Holding

A plaint may be rejected under Order 7 Rule 11 CPC at any stage of the suit, and an allegation of non‑supply of goods does not constitute fraud, so no cause of action exists against the seller.

Summary

The bank had issued letters of credit to the appellant (seller) for buyers, and the appellant drew funds despite alleged non‑shipment of cigarettes. The bank sued the buyers and the appellant for recovery of Rs 52,59,639.66. The appellant moved to reject the plaint under Order 7 Rule 11 CPC, claiming no cause of action. The Debt Recovery Tribunal, the Appellate Tribunal, and the Karnataka High Court all rejected the application, but the Supreme Court allowed the appeal. The Court held that the power to reject a plaint under Order 7 Rule 11 can be exercised at any stage, even after issues are framed and evidence is posted. It further held that an allegation of non‑supply of goods does not amount to fraud or misrepresentation under banking law, and absent forged or fraudulent documents the bank has no independent cause of action against the seller. Consequently, the plaint was rejected as against the appellant.

Issues considered

The applicability of Order 7 Rule 11 CPC after issues are framed and the case is posted for evidence.
Whether the plaint discloses a cause of action against the seller when the only allegation is non‑supply of goods under a letter of credit.
Whether the bank can rely on alleged fraud or misrepresentation without proof of forged or fraudulent documents.

Legislation cited

Code of Civil Procedure, 1908s. Order 7 Rule 11

Subjects

Order 7 Rule 11cause of actionbank guaranteeletter of creditfraudnon‑supply of goodsindependent contractrejection of plaintcivil procedurebanking law

Judgment

l.T.C. LIMITED A
v.
. DEBTS RECOVERY APPELLATE TRIBUNAL

DECEMBER 19, 1997

(SUHAS C. SEN AND M. JAGANNADHA RAO, JJ.) B

Code of Civil Procedure 1908-0rder 7 Rule I I-Rejection of
Plaint-Held, court entitled to reject plaint under Order 7 R 11 at any stage
of the suit even if the issues were framed and the matter was posted for
evidence. C

BANKING : Bank guarantee and letters of credit-Payment by Bank
to the seller-Allegation by the bank that seller had drawn monies from the
bank against the letter of credit without movement of goods to the buyer and
therefore acted fraudulently-Suit for Recovery--Cause of action-Held, the
dispute as to non-supply of goods was a matter between the seller and the D
buyer and did not provide any cause of action for the bank against the
seller-Fwther, the Bank would have an independent cause of action against
the seller only if the documents presented by the seller were forged or
fraudulent to the knowledge of the selle1---Clever drafting r:reating illusions of
cause of action are not pem1itted in law and a clear 1ight to sue should be E
shown in the plaint.

Fraud-Plea of-Payment of amounts covered by Bank Guarantees or
letters of Credit-Held; bank has to honour the Bank Guarantee or the letters
of credit subject to cases of two exceptions, namely, where there was fraud or
in-etrievable injwy--An allegation of non-supply of goods by the sellers to the F
buyers did not by itself amount, in law, to a plea of "Fraud" as understood
under Banking Law-No fraud or misrepresentation as it was 1wt a case of
· presentation of forged or fraudulent documents.

Respondents 4 to 7, the buyers, approached respondent no. 3 Bank
for the issue of letter of credit in favour of the appellant company; the G
seller, for the purpose of securing the payment towards supply of cigarettes
manufactured by the appellant and for certain other facilities. The Bank
sanctioned letter of credit facility which was renewed from time to time.
The appellant availed the benefits of drawing various sums of several
dates. The buyer refused to make good the payment made by the Bank to H
683
684 SUPREME COURT REPORTS [1997) SUPP. 6 S.C.R.

A the appellant to the extent of the money already paid by the Bank to the
appellant under the Letters of Credit. The Bank demanded reimbursement
of the said amounts by the buyers to which demand the buyers put off by
replying that the appellant seller was not entitled to draw any amount
under the LC facility from the Bank as there was no movement of the goods
by the appellants.
B
The Bank instituted a suit for recovery of Rs. 52,59,639.66 against
the buyers and the appellants which was transferred to the Debt Recovery
Tribunal from the Civil Court. The appellant filed an application under
Order 7 Rule 11 CPC for rejecting the plaint so far as the appellant was
C concerned on the ground that no valid cause of action had been shown
against the appellant. The said application was rejected by the Tribunal
against which the appellant filed an appeal before the Appellate Tribunal
which was again dismissed. The appellant then filed a writ petition in the
High Court which was dismissed. Against this, the appellant filed a writ
appeal which was also dismissed. Aggrieved, the appellant preferred this
D appeal.

