Court citing on documentary credit

This has reference to your comments particularly with reference to the

“ owner” of the goods. We thought it would be appropriate at this
juncture to reiterate Article 5 of UCP 600, which specifically and
categorically confirms that the banker is in no way connected to the
transactions or underlying contract and he deals with the documents.
We could also find the same view is supported by the other statutes
that are prevalent not only in India but also internationally.

We are enclosing extracts from Indian Sale of goods Act 1930

( annexure 1), Extracts from an article of on LC transactions,
( annexure II ), and also an extract from a book American law series
( annexure III) which clarifies not only the ownership aspect but also LC
transactions.

To amplify, referring to the Sale of goods Act , Sec 19 refers to the

transfer of ownership is completed only when parties intend such
completion. To ascertain such intent, conduct, contract terms and
circumstances are to be studied. By opening a LC the seller of goods
intend that such ownership transfer will take place only when the bill is
paid by the buyer. Hence we can safely conclude that the ownership of
the goods lie with the seller even after they are shipped. Section 25
further states that that ownership is retained with the seller even after
delivery to the shipper or any other agent. Sec 25 ( 3) further avers
that even if the buyer is in possession of the document of title to
goods, it does not make him the owner until the terms of contract is
fulfilled ( in the case of LC transactions, the bill is paid.) The rules of
delivery further state that it is the duty of the seller that he should
incur all charges that would result in delivery. Thus we are of the
opinion that the intention of Semcor was to obtain payment through
the LC mechanism and the intent was that the buyer ( MSTC) will get
the ownership only on making payment.

Referring to annexure II will reveal the intention of UCP and the LC

mechanism. The intention of inclusion of Article 5 has been explained.
LC is mechanisam founded on independent principle, and the banks
are to be protected against claims arising on account of underlying
transactions or contract that gave birth the LC. It also speaks about the
intention of consigning the goods in favour of the bank. By naming the
bank as consignee the intention of the seller is to ensure that the
buyer obtains the ownership only after payment of the bill. The
intention of naming the bank as consignee is only to ensure that the
buyer do not get access to the goods unless the payment is made to
the Bank. Hence the consignee Bank is no way connected to the claims
arising out of the bill of lading, as the intention here is to protect the
seller and seller continue to retain the ownership.

The above view is also confirmed in the extract of the book American
law series provided as annexure 3.

Thus our stand should be:

1. The act of naming the consignee in the bill of lading does not
confer any responsibility to the bank as the intention of such
consignment is to secure payment.
2. Semcor continues to be the owner of the goods and
3. Article 5 of UCP provides immunity to the banker from the
actions that may arise out of the underlying contract that
resulted in LC mechanism.
Annexure 1

THE SALE OF GOODS ACT, 1930 ( India)

19- Property passes when intended to pass –

(1) Where there is a contract for the sale of specific or
ascertained goods the property in them is transferred
to the buyer at such time as the parties to the contract
intend it to be transferred.
(2) For the purpose of ascertaining the intention of the
parties regard shall be had to the terms of the
contract, the conduct of the parties and the
circumstances of the case.
(3) Unless a different intention appears, the rules contained in
sections 20 to 24 are rules for ascertaining the intention of the
parties as to the time at which the property in the goods is to
pass to the buyer.

