1984 PLP 919 (SCMR)

M. S. H. QURAISHI, J.‑This certificated appeal arises out of a suit brought by the respondent, Messrs Australasia Bank Limited, against the appellants/their predecessors‑in‑interest for recovery of Rs. 71,858‑15 by sale of mortgaged property consisting of land in Gujranwala City along with buildings thereon, as also by sale of the hypothecated moveable property mentioned in the schedule to the plaint. The basis of the claim was loan of Rs. 60,000 advanced to the defendants upon their executing a pronote dated 17‑a‑1950 in that sum and upon documents of hypothecation executed by the defendants as collateral security for re‑payment of the loan.

2. The background of the claim was that the defendants had applied to the respondent‑Bank on 6‑9‑1949 to purchase for them Swiss Francs 1,06,683 for the import of aluminum sheets from Switzerland and Canadian Dollars 18,500 for aluminum ingots from Canada. The respondent‑Bank accordingly opened two confirmed letters of credit bearing Nos. LCG/ W/657 and LCG/ W/656, respectively, both dated 8‑9‑1949, for the beneficiaries in the aforesaid two countries, through its intermediary the Midland Bank Ltd. London, as the respondent‑Bank having no direct connection with the countries of origin which were outside the sterling area had to route the letters of credit via the sterling area. The intermediary Bank debited the account of the respondent‑Bank with sterling equivalent to the amount required for the purchase of the foreign currency. Before the shipment of the goods could materialize, the sterling was devalued on 17‑9‑1949, with the result that the amount of sterling debited by the Midland Bank for the purchase of the foreign currency in both the cases fell short. The Midland Bank, therefore, debited the respondent‑Bank with extra amount on account of the devaluation. The documents from the suppliers were received on 17‑11‑1949 and 6‑13‑1949. The respondent‑Bank in order to realize the excess amount paid by it to the intermediary‑Bank obtained a promissory note in question on 17‑4‑1950 in the sum of Rs. 60,000 in its favour from the defendants, out of which Rs. 1,205 was received by them in cash while the balance of Rs: 58 800 was adjusted by the respondent‑Bank against their debit. As a collateral security for re‑payment of the amount, the defendants executed a trust receipt hypothecating certain machinery mentioned in‑the schedule attached thereto and also created an equitable mortgage by deposit of title deeds of some landed property. The defendants got release of the goods imported under the said letters of credit but failed to pay the amount due under the pronote and finally refused payment on 16‑4‑1953. The respondent‑dank, thereupon, instituted the suit the next day.

3. The defendants in their written statement resisted the claim on the ground that the pronote had, never been presented nor had any demand been made by the respondent‑Bank that they had in fact never borrowed the amount nor had they agreed to pay any interest. They pleaded that the promissory note as also the trust receipt and the deposit of the title deeds alleged to have been executed by them were void. They further pleaded that the resultant shortfall in sterling on account of the devaluation was no liability of theirs, that they were liable to pay in terms of sterling on its valuation when it had been initially purchased or the valuation of the sane in terms of Pakistani currency on the day when the shipping papers were presented and that, therefore, the documents were not in law enforceable, more so because they had been executed under duress and undue influence exercised by the respondent‑Bank who had refused to give delivery of the goods without execution of the said documents. They admitted their liability under the pronote only to the extent of Rs. 1,

200. A number of issues were framed by the trial Court, concerning the questions whether the pronote and the mortgage had been without consideration, whether the pronote had not been presented and whether the same had been obtained under influence and coercion. After the parties led their evidence, the trial Court found that the presentation of the pronote was not necessary but that the pronote had been executed in the result of undue influence and coercion and without consideration to the extent of Rs. 58,800 and that the defendants were liable to pay interest only on the sum of Rs. 1,200 which they had admittedly received under the pronote. In view of these findings, the respondent Bank was granted a preliminary mortgage decree for the sum of Rs. 1,200 with interest at the rate of 6% per annum with monthly rests from 17‑4‑1950 to 17‑3‑ 953 and with future interest on the total thus failing due on the latter date at 9 % per annum simple interest till the date of realization. The claim for the‑rest of the amount was dismissed.

