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Petitioner: M/S Sazco (Pvt.) Ltd VS Respondent: Askari Commercial Bank Limited
Court Name: Supreme Court of Pakistan Judge(s): Sajjad Ali Shah, Umar Ata Bandial, Yahya Afridi Title: M/S Sazco (Pvt.) Ltd vs Askari Commercial Bank Limited Case No.: Civil Appeal No. 870 and 871 of 2012 Date of Judgment:2020-10-19 Reported As: 2021 CLD 157, 2021 P SC 1140, 2021 SCMR 558, 2021 SCP 16 Result: Appeal dismissed
JUDGMENT
JUDGMENT YAHYA AFRIDI, J. The present two appeals ("Appeal No. 50/2009 and Appeal No. 51/2009") , with leave of the Court, impugn the common judgment dated 17.01.201 1 passed by the High Cour t of Peshawar in F.A.B. Nos. 50 and 51/2009 filed by the present appellant. 2. The issue in hand relates to a dispute between M/s Sazco (Pvt.) Ltd ("appellant-company") and M/s Askari Commercial Bank Ltd. ("respondent-bank") relating to an irrevocable documentary letter of credit ("credit") availed by the former from the latter to finance an international sale transaction. 3. The appellant-company , a private limited company incorporated under the Companies Ordinance 1984, having its registered office at 83 Shahreh-e-Quaid-e-Azam, Lahore and its manufacturing unit at Industrial Estate Gadoon Amazai, Tehsil and District Swabi, Pakis tan entered into an agreement with M/s Alpha International Trading and Enterprise Services, a company having its registered office at 20 Kingsway Avenue WestPoint, Manchester , M192 DH United Kingdom ("supplier-company") for the supply of Acrylic Dyed Tow Semi Dull 3D ("imported goods") vide Invoice No. 902 dated 14.08.1998 and Invoice No. 1050 dated 26.08.1998 ("main contract") . To facilitate and finance the payment of the imported goods under the main contract, the appellant-company approached the respondent-bank at Peshawar . The request of the appellant-company was accept ed by the respondent-bank, and two irrevocable Letters of Credit were opened; Letter of Credit No.014-LC-315 -98 dated 02.09.1998 (Exhibit- PW1/3) and Letter of Credit No.014-LC-3 27-98 dated 16.09.1998 (Exhibit-PW1/4) ("L.C.s") . Under the L.C.s, the respondent-bank ("Issuing-bank") nominated National Westminster Bank located at Lawry House, 17 Marble Street, Manchester , United Kingdom as its nominated bank ("Nominated-bank") to make the due payments to the supplier-company ("beneficiary") on presentation of the requisite documents stated in the respective L.C.s. Further to the terms of the L.C.s, the supplier-company tendered the requisite documents, including the two Bills of Ladings No.1014 dated 23.10.1998 (Exhibit-DW1/X-1) and No.1018 dated 03.11.1998 (Exhibit-DW1/X-2) ("Bills
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of Lading") to the Nominated-bank, which it found to conform with the terms of the L.C.s. Accordingly , the Nominated-bank paid the supplier-company/beneficiary for the imported goods in terms of the L.C.s. The appellant- company vide letter dated 27.01.1999 requested the respondent-bank to pay the import duty and taxes in order to release the imported goods from the port at Karachi. This request of the appellant-company was complied with by the respondent-bank. However , the imported goods shipped under the Bills of Lading on arrival at the port at Karachi, on enquiry , were found to have been released to M/s. Crescent Chemical Co., 131-Circular Road, Lahore and Mr. Pino Khan, 4-Alam Zar, Sam Sunny Road, Canal View, Lahore. This information was duly conveyed by the respondent-bank to the appellant-com pany vide letter dated 30.01.1999. The appellant-company despite knowledge of the said release of the consignments of the imported goods to two other parties, acknowledged its liability under the L.C.s vide its letter dated 01.03.1999, and in fact, paid off the entire outstanding liability under L.C. No.014-LC-315-98, and partially cleared its liability under L.C. No.014-LC-3 27-98. However , with time, the relations between the parties became strained, and they were unable to resolve their disputes, leading the appellant-company and respondent-bank to file their respective suits for recovery against each other before the Banking Court II, Peshawar ("Banking Court"). 4. The Banking Court granted leave to defend to both parties, thereafter , consolidated the two suits, and framed twelve issues. This was followed by the parties to produce their respective evidence. The Banking Court vide its common judgment dated 24.04.2009, dismissed the suit of the appellant-company , and accepted the one filed by the respondent-bank, granting it a decre e of Rs.567,1 11/- against the appellant- company , which on appeal was maintained by the High Court. Hence, the present appeals by leave of this Court vide order dated 12.09.2012. 