Supreme Court of India
STATE BANK OF SAURASHTRAversusM/S. ASHIT SHIPPING SERVICES (P.) LTD. AND ANR.
- Citation
- 2002 INSC 192
- Decided
- 12 April 2002
- Disposal
- Disposed off
- Bench
- S S M QUADRI
Holding
Because there is a genuine dispute as to whether the document is a guarantee or an indemnity and fraud is alleged, the bank is entitled to leave to defend; summary procedure under Order 37 cannot be applied to an indemnity bond.
Summary
The State Bank of Saurashtra (appellant) sought leave to defend a summary suit filed by Ashit Shipping Services (respondent No.1) under Order 37 of the CPC, which claimed payment on a bond that the bank alleged was an indemnity, not a guarantee. The bank alleged fraud and collusion involving the respondent and a second respondent, and contended that the bond’s nature required proof of loss, making the summary procedure inapplicable. The trial court and the Gujarat High Court refused leave, holding that no triable issue existed and that the defence was a sham. On appeal, the Supreme Court examined whether a genuine dispute over the document’s character and the fraud allegation created a triable issue warranting leave to defend. It held that Order 37 applies only to guarantees, not indemnity bonds, and that the bank’s contentions raised a real issue that could not be summarily dismissed. Consequently, the Court set aside the lower courts’ orders and granted the bank leave to defend, directing it to file its written statement within eight weeks.
Issues considered
- Whether a claim based on an indemnity bond falls within the ambit of Order 37 CPC and thus can be proceeded with as a summary suit.
- Whether the existence of a dispute over the nature of the document (guarantee vs indemnity) and allegations of fraud constitute a triable issue deserving leave to defend.
- Whether the trial court erred in treating the bank's defence as a sham or illusory.
- Whether leave to defend can be denied when the plaintiff seeks recovery of a sum without proof of loss under an indemnity.
Legislation cited
- Code of Civil Procedure, 1908s. Order 37 Rule 1 (sub‑rule (2)(iii))
Subjects
summary suitOrder 37 CPCleave to defendindemnity bondbank guaranteefraud allegationtriable issuecivil procedure
Judgment
A STATE BANK OF SAURASHTRA
v.
·-
MIS. ASHIT SHIPPING SERVICES (P.) LTD. AND ANR.
APRIL 12, 2002
B [SYED SHAH MOHAMMED QUADRI AND S.N. VARIA VA, JJ.]
Code ofCivil Procedure, 1908-0rder 37 Rule I-Summary Procedure- ....
~
Leave to defend-Grant of-On facts, summary suit filed-Application for
leave to defend-Courts below refusing to grant leave to defend-Whether
c document is indemnity or guarantee not clear-Document appears to be
indemnity bond for which loss has to be proved first thus summary procedure
cannot be applied-Also\j document is, held to be guarantee it is only on
proof of loss-There is also an allegation offraud, leave to defend could not
have been refused
D
Certain goods were shipped on a vessel, for which respondent No. 1 is
an agent Respondent No. 2 sent a bond to respondent No.1 indemnifying them
and requesting delivery of goods for which bill of lading was to be delivered.
On the bond, Manager of the appellant-Bank affixed his stamp and signed it
-
stating that it joined in the indemnity. Thereafter Respondent No. 2 took
E delivery of the cargo but did not deliver the discharged bill of lading.
Respondent No. 1 then wrote to appellant-Bank terming the document as
indemnity/guarantee and that if bill of lading is not delivered would invoke
the indemnity/guarantee. Respondent No. 1 filed summary suit Appellant- --r--
Bank filed application for leave to defend. Appellant-Bank alleged commission
of fraud by respondent No.1 in collusion with respondent No. 2. and their
F
Manager. Appellant Bank had also set out in their application for leave to
defend, that the documents submitted to the Negotiating Bank had not been
negotiated as there were discrepancies in these documents. Respondent No. 1
did not file any rejoinder. Hence there was no denial of these averments. Trial
Court refused leave to defend. Revision Petition was also dismissed. Hence
G the present appeal.
Disposing of the appeal, the Court
----
HELD: 1.1. Appellants had set out in their application for leave to
defend that the documents submitted to the negotiating Bank were not
H 1074
STATE BANK OF SAURASHTRA I' ASHIT SHIPPING SERVICES (P.) LTD 1075
negotiated as there were discrepancies in those documents. To this averment A
there was no reply or denial by respondent No. 1. Appellants have made
serious allegations of fraud and collusion. They had stated that such, a
document did not exist in their records. This was not a defence which could
be characterised, at this stage, as sham or illusory or practically moonshine.
