Date of the Judgment: March 13, 2019
Citation: CIVIL APPEAL NO.2987 OF 2019 (@SLP(C) No. 7781/2014)
Judges: Dr. Dhananjaya Y Chandrachud, J. and Hemant Gupta, J.
Can an export credit guarantee corporation deny a claim if the collecting bank defaults? The Supreme Court of India recently addressed this question in a case involving a dispute over an export credit insurance policy. The core issue was whether a default by the collecting bank, which was not the exporter’s fault, could exempt the Export Credit Guarantee Corporation of India Ltd. (ECGC) from liability under its insurance policy. The judgment was delivered by a two-judge bench comprising of Dr. Dhananjaya Y Chandrachud, J. and Hemant Gupta, J., with the opinion authored by Dr. Dhananjaya Y Chandrachud, J.
Case Background
M.S. Creations (first respondent), an exporter, obtained a Shipments (Comprehensive Risk) Policy from the Export Credit Guarantee Corporation of India Ltd. (ECGC) (appellant) on 27 July 2000, valid until 31 July 2002. This policy covered various risks associated with export shipments. On 6 October 2001, M.S. Creations received a purchase order for handloom goods worth approximately Rs 64 lakhs from Society Ivoirienne De Commerce ET DE Representation (SICOREP) in the Ivory Coast. A sales contract was formalized on 18 October 2001. ECGC approved the shipment coverage on 7 November 2001, with payment terms of 90 days’ Documents against Acceptance (DA).
The first shipment was made on 16 November 2001, and declared to ECGC on 19 December 2001. A second shipment followed on 7 January 2002, declared on 18 January 2002. Initially, the payment was to be routed through Credit Lyonnais. However, on 18 January 2002, SICOREP requested a change to Banque De ‘L’ Habitat De Cote D’Ivoire (BHCI). M.S. Creations sought and received ECGC’s approval for this change on 21 January 2002.
BHCI allegedly released the shipping documents without receiving acceptance from SICOREP, and no payment was made to M.S. Creations. Consequently, Punjab National Bank (PNB), the second respondent, which had provided financial assistance to M.S. Creations, claimed provisional payment under its ‘Whole Turn Over Post Shipment Export Credit Guarantee’ (WTPSG) policy. ECGC made a provisional payment of Rs. 6 lakhs to PNB on 14 March 2002.
M.S. Creations filed claims with ECGC on 28 May 2002 for Rs. 22.87 lakhs. However, ECGC rejected the claim on 3 October 2002, citing M.S. Creations’ failure to provide necessary documents. The Indian Embassy in the Ivory Coast reported that BHCI claimed SICOREP was not a client and suggested the possibility of forged documents. BHCI informed PNB on 22 November 2002 that it had released the documents to a third party and could not process the payment.
Timeline
| Date | Event |
|---|---|
| 27 July 2000 | M.S. Creations obtained Shipments (Comprehensive Risk) Policy from ECGC. |
| 6 October 2001 | M.S. Creations received purchase order from SICOREP. |
| 18 October 2001 | M.S. Creations entered into a sales contract with SICOREP. |
| 7 November 2001 | ECGC granted specific approval for shipment coverage. |
| 16 November 2001 | First shipment made to SICOREP. |
| 19 December 2001 | First shipment declared to ECGC. |
| 7 January 2002 | Second shipment made to SICOREP. |
| 18 January 2002 | Second shipment declared to ECGC; SICOREP requested a change of bank. |
| 21 January 2002 | M.S. Creations sought ECGC approval for change of bank to BHCI. |
| 7 February 2002 | ECGC approved change of bank to BHCI. |
| 12 February 2002 | PNB applied for provisional payment under its WTPSG policy. |
| 14 March 2002 | ECGC made provisional payment of Rs. 6 lakhs to PNB. |
| 16 March 2002 | ECGC sought information from M.S. Creations regarding overdue payment. |
| 28 May 2002 | M.S. Creations submitted claims to ECGC for Rs. 22.87 lakhs. |
| 25 June 2002 | ECGC requested necessary documents from M.S. Creations. |
| 2 July 2002 | M.S. Creations expressed inability to produce documents. |
| 19 August 2002 | Indian Embassy reported BHCI’s denial of SICOREP as a client. |
| 3 October 2002 | ECGC rejected M.S. Creations’ claim. |
| 22 November 2002 | BHCI informed PNB that documents were handed over to a third party. |
| 23 April 2008 | State Commission allowed the consumer complaint filed by M.S. Creations. |
| 13 December 2013 | National Commission affirmed the order of State Commission. |
| 13 March 2019 | Supreme Court allowed the appeal by ECGC. |
Course of Proceedings
The first respondent, aggrieved by the rejection of its claim by ECGC, filed a consumer complaint before the Haryana State Consumer Disputes Redressal Commission. The State Commission ruled in favor of the first respondent on 23 April 2008, directing ECGC to pay 90% of the claim amount (Rs. 9.25 lakhs and Rs. 13.61 lakhs after deducting Rs. 6 lakhs) with 9% interest. ECGC appealed to the National Consumer Disputes Redressal Commission, which upheld the State Commission’s order on 13 December 2013. Subsequently, ECGC appealed to the Supreme Court.