5. The worthy counsel for the appellant-company vehemently contended that: the two courts below have erred by not appreciating the fraud committed by the supplier-company by tendering forged Bills of Lading to the Nominated Bank; and that the Bills of Lading presente d were discrepant to the terms of the L.C.s and thus violated the Uniform Customs and Practice for Documentary Credits 500 (1993 Revision) ("UCP 500") . The worthy counsel for the respondent-bank contended otherwise and emphasized that the two courts below had correctly appreciated the factual and legal aspect of the case in rendering the impugned judgments. 6. Valuable arguments of the worthy counsel for the parties have been heard. 7. Before we consider the above submissions of the worthy counsel for the appellant-company , we must appreciate that the subject matter of his challenge relates to an international sale transaction. Thus, we deem it appropriate to first understand the legal dynamics of such transactions; the parties thereto, the law applicable, and the judicial recognition and development thereon. Historical background to Documentary Credits - L.C. 8. International trade and commerce have over time, grown excrementally , exposi ng the contracting parties to the uncertainty of enforcing the terms of the agreement, and in particular , the risk of non-payment of the consideration for the goods, under the international law and the varying municipal laws of the contracting parties. Thus, there was a dire need to bring legal certainty to ensure prompt payments and safe delivery of goods under the international sale of goods taking place across the globe. To this end, the International Chamber of Commerce ("Chamber") took the initiative to introduce standardized regulations relating to Commercial Documentary Credits. In this regard, a committee of the Chamber in 1929, submitted to the Amsterdam Congress of that body its report, titled: "Uniform Regulations for Commercial Documentary Credits". Over time, the said regulations have been revised, and the one relevant to the present case is UCP 500. Meaning and scope of L.C. 9. Modern documentary credits, in particular Letters of credit, are essentially a mode of prompt payment to a contracting supplier of goods in another country . The payment under the said facility is assured to the party selling the goods, even before the consignment reaches the agreed destination under the underlying contract. The opening of a letter of credit constitutes a contract, inter alia, between the bank and the seller of the goods and imposes upon the bank an absolute obligation to pay the seller . Paul R. V erkuil aptly describes L.C. in terms that: "The letter of credit is a contract. The issuing authority usually a bank--promises to pay the 'beneficiary'-- traditionally a seller of goods--on demand if the beneficiary presents whatever documents may be required by the letter . There are normally the only two parties involved in the contract. The bank which issues a letter of credit acts1 2 3
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as a principal, not as an agent for its customer , and engages its own credit. The letter of credit thus evidence- irrevocable obligation to honour the draft presented by the beneficiary upon compliance with the terms of the credit." Indeed, it has now rightly been described as "the lifeblood of international commerce". 10. The scope of documentary credits, the parties involved, and the extent of their relationship inter-se, has been explained in Halsbury' s 'Laws of England' in terms that: "It is often made a condition of a mercantile contract that the buyer shall pay for the goods by means of a confirmed credit, and it is then the duty of the buyer to procure his bank, known as the issuing or originating bank, to issue an irrevocable credit in favour of the seller by which the bank undertakes to the seller , either directly or through another bank in the seller 's country known as the correspondent or negotiating bank, to accept drafts drawn upon it for the price of the goods, against tender by the seller of the shipping documents. The contractual relationship between the issuing bank and the buyer is defined by the terms of the agreement between them under which the letter opening the credit is issued; and as between the seller and the bank, the issue of the credit duly notified to the seller creates a new contractual nexus and renders the bank directly liable to the seller to pay the purchase price or to accept the bill of exchange upon tender of the documents. The contract, thus, created, between the seller and the bank is separate from, altho ugh ancillary to, the original contract between the buyer and the seller , by reason of the bank' s undertaking to the seller , which is absolute. Thus, the bank is not entitled to rely upon terms of the contract between the buyer and the seller which might permit the buyer to reject the goods and to refuse payment therefore; and, conversely , the buyer is not entitled to an injunction restraining the seller from dealing with the letter of credit if the goods are defective". (emphasis provided) Salient Features of L.C. 11. There are two fundamental principles on which the entire edifice of documentary credit rests: first, the independence-autonomy principle; and