I.T.C.
Limited Vs. The Debts Recovery Tribunal & Ors [1997] INSC 953 (19 December 1997)
SUHAS
C. SEN, M. JAGANNADHA RAO.
ACT:
HEADNOTE:
THE
19TH DAY OF DECEMBER, 1997 Present:
Hon'ble
Mr. Justice Sushas C.Sen Hon'ble Mr. Justice M.Jagannadha Rao Soli J. Sorabjee,
Sr. Adv., S.Ganesh, Ravinder Narain, Ms. Punitta, Ms. Juhi, Advs. for M/s.
J.B.D. & Co., Advs. with him for the appellant M.J. Rupal, U.A. Rana, Sudhanshu
Tripathi, Advs. for M/s. Fox Mandal & Co., and S.N. Bhat, Advs. for the
Respondents
The
following Judgment of the Court was delivered:
M.
JAGANNADHA RAO., J Leave granted.
The
appellant has preferred this appeal against the judgment of the High Court of
Karnataka dated 14.8.1997 in Writ Appeal No. 2876 of 1997. The Writ Appeal was
filed against the judgment of the learned Single Judge dated 9.4.1997
dismissing the Writ Petition filed by the appellant against the orders of the
Debt Recovered Tribunal and Appellate Tribunal rejecting the application of the
appellant filed under Order 7 Rule 11 of the Code of Civil Procedure.
The
appellant was the 5th defendant in the suit filed by the 3rd respondent,
namely, the Corporation - Bank which has its zonal office at Bangalore. The suit was filed in the year
1985 by the said Bank against at Guntur in Andhra Pradesh and against the appellant I.T.C. Limited. The relief
claimed in the suit was for a sum of Rs. 52,59,639.66. The defendants 1 to 4
above mentioned are respondents 4 to 7 in this appeal. The first respondent is
the Debt Recovery Appellate Tribunal and the 2nd respondent is the Debt
Recovery Tribunal. After the suit was filed in the Civil Court it was transferred to the Debt
Recovery Tribunal on 9.10.1995. Before the said Tribunal the appellant filed an
application under order 7 Rule 11 of the Civil Procedure Code for rejecting the
plaint so far as the appellant was concerned on the ground that no valid cause
of action had been shown against the appellant. The said application was
rejected by the Tribunal on 12.12.1996 holding as follows:- "Objections
filed. Heard. Cause of action is a mixed question of fact and law. Hence I.A. 3
cannot be entertained at this stage. Post for evidence".
Against
the said order, the appellant filed an appeal before the Appellate Tribunal
which was dismissed by the said Tribunal on 3.3.1997 holding that in view of
the averments in the plaint and particularly para 12, the question about the
liability of the appellant was to be determined at the trial on merits. It
stated that the appellant had admittedly received Rs. 32 lacs under the Bills
of Exchange or Letters of Credit and the question whether the appellant was
justified in receiving the said amount or not and whether plaintiff-Bank was
entitled to recover the said amount from the appellant - were to be determined
only at the trial. Accordingly the appeal was dismissed in limine.
The
appellant filed Writ Petition 9564/1997 in the Karnataka High Court which was
again dismissed by an order dated 9.4.1997 holding that the question has to be
decided at the trial and that it could not be stated that there was no cause of
action at all disclosed in the plaint against the appellant. Against the said
judgment the appellant filed Writ Appeal 2876/1997 which was dismissed on
14.8.1997 holding that at the stage of an application under Order 7 Rule 11
C.P.C. in order to find out whether the plaint did not disclose a cause of
action, the Court should not look into anything else except the plaint.
Further, after the issues were framed and the case was posted for evidence, it
was not desirable to consider the application filed under Order 7 Rule 11,
C.P.C.