On 'behalf of the appellant it was contended that the court was
entitled to reject the plaint under Order 7 Rule 11 CPC at any stage of the
suit even if the issues were framed and the matter posted for evidence. It
E was also contended that in regard to payment under the Bank Guarantees
or the irrevocable Letters of Credit, the contract between the appellant
seller and the Bank was independent of contract between the buyers and
the sellers in res1iect of the goods. 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.
F
On behalf of the respondent Bank it was 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 considera-
G tion. -
Allowing the appeal, this Court

HELD : 1. The fact that issues have been· framed in the suit cannot
come in the way of consideration of the application filed by the appellant
H under Order 7 Rule 11 C.P.C. The power to reject the plaint under Order
1.T.C. LTD. v. DEBTS. RECOVERY APPELLATE TRIBUNAL 685

7 Rule 11 C.P.C. can be exercised even after the framing of issues, and A
when the matter is posted for evidence. [691-C]

Azhar Hussain v. Rajiv Gandhi, [1986]1 Suppl. SCC 315 and Samar
Singh v. Kedar Nath, [1987] Suppl. SCC 663, relied on.

2.1. There will be no cause of action in favour of the Bank in cases B
where the seller has not shipped the goods or where the goods have not
conformed to the requirements of the contract. The question whether
goods were supplied by the appellant or not is not for the Bank to decide.
The Bank, in the present case, could not, by merely stating that there was
non supply of goods by the appellant, use the words "fraud or misrepresen-
tation" for purposes of coming under the exception. The dispute as to non-
c
supply of goods was a matter between the seller and buyer and did not,
provide any cause of action for the bank against the seller. [693-A-B]

U.P. Co. operative Federalion Ltd. v. Singh Consultants & Enginee1:1,
[1988) 1 sec 174, relied on. D
Bank Rousseau Iran v. Gordon Woodroffe & Co. Ltd. [1972] 116 Sol.
Jo 921; Edward Owen v. Barclays Bank Intemational, [1978) 1 All E R 976
CA; UCM (Investments) v. Royal Bank of Canada, [1982) 2 All ER 720 HL;
Etablissement Esefka Intemational Anstalt v. Celltral Bank of Nige1ia, [1979)
l Lloyds law reports 445 (CA); Bolivinler Oil S.A. v. Chase Manhattan Bank E
NA., [1984) 1 LLR 392; United Trading Cmporation SA. & Mwrny Clayton
Ltd. Allied Arab Bank Ltd. & 01:1., [1985] 2 LLR 554 and Twkiye v. Bank
of China, [1996) 2 LLR 611, referred Jo.

2.2. If the documents presented by the seller before the Bank were
forged or were fraudulent to the knowledge of the seller, surely the Bank F
wonld 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, in the instant case, there is no question of the appellant having
presented any forged documents or fraudulent documents. [693-F]
G
United Commercial Bank v.Hanwnan Synthetics Ltd., AIR (1985) Cal.
96, relied on.

Sztejan v. J. Hemy Schroder Banking Cmporation, [1941) 31 NYS (2d)
631 and Discount Records Ltd. v. Barclay's Bank Ltd., [1975) All ER 1071,
referred to. H
686 SUPREME COURT REPORTS (1997) SUPP. 6 S.C.R.

A 3.1. An allegation of non-supply of the goods by the sellers to the
buyers did not by itself amount, in law, to a plea of 'fraud' as understood
in Banking 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 present case one where
there is an allegation of presentation of forged or fraudulent documents.
B [694-H; 695-A)

3.2. Non· movement of goods by the seller could due to a variety of
tenable or untenable reasons but that by itself does not permit a plaintill'
to use the word 'fraud' in the plaint and get over any objections that may
be raised by way of filing an application under qrder 7 Rule 11 C.P.C. The
c 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 ll(a). In as much as the mere allegation
of drawal of monies without movement of goods does not amount to cause
of action based on 'fraud', the Bank cannot take shelter under the words
D 'fraud' or 'misrepresentation' used in the plaint. Even on the basis of the
allegations in the plaint there is no cause of action against the appellant.
[697-C)
T. Alivandandam v. V. Satyapal & Anr., [1977) 4 SCC 467, relied on.

E CIVIL APPELLATE JURISDICTION: Civil Appeal No. 8864 of
1997.

From the Judgment and Order dated 14.8.97 of the Karnataka High
Court in W.A. No. 2876 of 1997. ..,

F Soli J. Sorabjee, S. Ganesh, Ravinder Narain, Ms. Punitta and Ms.
Juhi for M/s. J.B.D. & Co. for the Appellant.

M..J.S. Rupal, U.A. Rana, Sudhanshu Tripathi, for M/s. Fox Manda!
& Co. and S.N. Bhat for the Respondents.

