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PETITIONER: STATE BANK OF INDIA & ORS.

       Vs.

RESPONDENT: MANGANESE ORE (INDIA) LTD. & ANR.

DATE OF JUDGMENT:       08/10/1996

BENCH: K. RAMASWAMY, G.B. PATTANAIK

ACT:

HEADNOTE:

JUDGMENT:                          O R D E R      This appeal  by special  leave arises from the judgment of the  Division Bench  of the  Bombay High  Court  made  on October 30-31, 1979 in Appeal No.163/71.      The first  respondent-Manganese Ore  (India) Ltd.  laid the  suit  against  the  appellant  and  M/s.Emmenor  Export Traders, the  first defendant  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. On appeal by the first respondent, the High Court reverted 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 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 defendant. The most important clauses relating thereto are as under:      "Clauses l(i) and l(iii)(b). Clause      1(i) provides  in  respect  of  the      documents     for     negotiations.      Firstly, it  is the seller’s signed      commercial invoice in quadruplicate      based  on   the  weight,  sampling,      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 percent  Manganese with  the pro      rata  scale   for  each   unit   of

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    Manganese content  above   or below      40 per  cent down to the minimum of      39 per  cent. The  clause  1(ii)(b)      speaks  about  the  certificate  in      triplicate from  M/s,  R.G.  Briggs      and Co.  Private Ltd.  of  sampling      assaying and  moisture,  determined      at the port of shipment showing the      material   to    conform   to   the      following contracted qualities.      (B)   hard  lumpy, Indian Low grade      Manganese Ore  having the following      chemical analysis at 105 degrees C.      minimum 39  per cent.  (F.E.)  Iron      Maximum 8.25 per cent SIO-2 Maximum      23.00 per  cent Phosphorus  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 first defendant  to the  buyers did  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 the contract in paragraph 13 and concluded as under:      "Now I  proceed to see whether, the      Plaintiff had  complied  with  both      these  clauses.   It  is   not  now      disputed that  inboth the  supplies      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.      They  are   exhibits  80   to   85.      Exhibits   81   to   84   are   the      certificates issued by the analyser      R.V.  Briggs  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  credit      exhibit 78  or in  the agreement at      exhibit 69  cannot be so read as to      allow the  percentages to  go below      or  above  theagreed  minimums  and      maximums.  The   minimum  and   the      maximum percentages  shall have  to      be treated  as the  percentages  of      rejection limits.  The  approximate      percentage can be slightlyabove the      minimum agreed  and slightly  below      the  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

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    opinion  the  minimum  and  maximum      percentage stated  in the agreement      at exhibit  68 or  in the  attached      sheet  of   letter  of   credit  at      exhibit 78,  shall have 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.      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 per cent.      So far  as manganese  is concerned,      the first was down by 0.04 per cent      while in the second consignment. it      was up by 0.1 per cent. There is no      dispute between  the parties  about      these  facts.  The  shipments  when      sampled and analysed did not confer      exactly     to      the     quality      spocifications   either    in   the      agreement dated  18th March  or the      letter of  Credit dated  6th May is      not a matter of dispute."      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 appellant? The High Court has  proceeded   on  the  premise  that  the  appellant  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 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 defendant. 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  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   credit,  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 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 supplied were not of the specification and the standard required under the

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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  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  stands restored, namely,  the fists  respondent shall  seek for the payment from  the first  defendant. Since  the appellant was directed to  deposit as per the 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 costs.