Was
shall refer to the facts of the case as set out in the plaint. The first
defendant belonging to Tadikonda family (hereinafter called the buyers)
approached the plaintiff Bank in December 1979 for the issue of a Letter of
credit in favour of the appellant-Company for an amount of Rs. 32 lacs for the
purpose of securing the payment towards supply of Cigarettes manufactured by
the appellant and for certain other facilities. The plaintiff-Bank sanctioned
L.C. facility for the said sum and agreed to open the L.C.
and
issued a "revolving Letter" of Credit No. 1/1980 dated 12.11980 in favour
of the appellant for Rs. 32 lacs available against demand bills of the
appellant at sight, "without recourse" to the full invoice value of
the goods purporting to be supply of Cigarettes by the appellant. At the
request of the buyers the Letter of Credit was renewed from time to time and
the last one was on 20.1.1983 till 20.1.1984. Thereafter the buyer again
approached the plaintiff - Bank for additional Letter of Credit in favour of
the appellant - Company and this was in August 1983 and the plaintiff Bank
agreed to open an additional Letter of Credit in favour of the appellant and
did so in April 1983 and issued a "revolving Letter" of Credit 1/883
in favour of the appellant for Rs. 18 lacs against demand bills of the
appellant on the buyers at sight "without recourse" for the full
invoice value of the goods purporting to the supply of Cigarettes manufactured
by the appellant. In respect of the above Letters of Credit the buyers executed
necessary loan documents in favour of the Bank for issue of confirmed
irrevocable Letter of Credit, Letter of General Lien relating to immovable
properties, etc. Demand Promissory Notes were also executed by the buyers.
The
plaint then states that the appellant availed the benefits of drawing various
sums on several dates purporting to be for despatch of goods (Cigarettes) by
the appellant to the buyers (defendants 1 to 4) and that was hose the appellant
appropriated the amounts drawn as against goods purportedly despatched by the
appellant to the buyers. It stated in para 6 of the plaint, that "the 5th
defendant misrepresented to the plaintiff that the goods were despatched while
presenting the relevant demand bills for negotiation under L.C. and
fraudulently obtained payments." After referring to the refusal of the
buyers to make good the payment made by the Bank to the appellant to the extent
of the money already paid by the bank to the appellant under the L.Cs, the
plaint proceeded to state that the plaintiff demanded reimbursement of the said
amounts by the buyers and that the buyers informed the plaintiff that in fact,
there was no movement of the goods by the appellant and that unless there was
such a movement, the appellant was not entitled to draw any amount under the
L.C. facility from the plaintiff - Bank. It was stated in para 8 of the plaint
that the buyers by letter dated 23.1.1984 stated that the appellant had drawn
the bills for an amount of 18 lacs without support of actual movement of stock
of Cigarettes on 1.9.1983. It was stated in para 8 that the Bank has now realised
that the appellant had drawn monies from the Bank without movement of goods to
the buyer and had therefore acted fraudulently. The plaint than proceeds to
state in para 9, that the appellant had committed breach of faith and acted
contrary to the terms of the Letters of Credit and that the plaintiff issued
registered notices to all the parties. The appellant stated in its reply dated
18.4.1984 that the payments had been received by it only for the supplies made
and towards monies definitely due thereby.
This
according to the Bank implied that the goods were not despatched under the
terms of the Letters of Credit.
Plaintiff
them stated that appellant had appropriated the monies from the Bank under the
guise of L.C. facilities to adjust some other liabilities incurred by the
buyers towards the appellant under different transactions than envisaged in the
L.C. facilities. The plaint referred to in para 10 to a reply dated 13.4.1984
of the buyers to the effect that the bills were drawn by the appellant and
money appropriated towards the trading balance dues of the buyers. The plaint
then stated that both the appellants as well as buyers acted contrary to the
terms of the Letters of Credit and monies were drawn wrongly by the appellant
misrepresenting the fact as to despatch of goods and the amount was
appropriated towards other liabilities of the buyer towards the appellant. Both
the buyers as well as the appellant had the benefit of these illegal drawings
and therefore both were liable to reimburse the plaintiff with interest. In para
12 of the plaint it was then stated as follows:
"The
5th defendant has drawn the amounts contrary to the terms of Letters of Credit.