G The Judgment of the Court was delivered by

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.
H The Writ Appeal was filed against the _judgment of the learned Single
' !.T.C. LID.'· DEBTS. RECOVERY APPELLATE TRIBUNAL [M. JAGANNADHA RAO, j_) 687

Judge dated 9.4.1997 dismissing the Writ Petition filed by the appellant A
against the orders of the Debt Recovery 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 B
Bangalore. The suit was filed in the year 1985 by the said Bank against
defendants 1 to 4 belonging to Tadikonda family residing at Guntur in
Andhra Pradesh and against the appellant l.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 2nd respondent
c
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 D
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 E
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 F
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 G
was dismissed in limine.

The appellant filed Writ Petition 8564/1997 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 H
688 SUPREME COURT REPORTS (1997) SUPP. 6 S.C.R.

A 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 disdose 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
B
application filed under Order 7 Rule 11, C.P.C.

We 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
C 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
D 12.1.1980 in favour of the appellant for Rs. 32 lacs available against demand
bi,lls 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
E 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 1/83 in
favour of the appellant for Rs. 18 lacs against demand bills of the appellant
on the buyers at sight "without recow:ie" for the full invoice value of the
F goods purporting to be 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.

G The plaint then states that the appellant availed the benefits of
drawing various sums on several dates pwp01ting to be for despatch of goods
(Cigarettes) by the appellant to the buyers (defendants 1 to 4) and that was
how the appellant appropriated the amounts drawn as against goods
purportedly despatched by the appellant to the buyers. It stated in para 6
H of the plaint, that "the 5th defendant misrepresented to the plaintiff that the
-.
l.T.C. LID. v. DEBTS. RECOVERY APPELLATE 1RIBUNAL (M. JAGANNADHA RAO. J.J 689

goods were despatched while presenting the relevant demand bills for A
negotiation under L.C. and fraudulently obtained payments." After refer-
ring 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
B
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 C
Cigarettes on l.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 D
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 then stated that the
appellant had appropriated the monies from the Bank under the guise of E
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 lo the effect that the bills were drawn by the appellant and money
appropriated towards the trading balance dues of the buyers. The plaint then F
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 G
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 111i.1·1aken assumption that the 5th defcn- H
690 SUPREME COURT REPORTS (1997) SUPP. 6 S.C.R.

A dant had despatched the cigarettes which entitled the 5th defendant
to the payments under the Letters of credit. The plaintiff dis-
covered the mistake when it received the letter of the first defen-
dant 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
B
plaintiff will entitled to be repaid of the said amounts by the 5th
defendant. The 5th defendant has unjustly enriched itself by the
sever<tl payments."

In para 14 of the plaint again there is an allegation that the appellant
C 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
D 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
E 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 ~ad no
authority to refuse payment on the ground of any alleged breach of contract
F 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 buyer could seek an 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
G 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
H misrepresentation were used in the plaint, the Bank could not claim that
l.T.C. LTD.'· DEBTS. RECOVERY APPELLATE TRIBUNAL [M. JAGANNADHA RAO. J.) 691

the said allegations have to be accepted as true for purposes of Order 7 A
Rule 11 C.P.C.

On the other hand, learned counsel for the respondent-Bank sub-
mitted that in view of the averments in the plaint relating to misrepresen-
tation 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 B
up for consideration and it was not permissible for the court to refer to
any other material for the purpose of deciding whether there was any cause
of action against the appellant.

The first point here is whether the power to reject the plaint under C
Order 7 Ruic 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 "Yhile
dismissing the appeal.

We may state that m the context of Order 7 Rule 11 C.P.C., a D
contention that once issues have been framed, the matter has necessarily
to go to trial Iias been clearly rejected by this Court in Azhar Hussain v.
Rajiv Gandhi, [1986] Supp. SCC 315 (p.324) as follows :

"In substance, the argument is that the Court must proceed with
E
the trial, record the evidence, and only after the trial... .. is con-
cluded 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 F
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 Singh v. Kedar Nath,
[1987] Supp. SCC 663. We therefore hold that the fact that issues have been
G
framed in the suit cannot come in the way of consideration of this applica-
tion 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 H
692 SUPREME COURT REPORTS [1997) SUPP. 6 S.C.R.

A bank, of the amounts already paid under the irrevocable Letters of Credit.
The principles regarding the payment of amounts 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. v. Singh
B Consultants & Engi11ee1:~, (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 v. Hanwnan Synthetics Ltd., AIR (1985) Cal.
96 (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
C Letter of Credit subject of course to the cases 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 stat_ed to be the cause of action in the plaint.

