Full Judgment Text
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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.