the minimum of 39 per cent. The F
clause l{iii){b) speaks about the certificate in triplicate from M/s.
R.G. Brigga and Co. Private Ltd. of sampling assaying and mois-
ture, determined at the post of shipment showing the material to
conform to the following contracted qualities. {B) hard lumpy,
Indian Low grade Manganese Ore having the following chemical G
analysis at 105 degrees C. minimum 39 per cent. {F.E.) Iron
Maximum 8.25 per cent· SI0-2 Maximum 23.00 per cent Phos-
phoruio. 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 defendant to the buyers did H
312 SUPREME COURT REPORTS [1996] SUPP. 7 S.C.R.

A 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 l
the contract in paragraph 13 and concluded as under : ~

"Now I proceed to see whether, the Plaintiff had compiled with
both these clauses. It is not now disputed that in both the supplies
B 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.
c They are exhibits 80 to 85. Exhibits 81 to 84 are the certificates
issued by the analyser R.V. Brigga 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. Now this approximation clause qualifying these percentages
stated either in the letter of credi~ exhibit 78 or in the agreement
D at exhibit 69 cannot be so read as to allow the percentages to go
below or above the agreed minimums and maximums. The mini-
mum and the maximum percentages shall have to be treated as the
percentages of rejection limits. The approximate percentage can
be slightly above the minimum agreed and slightly below the
E 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 percentages stated in the agreement at exhibit 68
or in the attached sheet of letter of credit at exhibit 78, shall have
F 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.
G
The High Court also recorded the finding as under :

"It 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
H per cent. So far as manganese is concerned, the first was down by
\
\ STATEBANKOFINDIAv.MANGANESEORE(l)LTD. 313
' 0.04 per cent while in the second consignment it was up by 0.1 per.· A
cent. There is no dispute between the parties about these facts.
The shipments when sampled and analysed did not confer exactly
to the quality specifications either in the agreement dated 18th
March or the letter of credit dated 6th May is not a matter of
dispute."
B
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 C ·
appellant? The High Court has proceeded on the premise that the appel-
lant 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 D
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 defen-
dant. 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 E
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 crdit,
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 F
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 G
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 H
314 SUPREME COURT REPORTS [1996) SUPP. 7 S.C.R.
A 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 court stands
restored, namely, the first respondent shall seek for the payment from the
first defendant. Since the appellant .was directed to deposit as per the
B 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.

The appeal is accordingly allowed, but, in the circumstances, without
C costs.
R.P. Appeal allowed.