These triable issues should not have been summarily rejected by the trial court B
and/or the High Court. (1081-C-DI
1.2. In the instant case, there is a dispute as to whether the document is
-- a guarantee or merely an indemnity. Respondent No. 1 termed the document
to be an indemnity guarantee. Appellants denied that the document was a
Guarantee. On the face of it the document appears to be an indemnity and C
not a guarantee. The Court was, therefore, required to consider the nature
and meaning of the document which by itself necessitated granting of leave
to defend. [1080-H; 1081-A]
1.3. Primafacie the document appears to be an indemnity bond. Under
' sub-rule (2)(iii) of Rule (1) of Order 37 CPC a claim could be made on the D
basis ofa guarantee. Significantly Order 37 CPC does not provide for a claim
·~ based on an indemnity bond. In cases of claims on indemnity bonds the loss
would first have to be proved. Thus a summary procedure cannot be adopted
in such cases. [1082-D)
E
1.4. In the instant case, it is not clear whether the document is an
indemnity or a guarantee. Even if the document is held to be a guarantee it
is only on proof of loss. However, in the instant case there is an allegation of
~ fraud. Thus leave to defend could not have been refused to the appellant-Bank.
However, leave to defend is not granted to respondent No. 2 since he is not
before this Court. (1082-F, G; 1083-B) F
Mecha/ec Engineers and Manufactures v. Basis Equipment Corporation,
AIR (1977) SC 577; Raj Duggal v. Ramesh Kumar Bansal, AIR (1990) SC page
2218 and Kam/esh Kohli v. Escortrac Finance and Investment Ltd, [2000] l SCC
324, referred to.
G
Oil and Natural Gas Corpn. Ltd v. SB!. Overseas Branch, (2000) 6 SCC
385, distinguished.
CIVIL APPELLATE JURISDICTION Civil Appeal No. 2662 of
2002. H
1076 SUPREME COURT REPORTS [2002] 2 S.C.R.
A From the Judgment and Order dated 18.4.2001 of the Gujarat High
Court in C.R.A. No. 1954 of 1996. --
K.N. Rawal, Additional Solicitor General, Sanjay Kapur and Shubhra
Kapur for the Appellant.
B P. Chidambaram and Ms. B. Vijaya Lakshmi Menon for the
Respondents.
The Judgment of the Court was delivered by
S.N. VARIAVA., J. (I) Leave granted.
c
(2) Heard parties.
(3) Briefly· stated the facts are as follows:
The lst Respondent is working as an agent for one Mis Palm Oil Transportation ~
D pvt. Ltd., Clo Mis Samta Shiping Agency P. Ltd., Singapore for their vessel~
MY Hee Ann which arrived at Kandla port on 20th June, 1995. The said ship
was carrying logs of timber consigned to various parties under the following
documents:
"(a) Bills of lading No. HAl9504147 to 49 dated 30.5.95.
(b) Invoice Nos VB 95003 dated 30.5.95 for US$ 10,566.43
-do- Nos. VB 950031Int of -do- for US$ 312.65
-do- Nos. VB 95002 of -do- for US$ 5,049.23
F -do- Nos. VB 950021Int of -do- for US$ 148.81
-do- Nos. VB 95001 of -do- for US$ 44,539.65
-do- Nos. VB 9500Illnt of -do- for US$ 1,317.89
$ 61,914.66"
G
It appears.that the 2nd Respondent sent to the 1st Respondent a Bond which,
inter alia, provided as follows:
"The above goods were shipped on the above vessel by Mis. Matsui
and company (Hong Kong) Limited Hong Kong 59 pieces (and consign
H to the order) but relevant bills of lading has not yet arrived.
ST ATE BANK OF SAURASHTRA ~ ASHIT SHIPPING SERVICES (P) LTD. [S.N VARIAVA, J.] } 077
We hereby request you to deliver such goods to Mis. (Vasani Bros) A
Bhavnagar in accordance with our request.
I. To indemnify you and held harmless in respect of any liability loss
or damage or whatsoever nature which you may sustain by reason of
delivering the goods of Mis. Vasani Brothers, Bhavnagar in accordance
with our request. B
2. To pay you on demand the amount of any loss on which the
Master I agent of the vessel or any other of your services or agents
whatsoever may incur as a result of delivering the goods aforesaid.
