P L D 1966 (W (PLP)

7. According to Lord Sumner in Sassoon (M.A.) & Sons Ltd. v. International Banking Corpn. ((1927) A C 711) there was no distinction from a legal point of view between an irrevocable credit and a confirmed credit, and that both were concluded contracts; but he was presumably referring to the legal effect of each, which as regards the beneficiary, is the same. The term as understood in commercial law has a different import because an irrevocable credit is confirmed if to it is added the confirmation of another banker,. by which that banker also binds himself irrevocably. It may also be mentioned that the banker issuing the credit is called the issuing or opening banker, the second banker, who advises the beneficiary is an advising, negotiating, confirming or paying banker according to the role he plays. The contract between the issuing or opening banker and the paying or negotiating, (intermediary) banker partakes of a dual nature. The relationship is partly that of principal and principal, partly of principal and agent, mandatory and mandatory. It depends, too, in some measure, on the nature of the credit, whether it be revocable or irrevocable. Similarly, the contract between the paying banker and the beneficiary depends upon the terms in which the former's promise to pay is couched; it becomes binding, in the case of a confirmed credit, that is, an irrevocable credit which has been confirmed by the intermediary or the paying banker, as soon as the beneficiary acts on the strength of it. L. J. Cairns In re: Agra and Masterman's Bank; Ex parte Asiatic Banking Corpn. ((1867) 2 Ch. App. 391) while dealing with confirmed banker's credit, said: ‑ "The essence of this letter (of credit) is . . . . . that the person taking bills‑on the faith of it is to have absolute benefit of the undertaking in the letter, and to have it in order to obtain the acceptance of the bills which are negotiable instru ments payable according to their tenor, and without referring to any collateral or cross claims."

8. Sheldon in his book. "Practice and Law of Banking", Fifth Edition, while explaining letters of credit, observes:‑ "There are various kinds of these instruments. One kind is a letter addressed by one banker to another requesting the banker to whom the letter is addressed to hold at the disposal of a named third party a specified amount of money, and to charge he issuing banker with the total amount of all cheques honoured or payments made on the authority of the letter. "Another kind of Letter of Credit authorises the person named in the Letter to draw bills on the issuing banker at the tenor and up to the amount stated in the Letter, the issuing banker on his part promising to accept all bills drawn in accordance with his instructions. This kind of Letter of Credit is usually issued for a specified period, generally not longer than six months. If the Letter undertakes the acceptance of bills without conditions, it is termed as Open or Clean Letter of Credit. If the promise to accept is a conditional one, viz., that the documents of title to the goods in respect of which the bills are drawn shall be sent to the issuing bank together with the bills for acceptance, the Letter is called a Documentary Letter of Credit. "Both these kinds of Letters of Credit contain a stipulation that the amount of all cheques or bills drawn under them shall be indorsed upon them, so that the Letters always show how much of the credit remains available. "Another kind is called a Marginal Letter of Credit, and is so named because on ~ the margin of the actual bill form to be used is a letter detailing the terms of drawing and acceptance. This letter must be datached from the bill portion of the document." "Letters of Credit are not negotiable, and also not trans ferable. If the person named in the Letter loses it, or has it stolen from him, and the finder or thief or any other person gets possession of the Letter and presents it to the banker to whom it is addressed, that banker will have to bear any loss should he negotiate any draft bearing the forged signature of the person named in the letter, as such a payment would be no payment as between the paying banker and the person rightfully entitled to sign the drafts. A Letter of Credit states the limit of the credit and the time during which it is held at the disposal of the grantee. These conditions and any others imposed by the grantor‑banker must be rigorously observed.. No holder of a bill on which the signature of the grantee is forged can maintain an action against the grantor‑banker for refusing to accept such a bill, and the holder cannot maintain an action unless the bill drawn on the authority of the Letter complies with the terms expressed in the letter. "The banker, having pledged himself to pay drafts drawn under a credit, takes a letter of guarantee, if necessary, security, from the person who has requested him to grant the credit. In the case of a documentary credit, the banker has the security of the merchandise shipped. In the guarantee the guarantor undertakes to provide the funds necessary to meet the drafts before their maturity or undertakes to accept and pay them according whether the bills are drawn on the banker or on the guarantor himself. Of the specimen forms of credit given above, two are addressed direct to the beneficiary and one to another bank. "Letters of Credit are very useful instruments in facilitating commercial relations between, say, an importer here and a merchant abroad, or in financing the shipment of merchandise from one foreign country to another. The importer, for instance, gets his banker to issue a Letter of Credit under taking to accept bills up to a certain amount drawn by the merchant abroad. Seeing that the credit of the importer is re‑inforced by the credit of the bank, the foreign merchant is in no doubt about receiving payment for the goods he exports. Moreover, he himself is able to rise the Letter in order to get the bills negotiated or discounted, and so obtain payment for his produce, or in getting credit for the purchase of the produce shipped."