second, strict performance principle. The Independence- Autonomy Principle: 12. As highlighted in the caption quoted above (Para. 10), documentary credit is separate and independent from the underlying sales contract or other transaction between the commercially contracting parties. This autonomy of the credit has been expressly addressed in various provisions of UCP 500, and in particular in Articles 3 and 4 of the UCP 500, which reads: Article 3. Credits v . Contracts a. Credits, by their nature, are separate transactions from the sales or other contract(s) on which they may be based and banks are in no way concerned with or bound by such contract(s), even if any reference whatsoever to such contract(s) is included in the Credit. Consequently , the undertaking of a bank to pay, accept and pay Draft(s) or negotiate and/or fulfil any other obligation under the Credit, is not subject to claims or defences by the Applicant resulting from his relationships with the Issuing Bank or the Beneficiary . b. A Beneficiary can in no case avail himself of the contractual relationships existing between the banks or between the Applicant and the Issuing Bank. Article 4. Documents v. Goods/Services/Performances In Credit operations all parties concerned deal with documents, and not with goods, services and/or other performances to which the documents may relate. The careful reading of the above provisions of UCP 500, highlights the intent of its drafters; to insulate the compliance of the terms of credit by the paying bank from any provision of the underlying contract between the applicant/buyer and beneficiary/seller . The paying bank is only to deal with the documents 'alone' . More importantly , the paying bank is to ensure that as long as the documents tendered by or on behalf of the seller are, on the face of it, in accordance with the terms of credit, it is under an obligation to make the payment regardless of any dispute between the seller and the buyer , may it be the quality of the goods or otherwise. One must appreciate that while reviewing documents under credits, the banks are to deal with documents and not goods. This view was resounded in Blonder & Co. v. Citibank, N.A. (supra), where the New York Supreme Court, while4 5 6 7 8 9
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dilating upon the extent of care required by a bank to examine the tendered docu ments under the credit, opined that: "It is fundamental that courts enforce contracts, not rewrite them The UCP requires that banks must examine documents "with reasonable care" in order to determine whether the documents "on their face" appear to comply with the letter of credit". The principle of autonomy has also been ardently noted by this Court in its earlie r decision in the case of Haral Textiles Limited v Banque Indosuez Belgium in terms that: "[T]he effect of an irrevocable Letter of Credit is to substitute the issuing bank for the buyer as to the person who undertakes to buy the shipping docume nts and this undertaking is absolute in the sense that so long as the documents of title to the goods which the seller tenders to the bank are in accordance with the terms of the contract, the bank is under an obligation to accept the same regardless of any dispute between the seller and the buyer as to the quality of the goods or otherwise. Any dispute between the seller and the purchaser is extraneous in such a case. On the basis of the above legal position an elaborate commercial system has been built up on the footing that bankers' confirmed credits are of that character which do not call for interference by a Court of law. The above system would break down completely if a dispute as between the seller and the purchaser was to have the effect of freezing the sum in respect of which the Letter of Credit was opened. The Exception to the rule of autonomy - fraud 13. The rule of autonomy is, however , not absolute. It has an exception, when fraud is alleged and established. Halsbury' s Law of England has dealt with this exception in terms that: "408. Forged documents . Payment against forged documents in good faith does not affect the paying banker's right to reimbursement . The person tendering does not warrant the genuineness of documents . The buyer cannot be held to have authorized payment against false documents ; nor can a banker be forced to pay again st documents he knows to be false, though, if he has given his acceptance, he is liable to a holder in due course ." 14. One of the early leading cases in the United States of America, where fraud was recognized as an exception to the rule of autonomy is the case of Sztejn v. J Henry Schroder Banking Copn . In this case, an Indian company selling to an American company "bristles" had shipped "cow hair and other worthless material". The New York Supreme Court in its ruling on the obligation of the bank, stated that it '[is] only required to see that the documents are in order ', and further that: "[W]here the seller's fraud has been called to the Bank's attention before the drafts and documents have been presented for payment, the principle of the independence of the Bank's obligation under the Letter of Credit should not be extended to protect the unscrupulous seller ." 