--- _.)
xxx xxx xxx c
6. To produce and deliver to you the Bills of lading for the above
goods duly endorsed as such as documents shall have arrived.
xxx xxx xxx
On the said Bond the following notation appears with the stamp of the D
Appellant Bank and the signature of their Manager:
"We the undersigned hereby join in the above indemnity and jointly
and severally guarantee due performance of the above contract and
accept all the formalities expressed therein.
E
Sci/-
Stamp and Signature of Bank."
.y 4. The !st Respondent claim that on the basis of this Bond they
issued a Delivery Memo dated 14th June, 1995 to the 2nd Respondent.
2nd Respondent thereafter took delivery of the cargo. It further appears F
that the 2nd Respondent never delivered to the !st Respondent the
duly discharged bills of lading.
- 5. The !st Respondent therefore wrote a letter dated 31st August,
1995 to the Appellants, terming the document as an indemnify
guarantee. The !st Respondent stated, in the latter, that if the bills of
lading were not delivered they would invoke the guarantee. The
G
...
--~
Appellant replied to the said letter by the letter dated 16th September,
1995 and asked for copy of the Bond and delivery Orders. Further
correspondence thereafter took place between the parties. The 1st
Respondent then filed a summary Suit under Order 37 of the Code of H ..
1078 SUPREME COURT REPORTS [2002] 2 S.C.R.
A Civil Procedure. They claimed a sum of Rs. 21,08,813.32 with interest
of Rs. 1,62,450.02 upto filing of the suit and further interest from
---
date of Suit till payment.
6. The Appellants and the 2nd Respondent filed applications for leave
to defend. The 2nd Respondent has not come up in Appeal to this
B Court. We are thus only concerned with the application for leave to
defend filed by the Appellants.
7. In the application for leave to defend the Appellant, inter alia,
contended that the suit was for recovery of the price of the goods and
the interest on the said amount. They contended that the Court at
c Gandhidham had no jurisdiction. They also contended that the
document was an indemnity bond and the lst Respondent should thus
prove that they had suffered a loss. They pointed out that in the Plaint
the 1st Respondent had not averred that they had suffered any loss or
damage. It was, inter alia, averred as follows:
D "In this connection it is submitted that the so called and alleged bond i
iS not Bank Guarantee or Guarantee Bond and it is only Indemnity
Bond. The said Bond purported to have been signed by the defendant
No. 2 in favour of the plaintiff and countersigned by the Manager of
-
the defendant No. I of Bhavnagar Station Branch which is in flagrant
E violation of the Bank's Procedure as it was never entered in the
Bank's record nor Controller's permission or sanction was obtained.
It is submitted that the Branch Manager has exceeded his powers and
alleged indemnity bond is not binding on the defendant No. 1. It
therefore leads to the suspicion that the same is fraudulently obtained
by the plaintiff in collusion with the defendant No. 2 and also with
F assistance of the then Branch Manager of the said Branch.
xxx xxx. xxx
G
Without prejudice to the averments made hereinbefore and hereinafter
and making no admission of what so ever nature it is submitted that
the Bhavnagar (main) Branch had received an inquiry from the
-
negotiating Bank about certain discrepancies noticed in the Bank
documents submitted by the beneficiary Mis. Mstui & Co., and
therefore, they sought the confirmation of the said Branch whether
...
the bill with those discrepancies could be negotiated. As this defendant/
H opener of the I/C was not accepting the discrepancies, the said-.
STATE BANK OF SAURASHTRA v ASH IT SHIPPING SERVICES (P_) LTD. [S.N_ VARIAVA, J_J l Q79
-- negotiating Bank was advised not to negotiate the bills under the Li
C. Thought the L/C was established by the defendant No. 1 the
A
negotiating Bank was advised not to negotiate the documents.
Therefore, there is no liability arises of this defendant of whatsoever
nature."
Thus it is to be seen that the Appellant had, amongst other contentions, B
averred that a fraud had been made on them by the 1st Respondent in collusion
with the 2nd Respondent and their Manager. They also averred that they had
-- refused to negotiate L/C as there were discrepancies. No rejoinder was filed
by the !st Respondent. Thus there was no denial of these averrnents.
