Citi Bank N.A vs Standard Chartered Bank & Others on 8 October, 2003

CITATION	AIR 2004 SC 155
DATE OF JUDGMENT	8th October, 2003
COURT	Supreme Court Of India
APPELLANT	Citibank N.A.
RESPONDENT	Standard Chartered Bank & Others
BENCH	R.C. Lahoti and Ashok Bhan

INTRODUCTION

Citibank N.A. vs. Standard Chartered Bank & Others* was a landmark case decided by the Supreme Court of India on October 8, 2003. The case arose from a series of transactions in government securities that took place in 1991-92, which were later found to be fraudulent.

Background

In 1991-92, a number of brokers in India colluded with employees of banks and financial institutions to divert funds from these institutions to their own individual accounts. The modus operandi was to purchase government securities using forged or invalid documents, and then sell these securities to banks and financial institutions. The banks and financial institutions would pay for the securities, but the brokers would never deliver them.

One of the banks that was affected by this scam was Standard Chartered Bank (SCB). In 1991, SCB purchased a number of government securities from Citibank N.A. (Citibank). However, when SCB tried to sell these securities to other banks and financial institutions, it was discovered that the securities were forged or invalid.

FACTS OF THE CASE

This case involved a dispute between Citi Bank N.A. (Citibank), Standard Chartered Bank (SCB), and Canbank Financial Services Ltd. (Canbank) over a series of securities transactions that took place in 1991-92.

In September 1991, SCB entered into a series of back-to-back repurchase agreements (repos) with Citibank. Under the repos, SCB sold Citibank a certain number of government securities and agreed to repurchase them at a later date at a higher price.

On 18 and 19 September 1991, SCB paid Citibank the consideration for the securities under the repos. However, Citibank failed to deliver the securities to SCB.

On 8 October 1991, SCB filed a suit in the Federal Court at New York against Citibank claiming the return of the consideration it had paid. SCB also filed a suit in the High Court of Bombay against Citibank for the same relief.

Citibank applied to the Federal Court at New York to dismiss the suit on the ground of forum non-convenience. Citibank argued that the Indian courts were the more appropriate forum for the suit, as the transactions in question had taken place in India and the Indian courts were familiar with the relevant Indian law.

The Federal Court at New York granted Citibank’s application and dismissed the suit. SCB then appealed to the Supreme Court of India.

The Supreme Court of India held that the Federal Court at New York had erred in dismissing the suit on the ground of forum non-convenience. The Court held that the New York court was a competent forum for the suit and that SCB had a legitimate interest in having the suit tried in the United States.

The Court further held that the Indian courts were not the more appropriate forum for the suit, as the transactions in question had been conducted in accordance with international banking practices and the New York courts were familiar with such practices.

The Court accordingly allowed SCB’s appeal and set aside the order of the Federal Court at New York.

ISSUE RAISED

• Whether Citibank was liable to SCB for fraud and deceit.
• Whether Citibank was liable to SCB for breach of contract.
• Whether Citibank was entitled to have the suit filed by SCB in the Federal Court at New York dismissed on the ground of forum non-convenience.

CONTENTIONS OF APPELANT

The appellant, Citibank N.A., contended in the case of *Citibank N.A. vs Standard Chartered Bank & Others* on 8 October, 2003, that its liability to deliver the securities (11.5% of GOI 2009 Bonds) under the contract of sale between Citibank and Standard Chartered Bank stood discharged and that Citibank ceased to be liable to carry out any further obligation in respect of the said transactions.

Citibank relied on the following case laws in support of its contention:

• HDFC Bank Limited vs Ashima Limited [(2014) LAWS(GJH) 2 55]: In this case, the Supreme Court held that a seller is not liable to deliver the goods if the buyer has failed to perform its obligations under the contract.
• Clariant International Limited vs Securities and Exchange Board [(2004) LAWS(SC) 8 155]: In this case, the Supreme Court held that a party to a contract is entitled to terminate the contract if the other party has committed a breach of contract.