15. In a later case, Blonder & Co. v. Citibank , where the buyer brought a motion claiming, inter alia, that defendant, the issuing bank, improperly paid $540,225/- under the credit covering a shipment of nickel scrap from Nicaragua to the Netherlands, which was never received in Rotterdam; that the supporting documents were fake; and that bank failed to examine the documents presented "with reasonable care", to ensure that they complied with the terms and conditions of the credit. The matter finally came up in appeal befor e the New York Supreme Court, where it was held that: "a court cannot impose upon the parties to a letter of credit any conditions not contained in the letter", "UCP requires that banks must examine documents 'with reasonable care' in order to determine whether the documents 'on their face' appear to comply with the letter of credit........ issuing bank is not required to ascertain whether the documents are false or whether the goods were delivered, only that the documents substantially comply with the letter of credit on their face." (emphasis provided) 16. Similarly , the courts in England have also recognized fraud as an exception to the rule of autonomy . Some of the leading cases on the matter are Hamzeh Milas and Sons v. British Imex Industries Ltd. , R.D. Harbottle (Mercantile) Ltd. and another v. National Westminister Bank Ltd. , Edward Owen Engineering Ltd. v. Barclays Bank International Ltd. , UCM (Investment) v. Royal Bank of India. Lord Diplock speaking for the10 11 12 13 14 15 16 17 18 19 20 21
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House of Lords, in the last case cited above, explained the general principle of autonomy , and the exception of fraud, in terms that: "The whole commercial purpose for which the system of confirmed irrevocable documentary credits has been developed in international trade is to give to the seller an assured right to be paid before he parts with control of the goods and that does not permit of the dispute with the buyer as to the performance of the contract of sale being used as a ground for non-payment or reduction or deferment of payment. To this general statement, of principle as to the contractual obligations of the confirming bank to the seller , there is one established exception: that is, where the seller , for the purpose of drawing on the credit, fraudulently presents to the confirming bank documents that contain, expressly or by implication, material representations of fact that to his knowledge are untrue. Although there does not appear among the English authorities any such case in which this exception has been applied, it is well established in the American cases, of which the leading or 'landmark' case is Sztejn v. J. Henry Schroder Banking Corporation. ....... The exception for fraud on the part of the beneficiary seeking to avail himself of the credit is a clear application to the maxim ex trupi cause non oriture actio or if plain English is to be preferred, 'fraud unravels all', the courts will not allow their process to be used by a dishonest person to carry out a fraud"." (emphasis provided) 17. In an earlier case, Gian Singh & Co Ltd v Banque de I'Indochine , Lord Diplock, while dilating upon the extent of "reasonable care" to be taken by the paying bank in reviewing the alleged forged documents tendered by or on behalf of the supplier/seller , opined that: "The fact that a document presented by the beneficiary under a documentary credit, which otherwise conforms to the requirements of the credit, is in fact a forgery does not, of itself, prevent the issuing bank from recovering from its customer money paid under the credit..... The bank is under no duty to take any further steps to investigate the genuineness of a signature which, on the face of it, purports to be the signature of the person named or described in the letter of credit." (emphasis provided) 18. Sir John Donaldson, M.R. in Bolivinter Oil SA v. Chase Manhattan Bank dilating on the extent of proof of fraud required to be placed before the court for the grant of a positive injunctive relief against payment under the credit observed that: "The wholly exceptional case where an injunction may be granted is where it is proved that the bank knows that any demand for payment already made or which may thereafter be made will clearly be fraudulent. But the evidence must be clear both as to the fact of fraud and as to the bank's knowledge. It would certainly not normally be sufficient that this rests on the uncorro borated statement of the customer , for irreparable damage can be done to a bank's Credit in the relatively brief time which must elapse between the grant ing of such an injunction and an application by the bank to have it charged." (emphasis provided) 19. In United Trading Corpn SA v Allied Arab Bank