8. The trial Court by an Order dated 30th October, 1996 refused leave
c
to defend. The trial court held that the Appellant had not raised any triable
issue. It, inter alia, held as follows:
"that facts clearly show that bank has categorically given a guarantee
and so no triable issue is arising, and therefore, provisions of Order D
37 of CPC specifically applies to the suit of the plaintiff and these
facts are supported by the decision reported in AIR 1990 Patna Page-
221. Further, it is not the say of the Defendant that the plaintiff has
committed fraud and for that reason it cannot also stop the payment
under the Bank Guarantee and that this fact has also been denied by
Defendant No. 2 and has stated that the plaintiff has not colluded E
with Defendant No. 2 and as only on the imaginary facts, it cannot
be said that the fraud has been committed."
9. Both the Appellants and the 2nd Respondent then filed Revisions
before the High Court of Gujarat at Ahmedabad. Both tho• t{evisions came F
to be dismissed by the impugned Order dated 18th April, 2002. The High
Court also held that no triable issue had been raised. The High Court held
that the defence sought to be raised "'!_as "nothing but a sham".
- IO. The law on the subject is well settled. In the case of Mechalec
Engineers & Manufacturers v. Basis Equipment Corporation reported in AIR
( 1977) SC 577, it has been held that the question of granting leave to defence
G
has to be considered in the light of following principles:
-· (a) If the defendant satisfies the Court that he has a good defence to
the claim on its merits the plaintiff is not entitled to leave to sign
judgment and the defendant is entitled to unconditional leave to defend. H
1080 SUPREME COURT REPORTS [2002] 2 S.C.R.
A (b) If the defendant raised a triable issue indicating that he has a fair
or bona fide or reasonable defence although not a positively good
defence the plaintiff is not entitled to sign judgment and the defendant
--..
t
is entitled to unconditional leave to defend.
( c) If the defendant discloses such facts as may be deemed sufficient
B to entitle him to defend, that is to say, although the affidavit does not
positively and immediately make it clear that he has a defence, yet,
shows such a state of facts as leads to the inference that at the trial
of the action he may be able to establish a defence to the plaintiff's
claim the plaintiff is not entitled to judgment and the defendant is
c entitled to leave to defend but in such a case the Court may in its
discretion impose conditions as to the time or mode of trial but not
as to payment into Court or furnishing security.
( d) If the defendant has no defence or the defence set up is illusory
or sham or practically moonshine then ordinarily the plaintiff is entitled
D to leave to sign judgment and the defendant is not entitled to leave
to defend.
(e) If the defendant has no defence or the defence is illusory or sham '
or practically moonshine then although ordinarily the plaintiff is
-...,
entitled to leave to sign judgment, the Court may protect the plaintiff
E, by only allowing the defence to proceed if the amount claimed is
paid into Court or otherwise secured and give leave to the defendant
on such condition, and thereby show mercy to the defendant by
enabling him to try to prove a defence.
11. In the case of Raj Duggal v. Ramesh Kumar Bansal reported in AIR
F (1990) SC page 2218, it has been held that leave to defend must be declined
where the Court is of the opinion that grant of leave would merely enable the
defendant to prolong the litigation by raising untenable and frivolous defences.
It has been held that the test is to see whether the defence raises a real issue
and not a sham one. It has been held that when there is a plausible defence
G leave to defend must be granted. It has been held that if there is a dispute as
to the meaning of a document or uncertainty as to the amount actually due
or the facts are of such a nature as to entitle the defendant to interrogate the
plaintiff or to cross-examine his witness leave should not be denied.
·--
12. In this case, as already set out hereinabove, there is a dispute as to
_ H whether the document is a guarantee or merely an Indemnity. The 1st
STATE BANK OF SAURASHTR.A 1• ASHIT SHI PPING SERVICES (P )lTD. [S.N VARIAVA , J] j 081
Respondent tenned the document to be an indemnity/guarantee. The Appellants A
denied that the document was a Guarantee. On the face of it the document
appears to be an Indemnity and not a Guarantee. The Court was therefore
required to consider the nature and meaning of the document. This by itself
necessitated granting of leave to defend.
13. Further this is a document given by the 2nd Respondent to the 1st B
Respondent On this document, contrary to the nonnal practice, the Manager
of the Appellant Bank has merely affixed the stamp of the Appellants and
signed under a paragraph which states that they had joined in the indemnity.