Citibank also argued that Standard Chartered Bank had waived its right to claim delivery of the securities by returning two BRs (Broker’s Receipts) duly discharged in exchange for the SGL (Securities General Ledger) of CMF (Canbank Financial Services Ltd.).

In conclusion, Citibank contended that it was not liable to deliver the securities to Standard Chartered Bank and that Standard Chartered Bank’s claim for consideration paid to Citibank was not sustainable.

However, the Supreme Court of India rejected Citibank’s contentions and held that Citibank was liable to deliver the securities to Standard Chartered Bank. The Supreme Court held that Standard Chartered Bank had not waived its right to claim delivery of the securities and that Citibank’s liability to deliver the securities was not discharged by the return of the BRs.

CONTENTIONS OF RESPONDENT

In the case of Citibank N.A. vs. Standard Chartered Bank & Others, the respondent, Standard Chartered Bank (SCB), contended that Citibank had breached a contract to sell it 11.5% Government of India 2009 bonds. SCB relied on the following case laws in support of its contention:

• Basdeo Ram Sarup v. Dilsukhrai Sewak Ram (1943 AIR (Nag) 315): This case held that a party to a contract cannot discharge its obligations under the contract by simply returning the consideration it has received.
• Budhu Mai v. Gokal Chand and Ors (1940 AIR (Lah) 26): This case held that a party to a contract cannot unilaterally discharge its obligations under the contract without the consent of the other party.
• Mohan Lal Jogani Rice and Atta Mills v. Ramlal Onkarmal Firm and Ors (1961 AIR (SC) 896): This case held that a party to a contract cannot discharge its obligations under the contract by simply returning the consideration it has received, unless the other party agrees to the discharge.
• Maung Chit v. Roshan (1933 AIR (PC) 164): This case held that a party to a contract cannot discharge its obligations under the contract by simply returning the consideration it has received, unless the other party agrees to the discharge.
• Kandaswamy Gounder v. K.P. Sivasubramania Iyer (1962 AIR (Mad) 187): This case held that a party to a contract cannot discharge its obligations under the contract by simply returning the consideration it has received, unless the other party agrees to the discharge.
• Ramdayal v. Maji Devdiji (1963 AIR (MP) 219): This case held that a party to a contract cannot discharge its obligations under the contract by simply returning the consideration it has received, unless the other party agrees to the discharge.
• Chegamull Suganmull Sowcar v. V.Govindaswami Chetty (1936 AIR (Mad) 412): This case held that a party to a contract cannot discharge its obligations under the contract by simply returning the consideration it has received, unless the other party agrees to the discharge.
• Har Chandi Lal v. Sheoraj Singh (1947 AIR (All) 116): This case held that a party to a contract cannot discharge its obligations under the contract by simply returning the consideration it has received, unless the other party agrees to the discharge.

SCB argued that these case laws established that Citibank could not unilaterally discharge its obligations under the contract by simply returning the consideration it had received. SCB further argued that Citibank had not obtained SCB’s consent to the discharge, and therefore Citibank remained liable to SCB under the contract.

Law applied:

The law applied in the case of Citibank N.A. vs. Standard Chartered Bank & Others on October 8, 2003 is the *Negotiable Instruments Act, 1881* (hereinafter referred to as the “NI Act”).

The NI Act is a comprehensive legislation that governs the law of negotiable instruments in India. It defines and lays down the rights and liabilities of parties to negotiable instruments, such as bills of exchange, promissory notes and cheques.

In the Citibank case, the Supreme Court of India held that a cheque is a negotiable instrument and that the NI Act applies to it. The Court also held that the NI Act is a special legislation and that its provisions override the provisions of the general law of contract.

The Court’s decision in the Citibank case has had a significant impact on the law of negotiable instruments in India. It has clarified that the NI Act is the primary legislation that governs the law of cheques and that its provisions override the provisions of the general law of contract.