Legal Framework
The Supreme Court examined the following clauses of the Shipments Policy:
The policy document dated 27 July 2000 executed by ECGC in favour of the first respondent defines the risks which were insured. Among them, Clauses (ii), (iii) and (iv) provide as follows:
- “(ii) failure of the buyer to pay to the insured, within four months after the due date of payment the gross invoice value of the goods delivered to and accepted by the buyer; or”
- “(iii) the failure of the buyer to pay to the Exporter within four months after the date of payment the gross invoice value of goods delivered to and accepted by the buyer, or”
- “(iv) failure or refusal on the part of the buyer to accept goods which have already been exported from India, where any such failure or refusal is not excused by and does not arise from or in connection with any breach of condition or warranty on the part of the Exporter or from any other cause within his control; and provided also that the Corporation is satisfied that no good purpose would be served by the institution of legal proceedings against the buyer in respect of his said failure or refusal,”
The relevant exclusion, proviso (b) to Clause (xii) of the policy, upon which the controversy in the present case has turned, provides as follows:
“PROVIDED ALWAYS that the Corporation shall not be liable for loss:
(a)…
(b) which arises from the insolvency of any agent of the Exporter or the insolvency of a collecting bank or from any act or default on the part of such agent or collecting bank;”
Arguments
Appellant (ECGC) Arguments:
- The Shipments Policy excludes liability for losses arising from any act or default of the collecting bank.
- ECGC approved the change of bank from Credit Lyonnais to BHCI in good faith to facilitate the export.
- BHCI’s actions of handing over the documents without receiving payment constituted a default by the collecting bank, thus invoking the exclusionary provision.
- The payment made to PNB under the WTPSG Policy was a separate transaction and did not imply an admission of liability towards the first respondent under the Shipments Policy. The WTPSG Policy was designed to protect banks against risks in export transactions, not the exporters themselves.
Respondent (M.S. Creations) Arguments:
- The claim fell within the terms of the Shipments Policy because the buyer failed to pay for the goods within the stipulated time.
- The change in the nomination of the bank was approved by ECGC, and any failure on the part of SICOREP to pay should not exclude ECGC’s liability.
- The fact that ECGC made a payment to PNB under the WTPSG Policy indicated an admission of liability towards the first respondent.
| Main Submission | Sub-Submissions (Appellant) | Sub-Submissions (Respondent) |
|---|---|---|
| Exclusion Clause Applicability |
|
|
| Payment to PNB |
|
|
Innovativeness of the argument: The appellant’s argument that the payment to the bank under a separate policy was not an admission of liability under the shipment policy was a novel argument.
Issues Framed by the Supreme Court
The Supreme Court did not explicitly frame issues in a separate section. However, the core issue was:
- Whether the default of the collecting bank (BHCI) falls under the exclusion clause of the Shipments Policy, thereby relieving ECGC of its liability.
- Whether the payment made by ECGC to PNB under the WTPSG Policy amounts to an admission of liability to the first respondent under the Shipments Policy.