Question is whether a real cause of action has been set out in the
D 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. A1ivandandam v. V. Satyapal & Another, [1977) 4 SCC
467.
E
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. Coorperative Federation case
referred to above. In that case it was stated (at p.193) by Jagannatha Shetty,
J. as follows :
F
''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 conjonned to the requirements of the contract.
Any dispute between the buyer and the seller must be settled
G 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 per-
mitted di~honour only on the fraud of the beneficiary, not the fraud
H of somebody else."
I.T.C. LTD. v. DEBT>. RECOVERY APPELLATE TRIBUNAL [M.JAGANNADHA RAO.J.) 693

It will be noticed from the underlined portion in the above passage that A
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 a
B
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 v. Gordon Woodroffe & Co. Ltd., [1972 The Times, 4th Oct.! C
[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 D
after payment".

The above passage was quoted with approval by Lord Denning M.R. in
Edward Owen v. Barclays Bank Intemational, [1978] 1 All ER 976 (CA) (at
982).
E
It is to be noted that the above passage from the judgment of
Browne, LI 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 F
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
forged documents or fraudulent documents.

We may, illustrate this aspect - relating to 'fraudulent documents' -
by referring to the well-known case of UCM (Investments) v. Royal Bank G
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 goods were actually shipped on 16th H
694 SUPREME COURT REPORTS [1997] SUPP. 6 S.C.R.

A 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 lo 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
B 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
C also refer a little later to another case in Sztejn v. J. Hemy Schroder Banking
Cmporution, [1941] 31 NYS (2d) 631 which is also a case of presentation
of 'fraudulent documents'.

D
Likewise in the 'Cement Scandal Case' in Etablissement Esejka
Intemational Anstalt v. Centrul Bank of Nige1ia, [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 were no such shipping vessels at all. That case is an
example of forged documents.

E 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. v.
Chase Manlwttan Bank N.A., [19841 I LL~ 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
F · it appeared to be a sharp practice but it must be established as 'fraud'.
Lord Ackner in United Trading Cmporation SA. & Mwrny Clayton Ltd. v.
Allied Arab Bank Ltd. & Others, [198512 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 Twkiye v. Bank of China, [1996] 2 LLR
611 (617-618) said that the question was whether the demand for payment
G 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
H sellers to the buyers did not by itself amount, in law, to a plea of 'fraud' as
l.T.C. LTD.>. DEBTS. RECOVERY APPELLATE TRIBUNAL (M. JAGANNADHARAO, J.] 695

understood in this branch of the law and hence by merely characterising A
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 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. v. Barclay's Bank Ltd., [1975] 1 All ER 1071. In
that case, Megarry, J. referred to the American case in Sztejn v. J. Hemy
B

Schroder Banking C01poratio11, .[1941] 31 NYS (2d) 631 decided by the New
York Court of Appeals. In that case Shientag, J. distinguished cases of
breaches of waroo.nty as to quality from cases of deliberate failure to supply C
goods and said :

"In such a situation, where the sellers' 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 D
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
E
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 tme".

Learned counsel for the respondent Bank contended that the case
before us which is concerned with an application under Order 7 Rule ll(a) F
CPC for rejecting a plaint on the basis of "absence of cause of action from
a reading of the plailli" was identical with the Sztejn case and hence what
Megarry, J. stated in 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 G
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, even if the allegation is to be H
696 SUPREME COURT REPORTS (1997] SUPP. 6 S.C.R.

A treated as true, could be for good 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) (p.160-161 for facts of this case) the
position was different. There the 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
B
obtained customary invoices. The documents desCJibed the goods as b1istles
as per the letter of credit. It 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 had instructed the defendants lo issue the letter of credit. The sellers
C then drew a draft under the letter of credit to the ordel# of the Chartered
Bank of India, Australia and China and delivered the draft and the
'fraudulent documents' to the Chartered Bank at Cawnporc 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
D (p.634):

"It must be assumed that the seller has intentionally failed to ship
any goods 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 prin-
E ciple 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 f mged or fraudulent,
if the issuing bank has already paid the draft before receiving

F
notice of the sellers' 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
G 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.
H Therefore the allegations in the complaint filed by the buyers in that case
I.T.C. LTD.'· DEBTS. RECOVERY APPELLATE TRIBUNAL (M. JAGANNADHA RAO, J.] 697

were based upon the above facts - which as per the legal position in this A
branch of law - i.e. presentation of 'fraudulent documents' where goods
were deliberately not shipped and an attempt W\JS 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 B
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. Alivandandam'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
c
ll(a). Inasmuch as the mere allegation of drawal of monies without move-
ment 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.
D
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 re_jected under Order 7 Rule ll(a) as against the appellant-5th E
defendant. Appeal is allowed accordingly to that extent. There will be no
order as to costs.

M.P. Appeal allowed.