Case Contested Between Indian Exporter And Negotiating Bank
It is a classic case contested between Indian Exporter vs. Negotiating Bank & Shipping Line in which Indian Exporter faced heavy problem / troubles, agony and financial loss due to mistakes done collectively by default of Issuing Bank, Negotiating Bank, Air Line, Shipping Line, Shipping Agent etc.
Petty collective mistakes from all these agencies gave very heavy blow to the exporter and exporter lost Rs. 45,00,000/- (45 Lac) or even more in 1995 or so which was considered very big amount in those days.
Now, it was the duty of competent national or international courts where the case was addressed to fix who is responsible to what extend and in which magnitude and then to fix the penalty / liability of respective agencies (like Issuing Bank, Negotiating Bank, Air Line, Shipping Line, Shipping Agent etc) discussed above.
Two separate suits were filed by exporter. One against bank and second against shipping line or its agent.
Here in this case study, we will discuss case contested between Indian exporter and negotiating bank. Case between Indian exporter and shipping line or their agents will be discussed in different section named Cases with Shipping Line, Logistic & CHA.
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Detail Case Discussion
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Parties to this export import transaction along with chronology of the case is as under:
Exporter: In this case exporter was from India who acted as beneficiary.
Importer / Applicant: Importer and applicant was from Hong Kong who acted as mid buyer.
Consignee: Final buyer and consignee in L.C / Letter of Credit was from China.
Letter of Credit: Applicant opened 90 days usance L/C (Letter of Credit) with Consignee as Chinese company and Notifying Party as applicant who was Hong Kong based company.
Issuing Bank: L.C / Letter of Credit was opened by HSBC, Hong Kong.
Advising Bank: L.C advising bank was SBI, ShibSagr Br., Mumbai.
Negotiating Bank: Documents were negotiated with SBI same branch, Mumbai.
Shipment Value: Goods were prepared of worth 45 Lac in 1994 – 95.
Mode of Shipment: From Mumbai to Hong Kong by air. From Hong Kong to China, it was to be sent by sea.
Exporter dispatched goods via shipping line / cargo agent and presented documents for negotiation with SBI. SBI accepted documents & after scrutiny, paid entire amount to complainant by means of credit against export bills discounting facility enjoyed by complainant with SBI and then forwarded documents to HSBC. SBI thus, discounted the bill and paid exporter under T&C.
Documents were sent to HSBC with clear instruction that for any further discussion, kindly have communication with our branch only and not with any another branch.
Cargo reached Hong Kong.
Complainant’s say in the court from arguments were as:
HSBC found that mid buyer in Hong Kong is a fraud company and no more exists. Finding it difficult to honor the bill, HSBC tried to find discrepancies into documents and discrepancies in the documents were informed to SBI main branch, Mumbai (instead of sub-branch from which documents were received with instruction that any further communication must be with our sub-branch only).
SBI main branch took 20 plus day to pass on this message of having discrepancy in documents from HSBC to sub-branch.
Upon receipt of the message by sub-branch of SBI, it acted fast and informed exporter. Exporter on very next date clarified and replied to the SBI sub-branch about discrepancy in the documents.
Meanwhile, probably in couple of days HSBC sent another telex message to SBI that till date we have not received any clarification of our last telex message about discrepancy in the documents for L/C no. xxxxxxxxx ref. no. xxxxxxxxx. In absence of any clarification in short time, we will dishonor your bill (i.e. crystallize the bill) and will send back documents / bill without paying anything. On very next day of this message, HSBC crystallized the bill and sent the documents back without paying anything to SBI.
Upon receipt of documents back, SBI approached exporter and demanded the payment back in exchanged of returned bill. SBI reversed the payment done to exporter and in addition to it charged the exporter interest on principle to the tune of Rs. 1.17 Lac plus.
Meanwhile, exporter had already started searching the whereabouts of his cargo with the shipping agent who could not trace the cargo. Shipping Line and its agent kept on delaying and after 3-4 months replied to the exporter that cargo was delivered to the Hong Kong based company and just after 10 days after the shipment date and then it was diverted to consignee in china.
Question is when the bill / original documents were lying with HSBC and never given to the mid-buyer / applicant in Hong Kong, how the applicant took the delivery of the cargo and how the cargo then was passed to the final buyer / consignee in china?
Loss to the Exporter:
1. Exporter didn’t receive the payment from either from Importer or Issuing Bank which was supposed to be received after 90 days.