Ltd the court, while discussing the critical time when knowledge of fraud has to be communicated to the bank, for it to be under an obligation to refuse payment, observed that: "It seems to us clear that, where payment has in fact been made, the bank' s knowledge that the demand made by the beneficiary on the performance bond was fraudulent must exist prior to the actual payment to the beneficiary and that its knowledge at that date must be proved. Accordingly , if all a plaintif f can establish is such knowledge after payment, then he has failed to establish his cause of action . The bank would not have been in breach of any duty in making the payment without the requisite knowledge. W e doubt that this is really open to contest." (emphasis provided) 20. Similarly , in Turkiye Is Bankasi AS v Bank of China , Waller J commenting on the issue, said: "It is simply not for a bank to make enquiries about the allegations that are being made by one side against the other . If one side wishes to establish that a demand is fraudulent it must put irrefutable evidence in front of the bank. It must not simply make allegations and expect the bank to check whether those allegations are founded or not".22 23 24 25 26
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(emphasis provided) 21. In India also, there is judicial recogni tion to the rule of autonomy and the exception thereto in cases of fraud. One of the leading case on the matter is Himadri Chemicals Industries Ltd. vs. Coal Tar Refining Company , where the court relying on its previous decisions in U.P. State Sugar Corporation v. Sumac International Ltd. , and U.P. Coop. Federation Ltd. v. Singh Consultants and Engineers (P) Ltd., Svenska Handelsbanken v. Indian Charge Chrome , U.P. Coop. Federation Ltd. v. Singh Consultants and Engineers (P) Ltd. , and U.P. State Sugar Corporation v. Sumac International Ltd. concluded that the principles to be considered, while deciding upon the matter of granting an injunction to restrain the encashment of a bank guarantee or a letter of credit were the following: "(i) While dealing with an application for injunction in the course of commercial dealings, and when an unconditional Bank Guarantee or Letter of Credit is given or accepted, the Beneficiary is entitled to realize such a Bank Guarantee or a Letter of Credit in terms thereof irrespective of any pending disputes relating to the terms of the contract. (ii) The Bank giving such guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer . (iii) The Courts should be slow in granting an order of injunction to restrain the realization of a Bank Guarantee or a Letter of Credit. (iv) Since a Bank Guarantee or a Letter of Credit is an independent and a separate contract and is absolute in nature, the existence of any dispute between the parties to the contract is not a ground for issuing an order of injunction to restrain enforcement of Bank Guarantees or Letters of Credit. (v) Fraud of an egregious nature which would vitiate the very foundation of such a Bank Guarantee or Letter of Credit and the beneficiary seeks to take advantage of the situation. (vi) Allowing encashment of an unconditio nal Bank Guarantee or a Letter of Credit would result in irretrievable harm or injustice to one of the parties concerned." The Doctrine of Strict Performance 22. The other principle governing documentary credit - doctrine of strict compliance, posits the bank to stringently follow the terms of credit, while examining the documents tendered by the seller thereunder . This rule has its strong roots dating back a century , when the application of the principle was adjudged as "common sense" and "elementary" . The judicial opinion since then has had no room for documents, which were 'almost the same', or which would 'do just as well'. This principle was highlighted in J H. Rayner & Co Ltd v Hambro' s Bank Ltd, wherein, the credit called for documents covering the shipment of 'coromandel groundnuts', but the bill of lading tendered referred to 'machine-shelled groundnut kernels'. Both terms were regarded as synonym in the trade. Nevertheless, the bank' s refusal to pay was upheld by the court on appeal, in terms that: ".... it is quite impossible to suggest that a banker is to be affected with knowledge of the customs and customary terms of every one of the thousands of trades for whose dealings he may issue letters of credit." 23. Later , in the case of Gian Singh & Co Ltd v Banque de I'Indochine , the Privy Council also confirmed the principle of strict performance by endorsing that the terms of the credit were to be strictly followed in examining the documents presented thereunder . What is crucial to note is that the paying bank, while examining the documents under the credit, is only obliged to exami ne, whether the same appear to conform to the language of the terms of the credit. The bank is not under a duty to carry out an enquiry during the said scrutiny . More so, the actions or inaction of…
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