9. The argument of learned counsel for the appellant is that because the Pakistani banks in the year 1949 had no direct con nections in the hard currency area, it was permitted by the State Bank of Pakistan to open letters of credit in hard currency area directly or through the sterling area, and in this respect he has referred us to Chapter XIV, Part II, para. 158 of the Law of Foreign Exchange in Pakistan Volume I by Dr. Qutabuddin Ahmad, as also to the statements of Khalil Ahmad (P. W. 2) and Hamid Ahmad (D. W. 5). These witnesses have deposed to the fact that the appellant bank had no direct dealings with the Canadian Banks or the Swiss Banks, the two countries of origin in the case. Paragraph 158, Chapter XIV of the Law of Foreign Exchange in Pakistan, recognises two modes of opening of letters of credit, namely, direct and through the sterling area. We also have it from the statement of Mr. Zaheer‑ud‑Din Qureshi (C. W. 1) that the usual procedure in the year 1949 was that as the Pakistani banks had no direct arrangement in hard currency area, they operated through the sterling area and such an arrangement was permitted as pointed out under paragraph 158 of the Law of Foreign Exchange. As against this there is no rebuttal on behalf of the respondents. In the circumstances there is no escape from the conclusion that at the relevant time the appellant bank had no direct link in the countries of the exporters in the case of the two letters of credit and the appellant bank as per its own limitations had to arrange for the letters of credit for the beneficiaries in the aforesaid two countries, namely, Canada and Switzerland, through a bank in the sterling area and it chose in this respect the Midland Bank Limited, London with which it had commercial dealings. An argument has been advanced that the respondents had asked for Canadian Dollars and Swiss Francs and since the Pakistani rupee had not been devalued, the respondents are in no way liable to pay any shortfall in the amount of sterling which resulted because of devaluation of the sterling and if the appellant bank, the agent of the borrowers, had purchased the desired foreign currency through sterling, the borrower was not responsible for any losses occasioned. The argument, when analysed, does not stand to test. The principal (the respondent‑borrowers in the case) appointed the appellant bank as its agent and in the circumstances the principal is deemed to have full knowledge of the limitations of the agent and the principal cannot be heard to say that the agent had failed to do something, which was within its power. The appellant bank, as a Pakistani concern, had its limitations, when the State of Pakistan was yet in its infancy and as it has been held by us that the appellant had actually no direct link with the hard currency area, the respondents cannot urge with success that the agent should have approached the countries of origin directly when the agent, as a matter of fact, could not adopt that direct link and had as of necessity to approach the countries of origin through the medium of sterling. It has been correctly pointed out by the learned counsel for the appellant that it was not the case of the respondents in trial Court that they had not accepted opening of letters of credit through an intermediary in the sterling area and in this respect he has referred us to para. 2 (c) of the written statement, which may be reproduced in extenso:‑ "The defendants are liable to pay for the Swiss Francs and the Canadian Dollars in terms of the sterling on the valuation of the sterling when it was initially purchased or the value of the Swiss Francs and Canadian Dollars in terms of the Pakistan currency on the date when the documents were presented, and if this principle is applied the defendants owe nothing to the plaintiff:" This paragraph is a clear admission on the part of the res pondents to pay for the Swiss Francs and Canadian Dollars in terms of sterling, which means that employment of an intermediary in the sterling area was within the knowledge of the respondents and they had accepted that limitation of the agent appointed by them in Pakistan, namely, the appellant bank. The argument on behalf of the respondents in this respect fails and is repelled.