4. In appeal, preferred by the respondent‑Bank, the High Court, by consent of the parties, examined two experts on foreign exchange, namely, Mr. Zaheer‑ud‑Din Qureshi, Assistant Controller, Foreign Exchange Depart ment, State Bank of Pakistan, Lahore, and Mr. D. E. A. Virley, Manager, National and Grindlays Bank, Lloyds Branch, Lahore. The main contentions raised before the High Court related to the liability of the defendants to pay the difference on account off' the devaluation of sterling and whether the pronote had been without consideration. The High Court came to the view that according to the usual procedure obtaining in the year 1949, Pakistani banks having no direct arrangement in hard currency area operated through the sterling area which arrangement was permitted under paragraph 158 of the Exchange Control law, that the defendants had knowledge that the respondent‑Bank would employ an intermediary in the sterling area and that the respondent‑Bank or its intermediary was under no obligation to purchase foreign currency immediately on opening of the letters of credit, the transaction being not of the nature of a forward booking. The High Court, therefore, ruled that the defendants were liable to pay the loss on account of the devaluation of the sterling and holding that the other contention that the pronote and the other documents had been obtained under duress and without consideration did not arise, allowed the appeal and decreed the respondent‑Bank's suit with costs throughout. 5. "A letter of credit," according to Halsbury's Laws of England, Volume 3, Fourth Edition, "is in principle an undertaking by a banker to meet drafts drawn under the credit by the beneficiary of the credit in accordance with the conditions laid therein". Where the credit is designed to facilitate trade, a letter of credit may be addressed to another specified banker (called the intermediary banker) or to the beneficiary. Where the credit is addressed to the intermediary banker, it may contain an instruction to that banker either merely to advise the beneficiary of the credit, without any commitment, or to add his confirmatory undertaking to it, in which case the beneficiary has the promise of both bankers. A letter of credit comes into being as the result of a formal written application by the applicant, usually the buyer of goods, who pursuant to his sales contract, instructs his banker to open a credit and undertakes to put the bankers in funds, providing the documents against which the banker pays are what the buyer calls for. The application is at the same time, a request, a mandate and an indemnity. The banker is bound to apply the funds to the purpose to which they are appropriated. Normally, and in the absence of any express arrangement to the contrary, the banker on paying under the credit debits the buyer's account. The banker must comply rigidly with his instructions and where he does, he is entitled to the indemnity of an agent. Denning, L. J., observed in Pavia do Co., S. P. A. v. Thurmann‑Neilsen ((1952) 1 All. E R 492), "the sale of good across the world is now usually arranged by means of confirmed credits. The buyer requests his banker to open a credit in favour of the seller and in pursuance of that request, the banker or his foreign agent, issues a confirmed credit in favour of the seller. This credit is a promise by the banker to pay money to the seller in return for the shipping documents. Then the seller, when he presents the documents, gets paid the contract price. The conditions of the credit must be strictly fulfilled, otherwise the seller would not be entitled to draw on it". According to Paget's Law of Banking (Eighth Edition) the usual form of import credit consists of an undertaking by the buyer's banker addressed to his foreign correspondent (the advising, paying, or negotiating banker), or to the beneficiary, by which the buyer's banker issues or opens his (irrevocable) credit in favour of the beneficiary, promising that payment will be made against tender of documents (including usually full set bills of lading, invoice and marine insurance policy) within a given period of time. The credit usually states further that it is available by sight (or time) drafts, drawn on the issuing banker or the buyer, and may, ask the intermediary banker to add his confirmation, or merely to advise.

6. Learned counsel concedes, and it is, even otherwise, amply clear by para. 3 of the application for opening the letters of credit, that the defendants had given full authority to the respondent‑Bank and authorised it "to debit our account at such time or times as you may decide with the amount of the credit and or any sums paid under or in connection with this credit or in respect of goods . . ..". They had undertaken to place the Bank "in funds to meet such debits and to accept and pay at maturity any Bills drawn upon us and to provide you with funds to meet your acceptance ‑ ‑ - ". They had further indemnified the Bank "against all liability costs charges and expenses which you may incur under or in connection with this credit". There is ample evidence to establish that the Pakistani banks in 1949 and 1950 had no direct arrangement for purchase of currency of countries outside the sterling area (Swiss Francs and Candian Dollars were outside sterling area) and had therefore, for the purpose, to go through sterling. Such arrangement had been permitted by the State Bank of Pakistan under paragraph 157, Chapter XIV of the Exchange Control Manual. This was supported even by the defendants' own witness D. W. 5 who stated: "The Australasia Bank had no direct arrangement for the purchase of Swise Francs and Canadian Dollars and they used to purchase them through the Midland Bank at London. The Australasia Bank used to remit pounds from here to the Midland Bank who used to purchase Swiss Francs and Candian Dollars from the foreign market."

