1997 (12) TMI 519 - SC - Companies Law

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/ Held that - Appeal allowed. 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. 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 word fraud or misrepresentation used in the plaint. The learned counsel for the appellant also contended that this was a case where a Letter of Credit was without recourse to the invoice value. Thus we hold that there is no cause of action even from the plaint allegations against the appellant. Thus plaint is rejected under order 7 rule 11(a) as against the appellant-5th defendant.

Issues Involved:
1. Rejection of plaint under Order 7 Rule 11 of the Code of Civil Procedure, 1908.
2. Allegations of fraud and misrepresentation in the context of irrevocable Letters of Credit.
3. Applicability of principles regarding bank guarantees and Letters of Credit.
4. Determination of cause of action based on the plaint's allegations.

Issue-Wise Detailed Analysis:

1. Rejection of Plaint under Order 7 Rule 11 of the Code of Civil Procedure, 1908:
The appellant challenged the rejection of their application under Order 7 Rule 11 by the Debt Recovery Tribunal and the Appellate Tribunal. The Karnataka High Court upheld the Tribunals' decisions, stating that the issue of cause of action should be determined at trial. The Supreme Court, however, clarified that the power to reject a plaint under Order 7 Rule 11 can be exercised at any stage, even after issues have been framed and the matter is posted for evidence. The Court cited Azhar Hussain v. Rajiv Gandhi, emphasizing that litigation should not occupy the court's time if it is bound to prove abortive.

2. Allegations of Fraud and Misrepresentation in the Context of Irrevocable Letters of Credit:
The appellant contended that the bank's allegations of fraud and misrepresentation were insufficient to constitute a cause of action. The Supreme Court noted that mere allegations of non-supply of goods do not amount to fraud in the context of Letters of Credit. The Court emphasized that fraud must be clearly established and cannot be based on mere allegations or suspicions. The Court referred to U.P. Co-operative Federation Ltd. v. Singh Consultants & Engineers, which held that the bank's obligation under a Letter of Credit is independent of the underlying contract between the buyer and seller, except in cases of fraud or irretrievable injury.

3. Applicability of Principles Regarding Bank Guarantees and Letters of Credit:
The Supreme Court reiterated that the principles governing bank guarantees and Letters of Credit are well-settled. The bank must honor the Letter of Credit if the documents are in order and the terms of credit are satisfied. The only exceptions are cases of fraud or irretrievable injury. The Court cited several cases, including U.P. Co-operative Federation Ltd., to illustrate that the bank's obligation is independent of the underlying contract between the buyer and seller. The Court also referred to the House of Lords' decision in UCM (Investments) v. Royal Bank of Canada, which highlighted that the bank could refuse payment if the documents presented were fraudulent.

4. Determination of Cause of Action Based on the Plaint's Allegations:
The Supreme Court examined the allegations in the plaint to determine if they constituted a cause of action. The Court found that the bank's allegations of non-supply of goods did not amount to fraud. The Court emphasized that the bank could not use the words "fraud" or "misrepresentation" to create an illusion of a cause of action. The Court referred to T. Arivandandam v. T.V. Satyapal, which held that clever drafting to create an illusion of a cause of action is not permissible. The Court concluded that the bank's allegations did not disclose a cause of action against the appellant and allowed the appeal, rejecting the plaint under Order 7 Rule 11(a).

Conclusion:
The Supreme Court allowed the appeal, holding that the plaint did not disclose a cause of action against the appellant. The Court emphasized that allegations of non-supply of goods do not constitute fraud in the context of Letters of Credit and that the bank's obligation is independent of the underlying contract between the buyer and seller. The Court reiterated that the power to reject a plaint under Order 7 Rule 11 can be exercised at any stage of the suit. The appeal was allowed, and the plaint was rejected as against the appellant, with no order as to costs.

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