The Appellants had also set out in their application for leave to defend that
the documents submitted to the negotiating Bank were not negotiated as there· C
were discrepancies in those documents. To this averment there was no reply
or denial by the I st Respondent. The Appellants have made serious allegations
·of fraud and collusion. They had stated that such a document did not exist
in their records. This was not a defence which could be characterised, at this
stage, as sham or illusory or practically moonshine. These triable issues should
not have been summarily rejected by the trial court and/or the High Court. D
14. As stated above, prima facie, the document appears to be_ an
Indemnity Bond. In cases of Indemnities the question of making good the
loss arises only when there is proof that loss is suffered. rn this behalf the
wording of Order 37 are relevant. Rule I of Order 37 reads as follows:
E
"1. Courts and classes of suits to which the Order is to apply.- (1)
This order shall apply to the following Courts, namely:-
(a) High Courts, City Civil Courts and Courts of Small Causes;
and
F
(b) Other Courts:
Provided that in respect of the Courts referred to in clause (b) ,
the High Court may, by notification in the Official Gazette restrict
the operation of this Order only to such categories of suits as it deems
proper, and may also, from time to time, as the circumstances of the G
case may require, by subsequent notification in the Official Gazette,
further restrict, enlarge or vary, the categories of suits to be brought
under the operation of this Order as it deems proper.
(2) Subject to the provisions of sub-rule (I) , the Order applies to the
following classes of suits, namely:- · H
1082 SUPREME COURT REPORTS [2002) 2 S.C.R.
A (a) suits upon bill of exchange, hundies and promissory notes;
(b) suits in which the plaintiff seeks only to recover a debt or
liquidated demand in money payable by the defendant, with or
without interest, arising,-
(i) on a written contract; or
B
(ii) on an enactment, where the sum sought to be recovered is
a fixed sum of money or in the nature of a debt other than
an penalty; or
(iii) on a guarantee, where the claim against the principal is in
c respect of a debt or liquidated demand only."
It is to be seen that under sub-rule (2) (iii) of Rule (I) of Order 37 a
claim could be made on the basis of a guarantee. Significantly Order 37 CPC
does not provide for a claim based on an Indemnity Bond. The reason is
D obvious. In cases of claims on Indemnity Bonds the loss would first have to
be proved. Thus a summary procedure cannot be adopted in such cases.
15. Mr. Chidambaram relied upon the case of Oil & Natural Gas Corpn.
Ltd v. SBJ, Overseas Branch reported in (2000] 6 SCC 385 . In this case the
question was whether leave to defend could have been granted in a summary
E suit based on an unconditional bank guarantee. This Court held that such
bank guarantees must be honoured unless fraud had been played. This Court
held that in the absence of any fraud leave to defend should not be 'granted
in cases of unconditional bank guarantees. There can be no dispute with the
above proposition. However, this decision is based on the Jaw regarding
unconditional bank guarantees. Courts have consistently held that unconditional
F bank guarantees must be honoured by the banks. In the present case, it is not
clear whether the document is an indemnity or a guarantee. In any event,
there is no unconditional bank guarantee. Even if the document is held to be
a guarantee it is only on proof of loss. Also in this case fraud has been
alleged. Thus the authority is of no assistance to the 1st Respondent.
G 16. In our view, for the aforesaid reasons, leave to defend could not
have been refused to the Appellants. We therefore set aside the impugned
Judgment dated 18th April, 200 l and the trial court Order dated 30th October,
1996 and grant the Appellants leave to defend the suit. They shall file their
written statement within a period of 8 weeks from today. The parties are at
H liberty to disclose documents within 4 weeks thereafter. The parties are at
STATE BANK OF SAURASHTRA v ASHIT SHIPP ING SER VICES (P ) L TO. [S.N . VARIAVA, J. j } Q8J
l\berty to apply to the trial court for expeditious hearing of the suit. A
17. Mr. Chidambaram also relied upon the authority in the case of
Kamlesh Kohli v. Escortrac Finance & Investment ltd., reported in (2000)
I SCC 324. In this case it has been held that leave to defend could be granted
to one of the defendants and not the others. It was held that the Court was
not obliged to grant leave to defend to other defendants merely because leave B
to defend is granted to one of the defendants. We clarify that the leave to
defend has been granted only to the Appellants. The 2nd Respondent is not
before this Court. We have not considered the case of the 2nd Respondent.
Merely because leave to defend is granted to the Appellant does not necessarily
mean that the 2nd Respondent is also to be entitled as of right to leave to C
defend. We also clarify that all observations made herein are primafacie and
that they shall not be taken into account at the final hearing of the Suit.
18. The Appeal stands disposed of accordingly. There shall be no order
as to costs.
D
N.J. Appeal disposed of.
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