Banking – Can Banks, including financial institutions & lenders claim ‘contractual rate of interest’ from the date of suit decree till realization of amount?

The Hon’ble Madras High Court has answered this question in negative in Central Bank of India Vs Vet Pharm & Others.  

The Hon’ble High Court has observed that the banks, in case of commercial transactions, can claim contractual rate of interest 1) as on date of filing the recovery suit and 2) from the date of filing recovery suit till the date of decree. 

But, it is the discretion of the Court to award rate of interest exceeding 6% or contractual rate of interest from the date suit decree till the decreetal amount is realized. The relevant portion is extracted herein under;

“13.  As per clause (d) the Hon'ble Supreme Court held that even after the 1956 Amendment the Court has discretion to fix interest, the same rate as agreed in the contract, or in the absence of any rate fixed, such rate  as the Court deems reasonable on the principal amount found or declared due.  Therefore it is not obligatory on the part of the Court to grant contractual rate of interest from the date of decree.  In this case, the Court exercised its discretion in awarding 6% per annum from the date of decree holding that the transaction was not a commercial transaction and there was no pleading to that effect. Therefore, the above Judgement is not applicable to the facts of the case.  The other Judgement of the Hon'ble Supreme Court  in Civil Appeal No.972 of 1995 dated 19.12.2002 (Syndicate Bank Vs. R. Veeranna and others) is also not applicable to the facts of the case.   In that reported case the Hon'ble Supreme Court dealt with the grant of interest prior to the passing of the decree.  Hence, I do not find any merit in the first appeal and the Judgement and Decree of the trial Court are confirmed and the first appeal is dismissed.”

Banking – Whether the borrower’s obligation is discharged by virtue of Doctrine of Commercial Frustration?

Different types of loans are granted by banks / financial institutions. For instance educational loan, home loan, project finance loan, etc., Loan availed by the borrower will be for attainment of certain specific objects. 

But there may be instances, wherein, after availing the loan, it comes to light that such objects for which loan was availed cannot be attained. In other words, such objects are impossible to attain or perform, may due to some government policy, vis major, force majeure, etc.,

In such circumstances, can the borrower plead discharge of his obligation to repay the loan availed by pleading of Doctrine of Commercial Frustration?

This question was answered in negative by the Hon’ble Supreme Court, State of Wyoming in EARLD. WALLACE and NAWANA V. WALLACE Vs PINNACLE BANK - WYOMING, wherein, as per the factual matrix, the Loan Agreement specified that the purpose of the loan was to provide a vehicle for the Senior Wallaces’ son. The Loan Agreement also contained a “Third Party Agreement” (Security Agreement), which was signed by the Junior Wallaces. Through the Security Agreement, the Junior Wallaces pledged the 2009 Nissan as collateral for the loan, but the Junior Wallaces assumed no obligation for the debt itself. The day after execution of the Loan Agreement and the Security Agreement, the Junior Wallaces, filed a Chapter bankruptcy petition. As part of that filing, the Junior Wallaces listed the 2009 Nissan in a schedule of personal property that they owned. The Bankruptcy Court allowed sale of 2009 Nisan. Wallaces stopped making payment on the ground that their obligation to repay the amount, they borrowed, extinguished when the collateral vehicle was lost to the bankruptcy estate.  In other words, the Loan Agreement was discharged by a supervening frustration.

The Hon’ble Supreme Court, rejecting the contention of Wallace, held as under:

“¶18] The Senior Wallaces next argue that they are excused from performance under the Loan Agreement based on the doctrine of commercial frustration. Specifically, the Senior Wallaces contend that the purpose of the loan was to allow them to purchase a vehicle for their son, and when Pinnacle released its lien on that vehicle, thereby allowing the bankruptcy trustee to seize the vehicle, Pinnacle effectively destroyed “the basic assumption underlying the loan.” We do not agree that Pinnacle’s action frustrated the purpose of the loan and reject this as a basis to excuse the Senior Wallaces’ performance under the Loan Agreement.