10. It was further argued by the learned counsel for the respondents that there was no privity of contract between the intermediary bank and the respondents‑borrowers. It was argued that as per statement of account (Exh. 17) of the appellant with the Midland Bank Limited, the account of the appellant bank had been actually debited with the amount equivalent to Canadian Dollars and Swiss Francs to be purchased for the purposes of the letters of credit as per foreign exchange rate on the particular day, namely, the 9th of September 1949, and there was no reason why the intermediary bank did not purchase the necessary Canadian Dollars and Swiss Francs the same day, instead of having waited till such time the sterling itself was devalued resulting in loss, which is now being visited on the head of the respondents. The short answer to this objection is that the respondents had no doubt opened a confirmed and irrevocable letter of credit, there was no instruction to the appellant bank for a forward booking and in the absence of forward booking the appellant or the intermediary bank were under no obligation to purchase the foreign currency on the date of opening of the letters of credit or immediately thereafter, as per trade usage which we have been able to glean from the statements of two Court witnesses with reference to the letters of credit opened by the respondents. It is common ground between the parties that the letters of credit (Exhs. P. 1/A and P. 2) are irrevocable and confirmed letters of credit. This necessarily means that the Midland Bank Limited had added its confirmation to the credit binding itself irrevocably to honour the bills or drafts of the bene ficiary and, therefore, the intermediary bank was fully justified to set apart sterling for purchase of foreign currency of the countries of origin and debiting the same to the account of the appellant bank. The argument, therefore, that the intermediary bank, the Midland Bank Limited, London, had failed in their duty in not purchasing the foreign currency immediately despite having debited all the amount to the account of the appellant bank at a time much earlier than devaluation of the sterling has no force. Equitable Trust Co. of New York v. Duwson Partners, Ltd. ((1926) 27 LI L Rep. 49 (H L)), South African Reserve Bank v. Samuel & Co. ((1931) 40 LI L Rep. 291), Rayner & Co. Ltd. v. Hambro's Bank Ltd. ((1943) 1 K B 37) and Bank Melli Iran v. Barclays Bank (Dominion, Colonial and Overseas) ((1951) 2 T L R 1057) refer. The respondents, therefore, cannot complain in this respect.

11. It has also been argued on the basis of answers to questions Nos. V, VI and XI given by C.W. 2, that the respondents are not liable to pay the amount of shortfall, because of devalua tion of the currency. The questions and answers relied upon by the learned counsel for the respondents are reproduced below:‑ "Q. V.‑On the arrangement made between the parties in this case, regarding which you have seen the relevant documents what would be the liability incurred by the importer vis‑a-vis the issuing bank in the matter of payment for the letter of credit? A. The importer would be expected to pay at the rate prevailing between the Pakistani rupee and the hard currency concerned on the day the documents are presented by the issuing bank to the importer in Pakistan, i.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. Q. VI.‑Is it correct that when an, order is placed for the supply of goods from a foreign currency, the liability of the importer is to be determined with reference to the rate of exchange prevailing between the foreign currency concerned and the Pakistani rupee? A. Yes. Q. XI.‑Suppose a letter of credit was opened in Pakistan before the devaluation of the rupee, but the exporter or the beneficiary presented his documents for payment after the devaluation of rupee in terms of sterling, what according to you would be the liability of the importer, namely, whether he would be required to pay at the rate of exchange between rupee and sterling prevailing on (a) the date on which he opened the letter of credit, or, (b) the date on which the beneficiary presents the documents in the foreign country, or (c) the dates on which the documents are retired by the importer in Pakistan from the issuing bank? A.‑In my view the relevant date would be the last one on which the documents are retired in Pakistan." We, however, find that the answer to question No. V is a mere expression of opinion of the witness in view of his reply to question No. XII, which reply is reproduced below: "We do not employ intermediaries since we have our repre sentatives in most countries." The bank in which C. W. 2 is employed has no intermediary and being a bank of international fame perhaps has direct links in various parts of the world, both hard and soft currency areas, and, therefore, the witness cannot be expected to have full knowledge of trade usage in this respect when he makes the reply that it would be proper to pay at the rate prevailing on the date the documents are presented by the issuing bank to the importer in Pakistan. Similarly, when he says that it is correct that when an order is placed for the supply of goods from a foreign country, the liability of the importer, is to be determined with reference to the rate of exchange prevailing between the foreign currency concerned and the Pakistani rupee and that his answer would hold good whether the credit is opened directly or through the intermediary bank, his reply is not based on personal experience or knowledge of trade usage in this respect. We are, therefore, reluctant to accept this part of the statement of C. W. 2.