2. SBI reversed the payment when the bill was crystallized, so that payment received by bill discounting was taken back. While reversing payment done to exporter, SBI the Negotiating Bank charged the exporter interest of 1.17 lac plus.
3. Exporter also lost the cargo as the cargo was delivered by shipping line to the mid buyer in Hong Kong and then was sent to end buyer in China though original documents were lying with the Issuing Bank, HSBC.
It is the say of complainant / exporter that it had appointed (O.P-1) SBI, as a Negotiating Bank for purpose of L/C opened at request of H.K based company and issued by HSBC Ltd.
It was contended by the complainant that:
As a Negotiating Bank, SBI offered to render services to the complainant / exporter in the matter of said L.C. for consideration agreed to be paid by complainant exporter. SBI failed doing so and fulfilling its duties and so SBI must pay us our losses.
PRAYER:
SBI be ordered to pay sum of Rs.44.47 Lac with
interest @ rate of 21% from October 1994 till realization.
LEGAL QUESTIONS DISCUSSED IN CASE & ANSWERS SOUGHT:
1. Xis Fin, India was company in India and Br.St, H.K was in H.K who gave delivery of cargo to H.K based applicant without receiving original documents. Can Xis Fin, India be taken as an agent of Br.St? Is there Principle-Agent relation between Xis Fin & Br.St? Can Sec. 230 of Indian Contract Act be invoked?: “230. Agent cannot personally enforce, nor be bound by, contracts on behalf of principal. – In the absence of any contract to that effect an agent cannot personally enforce contracts entered into by him on behalf of his principal, nor is he personally bound by them.
2. Can the Cargo be delivered without Consignee Copy of AWB in hand? In which circumstance consignee copy is not needed & in which case it is needed?
3. Is Negotiating Bank legally duty bound sort out all discrepancy? What is the legal liability of Negotiating Bank if any latent discrepancy is left in documents which subsequently found by Issuing Bank?
4. Is Negotiating Bank irrevocably bound for payment under L/C?: Can Negotiating Bank take the payment back if the latent discrepancy is found in doc by Issuing Bank? Is it compulsory for Negotiating Bank to clarify with customer if want to negotiate documents on recourse basis?
5. What is collection of documents? Is Negotiating Bank irrevocably bound to pay in collection?
6. What is the time limit in which Issuing Bank should notify about discrepancy to Negotiating Bank & what is time limit in which Negotiating Bank should notify discrepancy to customer? What is legal liability and penalty if Discrepancy Notification time limit is not maintained? In which case can the delay contention be acceptable & in which case can’t be accepted?
7. What is discrepancy & what should not be taken as discrepancy as per international laws?
8. What is negotiation? (What is said as negotiation of Documents?). What is the liability of Negotiating Bank if documents are negotiated? Can Export Bills Discounting facility enjoyed by Complainant be considered Negotiation?
9. What is barred By Limitation u/s. 24, 25, 29 Of “Multimodal Transportation Of Goods Act (MTGA), 1993 and what not?
10. What is L/C TRANSFER or ENDORSEMENT in favor of bank? What is Negotiation by TRASFER of negotiable Instrument in NIA-1881 India? What is ENDORSEMENT of Negotiable Instrument to bank as per NIA-1881 India.
11. What is the nature of contract between Complainant (Exporter) & SBI, the Negotiating Bank?
12. What is legal relation between Negotiating Bank & Issuing Bank?
13. Is SBI acting here as Negotiating Bank?
14. If delay in sending communication to complainant from SBI, sub-Br. makes SBI liable to pay entire amount lost by the exporter / complainant?
Law & Articles @ Points to learn in this case:
1. Uniform Customs and Practice for Documentary Credits (1993) Revision) [UCP]. Relevant articles upon which reliance is placed by parties are
Article xxxx - Meaning of Credit
Article yyyy - Types of Credit
Article zzzz - Standard Of Examination Of Documents
Article **** - Discrepant Document & Notice
2. ISBP: We will have a discussion of ISBP / International Standard of Banking Practice
Referred Old Judgments for this Case
Before conferring judgment the competent court also takes a note of old judgments from apex court of India like:
Federal bank Vs. Mr. Joggi, Pune
Corporation Bank Vs. Mr. Shah
At the end of this case, lesson to be learnt along with below interesting discussion is given:
- Legal questions raised by competent court,
- International Laws discussed by the court with its articles and
- Referred old judgments.
Order passed by the court