The payments by the plaintiff to the 5th defendant was due to the mistaken
assumption that the 5th defendant had despatched the cigarettes which entitled
the 5th defendant to the payments under the Letter of credit. The plaintiff
discovered the mistake when it received the letter of the first defendant dated
23.1.1984 as also the reply of the defendants 1 and 5 dated 13.4.1984 and
18.4.1984 respectively. The payments to the 5th defendant being under/due to
the mistake, as aforesaid, the plaintiff will entitled to be repaid of the said
amounts by the 5th defendant. The 5th defendant has unjustly enriched itself by
the several payments." In para 14 of the plaint again there is an
allegation that the appellant was guilty of false representation that goods in
question had been despatched when in fact the 5th defendant received the
payments towards other claims against the buyers.
As
already stated, the Tribunal and the High Court, on the above averments in the
plaint, refused to reject the plaint.
Learned
counsel for the appellant - Company Shri Soli J. Sorabjee contended that the
Court was entitled to reject the plaint under Order 7 Rule 11 C.P.C. at any
stage of the suit even if the issues were framed and even if the matter was
posted for evidence. Learned counsel also contended that it is well settled
that in regard to payment under Bank Guarantees or irrevocable Letters of
Credit, the contract between the sellers (appellant) and the Bank was independent
of the contract between the buyers and sellers in respect of the goods and that
the Bank had no authority to refuse payment on the ground of any alleged breach
of contract by the sellers in their contract with the buyers. The only
exceptions which have been recognised by the Courts were cases of fraud or
irretrievable injury. In the case of those exceptions, the buyers could seek
and injunction against the Bank before the Bank paid money to the sellers.
No
such injunction was sought by the buyers. Further, the exceptions relating to
forgery or fraud and misrepresentation recognised by the Courts relate to the
forgery or fraudulent presentation of the documents tendered to the Bank. The
case on hand did not come within the said exceptions and, therefore, there was
no cause of action against the appellant. Learned counsel also contended, that
merely because the word fraud or misrepresentation were used in the plaint, the
Bank could not claim that the said allegations have to be accepted as true for
purposes of Order 7 Rule 11 C.P.C.
On the
other hand, learned counsel for the respondent - Bank submitted that in view of
the averments in the plaint relating to misrepresentation and fraud by the
appellant, the said allegations have to be taken to be true when the
appellant's application under Order 7 Rule 11 was taken up for consideration
and it was not permissible for the court to refer to any other material for the
purpose of deciding whether thee was any cause of action against the appellant.
The
first point here is whether the power to reject the plaint under Order 7 Rule
11 C.P.C. can be exercised even after the framing of issues, and when the
matter is posted for evidence. This point has arisen because the Division Bench
of the High Court has referred to this aspect while dismissing the appeal.
We may
stated that in the context of Order 7 Rule 11 C.P.C., a contention that once
issues have been framed, the matter has necessarily to go to trial has been
clearly rejected by this Court in Azhar Hussain vs. Rajiv Gandhi [1986 (Supp.)
SCC 315] (p.324] as follows:
"In
substance, the argument is that the Court must proceed with the trial, record
the evidence, and only after the trial....is concluded that the powers under
the Code of Civil Procedure for dealing with a defective petition which does
not disclose cause of action should be exercised. With respect to the learned
counsel, it is an argument which it is difficult to comprehend. The whole
purpose of conferment of such powers is to ensure that a litigation which is
meaningless and bound to prove abortive should not be permitted to occupy the
time of the Court" The above said judgment which related to an election
petition is clearly applicable to suits also and was followed in Samar Sing vs.
Kedar Nath [1987 (Supp.) SCC 663]. We therefore hold that the fact that issues
have been framed in the suit cannot come in the way of consideration of this
application filed by the appellant under Order 7 Rule 11 C.P.C.
We
shall next deal with the question whether the allegations in the plaint prove a
cause of action against the appellant for recovery by the bank, of the amounts
already paid under the irrevocable letter of Credit.
The
principles regarding the payment of amount covered by bank guarantees or
Irrevocable Letters of Credit are fairly well settled. They have been discussed
in detail in several cases and there is an exhaustive discussion of the
principles in U.P Cooperative Federation Ltd. vs. Singh Consultants &
Engineers [1988 (1) SCC 174]. Reference was also made by the learned counsel
before us to the judgment of the Calcutta High Court in United Commercial bank cs.