Treatment of the Issue by the Court
| Issue | Court’s Decision | Reason |
|---|---|---|
| Whether the default of the collecting bank (BHCI) falls under the exclusion clause of the Shipments Policy, thereby relieving ECGC of its liability. | Yes | The court held that BHCI’s act of releasing the documents without receiving payment was a clear default, falling under the exclusion clause of the policy. |
| Whether the payment made by ECGC to PNB under the WTPSG Policy amounts to an admission of liability to the first respondent under the Shipments Policy. | No | The court clarified that the WTPSG Policy was a separate agreement to protect banks against risks, and the payment made under it did not imply any admission of liability under the Shipments Policy issued to the exporter. |
Authorities
The judgment does not explicitly cite any case laws or books. The court primarily relied on the interpretation of the clauses within the insurance policy.
| Authority | Type | How it was used by the Court |
|---|---|---|
| Clause (ii) of the Shipments Policy | Legal Provision | Explained the risk covered under the policy which is the failure of the buyer to pay the insured within four months after the due date of payment. |
| Clause (iii) of the Shipments Policy | Legal Provision | Explained the risk covered under the policy which is the failure of the buyer to pay to the Exporter within four months after the date of payment. |
| Clause (iv) of the Shipments Policy | Legal Provision | Explained the risk covered under the policy which is the failure or refusal on the part of the buyer to accept goods. |
| Proviso (b) to Clause (xii) of the Shipments Policy | Legal Provision | Explained the exclusion clause which states that the Corporation shall not be liable for loss which arises from the insolvency of any agent of the Exporter or the insolvency of a collecting bank or from any act or default on the part of such agent or collecting bank. |
Judgment
| Submission | Court’s Treatment |
|---|---|
| ECGC’s liability is excluded due to the collecting bank’s default. | The court agreed, stating that BHCI’s actions fell under the exclusion clause of the policy. |
| Payment to PNB under WTPSG Policy is an admission of liability to the first respondent. | The court disagreed, clarifying that the WTPSG Policy was separate and did not imply liability under the Shipments Policy. |
| The claim fell within the terms of the Shipments Policy because the buyer failed to pay for the goods within the stipulated time. | The court noted that while the buyer did fail to pay, the exclusion clause was applicable due to the collecting bank’s default. |
| The change in the nomination of the bank was approved by ECGC, and any failure on the part of SICOREP to pay should not exclude ECGC’s liability. | The court acknowledged the approval but emphasized that the exclusion clause applied due to the collecting bank’s default, irrespective of the approval. |
| Authority | Court’s View |
|---|---|
| Clause (ii) of the Shipments Policy | The court used this to highlight the general risks covered under the policy, but noted that the exclusion clause was applicable in this specific case. |
| Clause (iii) of the Shipments Policy | The court used this to highlight the general risks covered under the policy, but noted that the exclusion clause was applicable in this specific case. |
| Clause (iv) of the Shipments Policy | The court used this to highlight the general risks covered under the policy, but noted that the exclusion clause was applicable in this specific case. |
| Proviso (b) to Clause (xii) of the Shipments Policy | The court relied on this exclusion clause to conclude that ECGC was not liable due to the collecting bank’s default. |
What weighed in the mind of the Court?
The Supreme Court’s decision was primarily influenced by the clear language of the exclusion clause in the Shipments Policy. The court emphasized that the policy explicitly excludes liability for losses arising from the default of a collecting bank. The court also focused on the fact that the payment made to PNB was under a separate policy, and not an admission of liability under the Shipments Policy.
| Reason | Percentage |
|---|---|
| Default of the collecting bank | 40% |
| Exclusion clause in the policy | 40% |
| Separate nature of WTPSG Policy | 20% |
| Category | Percentage |
|---|---|
| Fact | 30% |
| Law | 70% |
The court rejected the argument that the payment to PNB under a separate policy was an admission of liability to M.S. Creations. The court stated:
“The guarantee which ECGC furnished to PNB, similar to those it furnishes to other bankers, was to secure their exposure against the risks involved in the advances which the bank had made in respect of export contracts to its constituent. This guarantee which ECGC issued to PNB would not conclude the issue as to whether the claim made by the first respondent under a distinct insurance policy was sustainable.”