12. The learned counsel for the respondents has relied on Brochure No. 151 of 1951 and Brochure No. 82 and certain other practices with regard to International Chambers of Com merce. Without going into the niceties of that aspect of the case, we find that the short question involved with regard to the privity of the intermediary bank with the borrowers (the respondents has to be determined with regard to the provisions of the Contract Act. Admittedly, the issuing bank, namely, the appellant, is the agent appointed by the borrowers in Pakistan and the Midland Bank Limited, London, the intermediary in the case, is the sub agent appointed in the case and the beneficiaries are in Canada and Switzerland, respectively. As we have already held that the respondents were fixed with the knowledge of employment of a sub‑agent in the sterling area, the respondents cannot escape the responsibility inter se the principal, the agent and the sub‑agent as laid down in sections 192, 193 and 194 of the Contract Act, which are reproduced below:‑ Representation of principal by sub‑agent properly appointed.‑Where a sub‑agent is properly appointed the principal is, so far as regards third persons, represented by the sub‑agent, and is bound by and responsible for his acts, as if he were an agent originally appointed by the principal. "Agent's responsibility for sub‑agent.‑The agent is responsible to the principal for the acts of the sub‑agent. "Sub‑agent's responsibility.‑The sub‑agent is responsible for his acts to the agent, but not to the principal, except in case of fraud or willful wrong." "Agent's responsibility for sub‑agent appointed without authority. Where an agent, without having authority to do so, has appointed a person to act as a sub‑agent, the agent stands towards such person in the relation of a principal to an agent, and is responsible for his acts both to the principal and to third persons the principal is not represented by or responsible for the acts of the person so employed, nor is that person responsible to the principal." "

194. Relation between principal and person duly appointed by agent to act in business of agency. Where an agent, holding an express or implied authority to name another person to act for the principal in the business of the agency, has named another person accordingly, such person is not a sub‑agent, but an agent of the principal for such part of the business of the agency as is entrusted to him."

13. Here we have an agent holding an express authority to name another person to act for the principal in the business of the agency and he has named that other person, i.e., the Midland Bank Limited, London. The Midland Bank Limited, therefore, no longer remains a sub‑agent and becomes an agent of the principal for such part of the business of the agency as is entrusted to it. The authority (Calico Printers Association v. Barclays Bank ((1931) 145 L T 51 (C A)) relied upon by learned counsel for the respondents in support of the proposition that ordinarily there is no privity between the borrowers (the respondents) and the paying (inter mediary) banker, is clearly distinguishable and is not applicable to the facts of the case before us.

14. The question as to whether there has been any negligence on the part of the intermediary in not purchasing the foreign currency after having set apart sterling for the purchase of the said foreign currency immediately on the 9th of September 1949, does not arise as we have held that the intermediary banker was under no obligation to purchase foreign currency immediately on the opening of the letters of credit, the transaction being not of the nature of a forward booking. It, therefore, cannot be urged with success that the respondents are not liable for the loss sustained because of devaluation of the sterling.

15. As we have come to the conclusion that the defendants are liable to pay the loss because of devaluation of the sterling, the second contention that there were circumstances indicative of the fact that promissory note and other documents had been obtained under duress and are without consideration, does not arise and we are not called upon to give an adjudication on this aspect of the case.

16. The result is that the appeal succeeds, the judgment and decree of the trial Court is set aside and the suit decreed with costs throughout. K. S. A. Appeal accepted.