Human
Synthetics Ltd. [AIR 1985 Cal. 961] (to
which one of us, Suhas C. Sen, J. was a party). It will be noticed that the
above cases do say that the bank has to honour the Bank guarantee or Letter of
Credit subject of course to the case of two exceptions where there was fraud or
irretrievable injury. In the present case, the contention for the Bank is based
on fraud or misrepresentation by the appellant. That is stated to be the cause
of action in the plaint.
Question
is whether a real cause of action has been set out in the plaint or something
purely illusory has been stated with a view to get out of Order 7 Rule 11
C.P.C.
Clever
drafting creating illusions of cause of action are not permitted in law and a
clear right to sue should be shown in the plaint. (See T. Arivandandam vs. T.V.
Satyapal & Another [1977 (4) SCC 467]).
It is
now well settled that the question whether goods were supplied by the appellant
or not is not for the Bank.
This
point has already been decided by the decision of this Court in U.P.
Cooperative Federation case referred to above.
In
that case it was stated (at p. 193) by Jagannatha Shetty, J. as follows:
"The
bank must pay if the documents are in order and the terms of credit are
satisfied. The Bank, however, was not allowed to determine whether the seller
had actually shipped the goods or whether the goods conformed to the
requirements of the contract. Any dispute between the buyer and the seller must
be settled between themselves. The courts, however, carved out an exception to
this rule of absolute independence. The courts held that if there has been
"Fraud in the transaction" the bank could dishonour beneficiary's
demand for payment. The courts have generally permitted dishonour only on the
fraud of the beneficiary, not the fraud of somebody else." It will be
noticed from the underlined portion in the above passage that there will be no
cause of action in favour of the Bank in cases where the seller has not shipped
the goods or where the goods have not conformed to the requirements of the
contract. the Bank, in the present case before us, could not, by merely stating
that there was non- supply of goods by the appellant, use the words "fraud
or misrepresentation" for purposes of coming under the exception. The
dispute as to non-supply of goods was matter between the seller and buyer and
did not, as stated in the above decision, provide any cause of action for the
Bank against the seller.
Learned
counsel for the respondent then relied upon Bank Russo-Iran vs. Gordon Woodroffe
& Co. Ltd. [1972 The Times, 4th Oct] (Reported in (1972) 116 Sol Jo 921)
where Browne, LJ stated as follows:
"In
my judgment, if the documents are presented by the beneficiary himself, and are
forged or fraudulent, the bank is entitled to refuse payment if the bank finds
out before payment, and is entitled to recover the money as paid under a
mistake of fact if it finds out after payment" The above passage was quoted
with approval by Lord Denning M.R. in Edward Owen vs. Barclays Bank
International [1978 (1) All ER 976 (CA) (at 982)].
It is
to be noted that the above passage from the judgment of Browne, LJ speaks of
'forged' or 'fraudulent' documents. If the documents presented by the seller
before the Bank were forged or were fraudulent to the knowledge of the seller,
surely the Bank would have an independent cause of action against the seller
for it was an act of the seller which was responsible for inducing the Bank to
release the funds. But here, in the case before us, there is no question of the
appellant having presented any presented any forged documents or fraudulent
documents.
We
may, illustrate this aspect - relating to fraudulent documents' - by referring
to the well- known case of UCM (Investments) vs. Royal Bank of Canada [1982 (2)
All ER 720 (HL) decided by the House of Lords which has been referred to by
this Court in the U.P.Cooperative Federation case (supra). In that case the
date 15th December,
1976 was falsely and
fraudulently entered on the Bill of Loading as the date on which the goods were
shipped even though the goos were actually shipped on 16th December, 1976 and the Bank which came to know
about this fact refused to pay. The House of Lords held that the bank could
have justifiably refused to pay because the Bill of Loading, which was one of
the documents to be presented before the Bank, was there a fraudulent document.
Having laid down the principle as stated above, the House of Lords however held
on facts that the said false statement on the bill of loading was not made by
the seller but was made by the shipping agent and inasmuch as the sellers were
not responsible, the Bank could not refuse payment. We are referring to this
case only to illustrate what could be a 'fraudulent document' presented before
the Bank by the sellers. We shall also refer a little later to another case in Sztejn
vs. H.Henry Schroder Banking Corporation [(1941) 31 NYS (2d) 631] which is also
a case of presentation of 'fraudulent documents'.