7. The appellants are not disputing the existence of such arrangement but what in fact they are asserting is that as the exchange rate between Pakistani rupee and the Swiss Francs or the Candian Dollar was not affected by the devaluation of the sterling, they were not liable for the shortfall resulting from that devaluation and that in any case their liability was determinable by reference to the date of the opening of the letters of credit. The first assertion could have some weight if the Pakistani bank had been in a position to deal directly with the countries outside the sterling area. No contrary instruction having been given. the Bank followed the usual prevalent practice of going through an intermediately bank in the sterling area. Moreover, full authority bad been extended to the Bank in the matter, indemnifying it at the same time against all liability costs charge and expenses which might be incurred under or in connection with the letters of credit. The respondent‑Bank was, therefore, entitled to recover the difference resulting from the devaluation.

8. There is also no substance in the other assertion that the crucial date was the date of opening the letters of credit. No special instructions, according to D. W. 5, had been given by the defendants to respondent‑Bank regarding the time or method of purchase of Swiss/Canadian currency. According to their applications to the Bank for opening the letters of credit, the credit was to be availed of by "Bills by beneficiary drawn upon ourselves at sight. . .". This is also what P. W. 2 Khalil Ahmad, Superintendent Foreign Exchange Department, stated : "We became liable to make payment to the exporters on behalf of defendants at the time when the documents were presented in respect of the goods to our Agents in London." This was supported by Mr. D. E. A. Virley, who, when his attention was drawn to the applications for opening the letters of credit, stated : "The arrangement embodied in the two documents shown to me could be described as at sight, meaning thereby that the foreign supplier of the goods has to be reimbursed the moment he presents the bills to the negotiating bank in the foreign country concerned." And further : "In my opinion, the arrangement clearly was that the rates of exchange to be charged by the Midland Bank was the one prevailing on the day the documents were presented for payment by the beneficiary concerned." He next elaborated : "The importer would be expected to pay at the rate prevailing between the Pakistani rupee and the hard currency concerned of the day the documents are presented by the issuing bank to the importer in Pakistan, f. e. on the day the documents are said to have been retired by the importer. This is the usual practice adopted in all letters of credit which are opened directly in the hard currencies concerned and I think the same practice applies even when an intermediary is employed." The documents in respect of the goods had admittedly been received, according to D. W. 5, on 17‑11‑1949 and 6‑12‑1949 which were thus the crucial dates for the purpose and as devaluation had already taken place, the intermediary bank was entitled to recover the difference from the respondent‑Bank who in terms of the undertaking given by the defendants was entitled to recover the same from them.

9. In any case, the fact remains that the appellants' liability is to be construed under the pronote and the collateral documents. The execution of the same is not denied. The appellants took advantage of the documents by securing the release of the goods without questioning their validity of the ground that the same had been got executed under duress or undue influence. Defendant Muhammad Yaqub admitted: "We made no written protest to the Bank . . . . After the execution of the pronote we never sent any written notice to plaintiff protesting against the execution of the pronote" The same fact was stated by their witness D. W. 5 who deposed: "When the amount at pre‑valuation rate was debited to defendants in their Pass Book they did not make any protest in writing." The plea that assurance had been held out by Khawaja Bashir Bakhsh, the then Managing Director of the respondent‑Bank, that the Bank would not insist on payment of the money under the pronote was denied by him who appeared as P. W.

1. There is, therefore, reason to believe that the defendants had executed the pronote and the other documents willingly and with full awareness of their liability arising as a consequence of the devaluation. That being so, they would be deemed estopped by their conduct from questioning the validity of the documents.

10. The appeal has, therefore, no merit and is accordingly dismissed with costs. M. Z. M. Appeal dismissed.