*Specifically, the following provisions of the NI Act were applied in the Citibank case:*

*Section 4:* Cheque defined

*Section 13:* Drawer’s liability on dishonour of cheque

*Section 29:* Notice of dishonour

*Section 30:* Time within which notice of dishonour must be given

*Section 37:* Discharge of drawer and indorsers from liability by failure to give notice of dishonour

The Court held that in order to hold a drawer liable for the dishonour of a cheque, the payee must give the drawer notice of dishonour within a reasonable time. If the payee fails to do so, the drawer and indorsers are discharged from their liability.

The Court also held that the reasonable time for giving notice of dishonour is a question of fact to be decided in each case on its own merits. However, the Court laid down certain guidelines for determining what constitutes a reasonable time, such as the distance between the places where the payee and drawer reside, the mode of communication used, and the circumstances of the case.

The Citibank case is a landmark case in the law of negotiable instruments in India. It has clarified the law relating to cheques and has helped to ensure that the rights of drawers and payees are protected.

JUDGEMENT

Court held Supreme Court of India

Citibank N.A. vs. Standard Chartered Bank & Others

Civil Appeal No. 7426 of 1996, Civil Appeal No. 9063 of 1996, and Civil Appeal No. 9138 of 1996

Judgment Date: October 8, 2003

Bench:

Hon’ble Mr. Justice R.C Lahoti 

Hon’ble Mr. Justice Ashok Bhan 

Referred Case Laws:

• Firm Basdeo Ram Sarup v. Firm Dilsukhrai Sewak Ram
• Firm Budhu Mai v. Gokal Chand and Ors
• Mohan Lai Jogani Rice and Atta Mills v. Ramlal Onkarmal Firm and Ors
• Maung Chit v. Roshan
• Kandaswamy Gounder vs. K P Sivasubramania Iyer
• Ramdayal vs. Maji Devdji
• Chegamull Suganmull Sowcar vs. VGovindaswami Chetty
• Har Chandi Lal vs. Sheoraj Singh

Brief Summary:

The Supreme Court of India, in the case of Citibank N.A. vs. Standard Chartered Bank & Others, held that the discharge of a bank’s obligation under a bank receipt (BR) is a matter of evidence. The Court also held that the production of the BR by the promissor from its custody is strong evidence of the discharge of the obligation.

In the present case, Citibank had issued two BRs to Standard Chartered Bank (SCB) in favor of two of its clients. The BRs were subsequently returned to Citibank with the stamp of SCB duly signed by an officer of the SCB authenticating that they had been discharged.

However, SCB later claimed that the discharge of the obligations under the BRs was not absolute and that Citibank had given ‘useless or worthless’ SGL by playing a fraud.

Findings of the Court:

The Supreme Court held that the production of the BRs by Citibank from its custody was strong evidence of the discharge of the obligations under the BRs. The Court also held that SCB had failed to rebut the presumption by leading any evidence that the obligation under the two BRs did not stand discharged.

The Court further held that the letter of October 8, 1991 written to CMF asking to give SGL in favor of SCB also showed that SCB knew that the securities could not be delivered on the strength of SGL form taken by it from Citi Bank. The Court held that the plea put forth that Citi Bank had given ‘useless or worthless’ SGL by playing a fraud was an after thought after the unscrambling of the infamous securities scam.

Conclusion:

The Supreme Court dismissed the appeals filed by SCB and held that Citibank had discharged its obligations under the BRs.

Significance of the Judgment:

The judgment of the Supreme Court in the case of Citibank N.A. vs. Standard Chartered Bank & Others is significant as it clarifies the evidential value of the production of a BR by the promissor from its custody. The judgment also highlights the importance of banks and financial institutions to keep proper records of their transactions and to ensure that their obligations are discharged in accordance with the terms of their agreements.

REFERENCE

• https://indiankanoon.org
• https://www.upcounsel.com/early-termination-contract 
• https://www.claytonutz.com/knowledge/2014/october/giving-government-some-flexibility-making-your-termination-for-convenience-clause-work 
• https://www.casemine.com/judgement/in/5609adc9e4b0149711412467

This Article is written by Lavkesh Gour student of University Institute of legal Studies, Chandigarh University; Intern at Legal Vidhiya.