Likewise
in the 'Cement scandal Case' in Establissement Esefka International Anstalt vs.
Central Bank of Nigeria [1979 (1) LLoyds Law Reports 445 (CA)], Lord Denning
pointed out that the shipping documents, the bills of loading, certificates
etc. were there forged and were all "moonshine" and there wee no such
shipping vessels at all. That case is an example of forged documents.
What
is necessary for the Bank to refuse payment is a case of clear
"fraud" and the Banks knowledge as to such fraud (Bolivinter Oil S.A.
vs. Chase Manhattan Bank N.A.) [1984 (1) (1) LLR 392]. As pointed by Lord
Denning and Lord Lane in Edward Owen the Bank cannot
refuse payment merely because according to it the claim was
"dishonest" or "suspicious" or it appeared to be a sharp
practice but it must be established as 'fraud'. Lord Ackner in United Trading
Corporation S.A. & Murray Clayton Ltd. vs. Allied Arab Bank Ltd. &
Others [1985 (2) LLR 554 (CA)] held that the Bank could object to pay not
because the demand was not "honestly" made but was made fraudulently.
Waller, J. in Turkiye vs. Bank of China [1996 (2) LLR 611 (617-618)] said that
the question was whether the demand for payment was "fraudulent".
Mere allegations and counter allegations between the parties as to breach of
contract, non-payment of advances or non-supply of machinery did not amount to
fraud.
In the
result we hold that an allegation of non-supply of goods by the sellers to the
buyers did not by itself amount, in law, to a plea of 'fraud' as understood in
this branch of the law and hence by merely characterising alleged non-movement
of goods as 'fraud', the Bank cannot claim that there was a cause of action
based on fraud or misrepresentation. Nor is the case before us one where thee
is an allegation of presentation of forged or fraudulent documents.
Learned
counsel for the respondent then relied upon the judgment in Discount Records
Ltd. vs. Barclay's bank Ltd.
[1975
(1) All ER 1071]. In that case, Megarry, J. referred to the American case in Sztejn
vs. J. Henry Schroder Banking Corporation [(1941) 31 NYS (2d) 631] decided by
the New York Court of Appeals. In that case Shientag, J. distinguished cases of
breaches of warranty as to quality from cases of deliberate failure to supply
goods and said:
"In
such a situation, where the seller's fraud has been called to the bank's
attention before the drafts and documents have been presented for payment, the
principle of the independence of the bank's obligation under the letter of
credit should not be extended to protect the unscrupulous seller" Megarry,J.
then distinguished the American Case on the ground that "It was important
to notice that in the Sztejn case, the proceedings consisted of a motion to
dismiss the formal complaint on the ground that it disclosed no cause of
action. That being so, the Court had to assume that the facts stated in the
complaint were true".
''fraud'',
the Bank cannot claim that there was a cause of action based on fraud or
misrepresentation. Nor s the case before us one where there is an allegation of
presentation of forged or fraudulent documents.
Learned
counsel for the respondent then relied upon the judgment in Discount Records
Ltd. vs. Barclay's Bank Ltd.
[1975
(1) All ER 1071]. In that case, Megarry, J. referred to the American case in Sztejn
vs. J. Henry Schroder Banking Corporation [(1941) 31 NYS (2d) 631] decided by
the New York Court of Appeals. In that case Shientag,J. distinguished cases of
breaches of warranty as to quality from cases of deliberate failure to supply
goods and said;
"In
such a situation, where the seller's fraud has been called to the bank's
attention before the drafts and documents have been presented for payment the
principle of the independence of the banks' obligation under the letter of
credit should not be extended to protect the unscrupulous seller" Megarry,j.
then distinguished the American Case on the ground that "It was important
to notice that in the Sztejn case, the proceedings consisted of a motion to
dismiss the formal complaint on the ground that it disclosed no cause of
action. That being so, the Court had to assume that the facts stated in the
complaint were true".