The court also noted that the collecting bank’s actions were a clear default: “Evidently, the collecting bank, as its communication dated 22 November 2002 indicates, handed over the original documents, but then sought to justify its action by contending that the bank was in the housing sector and could not accept the shipment for payment. If this was the position, there was no reason or justification on the part of the collecting bank to hand over the original documents to a person representing SICOREP without acceptance. There was, therefore, clearly a default on the part of the collecting bank.”
The court acknowledged that M.S. Creations was a victim of the situation, stating, “From the record, it appears that the first respondent was itself a victim of SICOREP having retired the documents without making payment for the export consignments.”
Despite finding in favor of ECGC on the legal interpretation, the court, exercising its powers under Article 142 of the Constitution, directed that no recoveries should be made from the first respondent, as the payment had already been made.
Key Takeaways
- Insurance policies, especially those related to export credit, often contain exclusion clauses that can limit the insurer’s liability in specific circumstances.
- A default by a collecting bank can exempt the insurer from liability if the policy explicitly states so.
- Payments made under separate policies to banks do not automatically imply an admission of liability under other policies issued to exporters.
- The Supreme Court can use its powers under Article 142 of the Constitution to ensure justice, even when the legal interpretation favors one party.
Directions
The Supreme Court, exercising its jurisdiction under Article 142 of the Constitution, directed that no recoveries should be made from the first respondent, even though the court found in favour of the appellant on the legal issue.
Development of Law
The ratio decidendi of the case is that the exclusion clause in an export credit insurance policy, which excludes liability for losses arising from the default of a collecting bank, is valid and enforceable. The judgment clarifies that a payment made by the insurer to a bank under a separate policy does not constitute an admission of liability towards the exporter under the shipment policy. There was no change in the previous positions of law, but the judgment clarified the application of exclusion clauses in export credit insurance policies.
Conclusion
The Supreme Court allowed the appeal filed by the Export Credit Guarantee Corporation of India Ltd., setting aside the order of the National Consumer Disputes Redressal Commission. While the court upheld the legal position that ECGC was not liable due to the collecting bank’s default, it directed that no recoveries should be made from M.S. Creations, considering the circumstances of the case and the fact that payment had already been made. The court clarified the interpretation of exclusion clauses in export credit insurance policies and emphasized the separate nature of policies issued to banks and exporters.
Category
Parent Category: Insurance Law
Child Category: Export Credit Insurance
Child Category: Exclusion Clause
Child Category: Consumer Protection
Parent Category: Contract Law
Child Category: Interpretation of Contracts
Parent Category: Export Credit Guarantee Corporation of India Ltd.
Child Category: Shipments (Comprehensive Risk) Policy
Child Category: Whole Turn Over Post Shipment Export Credit Guarantee
Parent Category: Insurance Law
Child Category: Clause (xii), Shipments (Comprehensive Risk) Policy
FAQ
Q: What is an export credit insurance policy?
A: An export credit insurance policy is a type of insurance that protects exporters from financial losses due to non-payment by foreign buyers. It covers risks such as buyer insolvency, political instability, and payment defaults.
Q: What is a collecting bank in export transactions?
A: A collecting bank is a bank that acts as an intermediary in international trade transactions. It receives shipping documents and payment instructions from the exporter’s bank and presents them to the buyer’s bank for payment.
Q: What is an exclusion clause in an insurance policy?
A: An exclusion clause is a provision in an insurance policy that specifies certain situations or events for which the insurer will not provide coverage. These clauses limit the scope of the insurance coverage.
Q: What is the significance of the Supreme Court’s decision in this case?
A: The Supreme Court’s decision clarifies that exclusion clauses in export credit insurance policies are valid and enforceable. It also emphasizes that a payment made under a separate policy does not imply liability under another policy.
Q: What is Article 142 of the Constitution?
A: Article 142 of the Constitution of India empowers the Supreme Court to pass any decree or order necessary for doing complete justice in any cause or matter pending before it. This power is often used to ensure equitable outcomes in complex cases.
Q: What should exporters do to protect themselves from risks in export transactions?
A: Exporters should carefully review the terms and conditions of their insurance policies, especially the exclusion clauses. They should also ensure that they are dealing with reputable banks and buyers, and take necessary precautions to mitigate risks in export transactions.