25- Reservation of right of disposal –

(1) Where there is a contract for the sale of specific goods
or where goods are subsequently appropriated to the
contract, the seller may, by the terms of the contract
or appropriation, reserve the right of disposal of the
goods until certain conditions are fulfilled. In such
case, notwithstanding the delivery of the goods to a
buyer or to a carrier or other bailee for the purpose of
transmission to the buyer, the property in the goods
does not pass to the buyer until the conditions
imposed by the seller are fulfilled.
(2) Where goods are shipped or delivered to a railway
administration for carriage by railway and by the bill of lading
or railway receipt, as the case may be, the goods are
deliverable to the order of the seller or his agent, the seller is
prima facie deemed to reserve the right of disposal.
(3) Where the seller of goods draws on the buyer for the price
and transmits to the buyer the bill of exchange together with
the bill of lading or, as the case may be, the railway receipt to
secure acceptance or payment of the bill of exchange, the
buyer is bound to return the bill of lading or the railway
receipt if he does not honour the bill of exchange ; and,
if he wrongfully retains the bill of lading or the railway
receipt, the property in the goods does not pass to
 him.
Explanation - In this section, the expressions "railway" and
"railway administration" shall have the meanings respectively
assigned to them under the Indian Railways Act, 1890.] (9 of
1890.)
36- Rules as to delivery –
(1) Whether it is for the buyer to take possession of the goods or
for the seller to send them to the buyer is a question
depending in each case on the contract, express or implied,
between the parties. Apart from any such contract, goods sold
are to be delivered at the place at which they are at the time
of the sale, and goods agreed to be sold are to be delivered at
the place at which they are at the time of the agreement to
sell, or, if not then in existence, at the place at which they are
manufactured or produced.
(2) Where under the contract of sale the seller is bound to send
the goods to the buyer, but no time for sending them is fixed,
the seller is bound to send them within a reasonable time.
(3) Where the goods at the time of sale are in the possession of a
third person, there is no delivery by seller to buyer unless and
until such third person acknowledges to the buyer that he
holds the goods on his behalf:
Provided that nothing in this section shall affect the operation
of the issue or transfer of any document of title to goods.
(4) Demand or tender of delivery may be treated as ineffectual
unless made at a reasonable hour. What is a reasonable hour
is a question of fact.
(5) Unless otherwise agreed, the expenses of and
incidental to putting the goods into a deliverable state
shall be borne by the seller.
Annexure II

Extracts from an article

Controlling The Letter of Credit Transaction

By Margaret L. Moses
Of Counsel

Ref: http://www.connellfoley.com/articles/moses1.html

…….One of the major purposes is to protect the banks from

liability in LC transactions. The banks are providing a service - the
financing of the transaction - and they expect to be protected from
getting involved in disputes between the parties as to the terms of the
contract of sale. For this reason "the independence principle" is
a very important concept in LC transactions. This means that the
LC, and the documents required under the LC for payment, are
completely independent from the underlying transaction between
buyer and seller.

The bank is not concerned with whether the contract between buyer
and seller is being performed according to its terms. ……..

………., a prudent seller will not let the buyer take possession
of the goods until he has been paid under the LC. The reason
should be obvious. If there are discrepancies in the documents
preventing payment of the LC, a buyer in possession of the goods has
much less incentive to waive discrepancies so the seller can be paid. If
the seller is not paid by the bank, the buyer still has a contractual
obligation to pay for goods, but the difficulty of collection can make the
price drop substantially, even assuming the buyer is solvent and can
pay something. Particularly when the goods have been shipped to a
foreign country, the attempt to collect payment can be quite costly.
The buyer, knowing this, will undoubtedly attempt to negotiate a lower
price, if he pays at all.

To keep goods out of the buyer's possession, the seller should

be sure to have the marine bill of lading consigned to order of
the bank. Since the marine bill of lading is a title document, a
consignment to order of the bank gives the bank title to the goods until
they have been paid for by the buyer. Assuming proper payment, the
bank transfers title to the buyer, who can then take the bill of lading
and go pick up the goods. If payment is not made, the bank has an
obligation to hold the documents for the seller, or return them to the
seller if instructed to do so by the seller. The buyer should not be able
to get the goods without the title document.
Annexure III

Extract from the book American law series

Sec. 61. Reservation, Upon Shipment, Of Title In Seller

Ref: http://chestofbooks.com/business/law/American-
Commercial-Law-Series/Title-Transfer-Between-Buyer-And-
Seller-When-Rights-Of-Thir.html

The seller by the form of his contract with the carrier may reserve title
in himself notwithstanding delivery to such carrier.

If the shipper has the bill of lading made out to himself or his agent,
this effects a retention of title in himself. A bill of lading is the evidence
of title and by its form may indicate that though the seller made
delivery to the carrier, yet he did not by that act finally appropriate the
goods to the contract, but intended until a future time to reserve title
in himself. This is sometimes referred to as the retention of the jus
disponendi. One mode of retaining title by means of the bill of lading is
to send the bill to some third person, usually a banker, with draft
attached, which must be accepted, or, if a sight draft, paid, before the
bill of lading can be secured. This reserves title even though the bill of
lading names the buyer as consignee.67