Case: I.T.C. Ltd, Calcutta Vs. The Debts Recovery App.Tribunal

on fraud or misrepresentation. Nor is the case before us one where there is an allegation of presentation of forged or fraudulent documents. 22. Learned counsel for the respondent then relied upon the judgment in Discount Records Ltd. v. Barclays Bank Ltd., 1975(1) All ER 1071. In that case, Megarry, J. referred to the American case in Szten v. 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 sellers fraud has been called to the banks 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 Szten 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." 23. 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 Sztein case and hence what Megarry, J. stated in Discount Records Ltd. directly applies. 24. 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, even if the allegation is to be 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 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 had instructed the defendants to issue the letter of credit. The sellers then drew a draft under the letter of credit to the order of the Chartered Bank of India, Australia and China and delivered the draft and the fraudulent documents to the Chartered Bank at Cawnpore for collection on account of the sellers. The buyer brought the action which succeeded, to restrain the defendants from paying the draft. The learned Judge said (p. 634): "It must be assumed that the seller has intentionally failed to ship any goods ordered by the buyer. In such a situation, where the sellers fraud has been called to the banks attention before the draft 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. 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 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 Transeas 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 documents where goods were deliberately not shipped and an attempt was made to pass off rubbish as the goods ordered for - amounted to fraud.25. 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. Arivandandams 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. 26. Learned counsel for the appellant also contended that this was a case where a letter of credit was without recourse to the invoice value.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]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 factsi.e. presentation of fraudulent documents where goods were deliberately not shipped and an attempt was made to pass off rubbish as the goods ordered foramounted to fraud.25. As stated above,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. Arivandandams 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.