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PETITIONER:

I.T.C. LIMITED

Vs.

RESPONDENT:

THE DEBTS RECOVERY APPELLATE TRIBUNAL & ORS.

DATE OF JUDGMENT: 19/12/1997

BENCH:

SUHAS C. SEN, M. JAGANNADHA RAO.

ACT:

HEADNOTE:

JUDGMENT:

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

J U D G M E N T

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:-

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"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

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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

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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

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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

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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

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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

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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

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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

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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.