Learned
counsel for the respondent Bank contended that the case before us which is
concerned with an application under Order 7 Rule 11(a) CPC for rejecting a
plaint on the basis of "absence of cause of action from a reading of the
plaint" was identical with the Sztejn case and hence what Megarry, J.
stated Discount Records Ltd. directly applies.
It is true,
we are also dealing with a question whether the plaint disclosed a cause of
action. But here the allegation in the plaint is only one relating to absence
of movement of goods by the seller. As pointed in the decided cases and in
particular in the U.P. Cooperative Federation Case and other cases decided by
this Court and also Courts elsewhere, mere absence of movement has never been,
in this branch of law, treated as amounting to fraud, Such non- movement, event
if the allegation is to be treated as true, could be for goods reasons or for
reasons which were not good. But that is not 'fraud'. In Sztejn (See law
relating to commercial credit by A.G. Davis (2nd Ed, 1954) (p160-61 for facts
of this case) the position was different. There the complaint was that the
sellers who were to ship complaint was that the sellers who were to ship
'bristles' deliberately placed 50 cases of material on board a steamship,
procured a bill of loading from a steamship company and obtained customary
invoices. The documents described the goods as bristles as per the letter of
credit.
In
fact, the Indian sellers had filled the 50 crates with 'Cowhair' and other
worthless material and rubbish with intent to simulate genuine merchandise and
so 'defraud' the plaintiff, the buyers - who has instructed the defendants to
issue the letter of credit. The sellers then drew a draft under the letter of
credit to the order of the Chartered bank of India, Australia and China and delivered the draft and the 'fraudulent documents' to
the chartered Bank at Cawnpore for collection on account of the
sellers. The buyer brought the action which succeeded, to restrain the
defendants from paying the draft. The Learned Judge said (p.634):
"It
must be assumed that the seller has intentionally failed to ship any gods
ordered by the buyer. In such a situation, where the seller's fraud has been
called to the bank's attention before the draft and documents have been
presented for payment, the principle of the independence of the bank's
obligation under the letter of credit should not be extended to protect the
unscrupulous seller. It is true that even though the documents are forged or
fraudulent, if the issuing bank has already paid the draft before receiving
notice of the seller's fraud, it will be protected if it exercised reasonable diligence
before making such payment. However, in the instant action Schroder had
received notice of Transea's active fraud before it accepted or paid the draft.
The Chartered Bank, which stands in no better position than Transea, should not
be heard to complain because Schroder is not forced to pay the draft
accompanied by documents covering a transaction which it has reasons to believe
is fraudulent" It will be noticed that Sztejn was a case where 'fraudulent
documents' were presented which simulated shipping of goods which were not only
not shipped but on the other hand the seller shipped some rubbish deliberately.
Therefore
the allegations in the complaint filed by the buyers in that case were based
upon the above facts - which as per the legal position in this branch of law -
i.e. presentation of 'fraudulent document's where goods were deliberately not
shipped and an attempt was made to pass off 'rubbish' as the goods ordered for
- amounted to 'fraud'.
As
stated above non-movement of goods by the seller could be due to a variety of
tenable or untenable reasons, the seller may be in breach of the contract but
that by itself does not permit a plaintiff to use the word ''fraud'' in the
plaint and get over any objections that may be raised by way of filing an
application under Order 7 Rule 11 CPC.
As
pointed out by Krishna Iyer,J. in T.Arivandandam's case, the ritual of
repeating a word or creation of an illusion in the plaint can certainly be unravelled
and exposed by the Court while dealing with an application under Order 7 Rule
11(a). Inasmuch as the mere allegation of drawal of monies without movement of
goods does not amount to a cause of action based on 'fraud', the Bank cannot
take shelter under the words 'fraud' or 'misrepresentation' used in the plaint.
Learned
counsel for the appellant also contended that this was a case where a letter of
credit was without recourse to the invoice value.
For
the aforesaid reasons, we hold that there is no cause of action even from the
plaint allegations, against the appellant. Appeal allowed and the plaint is
rejected under Order 7 Rule 11(a) as against the appellant-5th defendant.
Appeal is allowed accordingly to the extent.
Thee
will be no order as to costs.
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