[¶19] This Court has defined the doctrine of commercial frustration in the following terms:

“ * * * The doctrine of commercial frustration is close to but distinct from the doctrine of impossibility of performance. Both concern the effect of supervening circumstances upon the rights and duties of the parties but in cases of commercial frustration ‘[p]erformance remains possible but the expected value of performance to the party seeking to be excused has been destroyed by a fortuitous event, which supervenes to cause an actual but not literal failure of consideration.’ Lloyd v. Murphy, 25 Cal.2d 48, 153 P.2d 47, 50 (Cal. en banc1944).”

Downing v. Stiles, 635 P.2d 808, 811 (Wyo. 1981) (quoting Howard v. icholson, 556 S.W.2d 477, 482 (Mo. App. 1977)). The party seeking to be excused from performance under a contract based on this doctrine must prove the following elements:

1.   The contract is at least partially executory.

 2.   A supervening event occurred after the contract was made.

 3.   The non-occurrence of such event was a basic assumption on which the contract was made.

 4.   Such occurrence frustrated the party’s principal purpose for the contract.

 5.   The frustration was substantial, and

 6.   The party has not agreed, expressly or impliedly, to perform in spite of the occurrence of the event.

Downing, 635 P.2d at 814-15.

[¶20] We need not address each of these elements, because it is clear that the Senior Wallaces cannot prove the third element set forth above – that is, that Pinnacle’s retention of its lien was “a basic assumption on which the contract was made.” This argument, like the mitigation argument, is based on the premise that the collateral provision in the Loan Agreement was meant to benefit or protect the borrower, and that Pinnacle had a duty to hold and protect its collateral lien. The Loan Agreement does not support that premise. The Loan Agreement, as discussed above, allows Pinnacle to release, substitute or impair the loan’s collateral, and for its remedies, to foreclose on the collateral or take any other lawful action. The Loan Agreement’s terms make it clear that the pledging of collateral is solely for the protection and benefit of the bank, and it is impossible to argue that a basic assumption on which the loan was made was that Pinnacle would not release its lien, when the Loan Agreement itself expressly allows Pinnacle to do just that.

[¶21] Moreover, there was no failure of consideration. Pinnacle agreed to loan the Senior Wallaces $15,789, which loan the Senior Wallaces indicated in the Loan Agreement would be used to purchase a vehicle for their son. It is undisputed that Pinnacle did make the loan to the Senior Wallaces, that the Senior Wallaces did purchase a 2009 Nissan, and that the Senior Wallaces did transfer that vehicle to the Junior Wallaces. Pinnacle performed as required under the Loan Agreement, there was no supervening frustration of the Agreement’s purpose, and the Senior Wallaces are not excused from their obligations under the Loan Agreement.

[¶24] The Loan Agreement was the note from the Senior Wallaces agreeing to repay the Pinnacle loan, which also allowed Pinnacle to release any collateral securing the loan. The Security Agreement was the third-party agreement signed by the Junior Wallaces pledging the vehicle as collateral for the loan, without any agreement by the Junior Wallaces to be personally responsible for the debt under the Loan Agreement. Under these circumstances, the debt, by the terms of the Loan Agreement, survives separation from the collateral. Whether the lien has any separate meaning in the bankruptcy context or any other context is immaterial. Pinnacle seeks enforcement of the Loan Agreement, not its lien.”

“Will mostly not proved in the classic sense by the Advocate for the propounder thereof but is nevertheless proved by unnecessary and excessive cross-examination by the Advocate for the party challenging the Will.”

A ‘Will’ like any other document will have to be first proved by the propounder of the Will. If the original Will is lost, Secondary evidence can be led by the propounder.  

In one such interesting case titled as SATISH KUMAR CHOJAR Vs SUBHASHNI CHOPRA & ORS before the Hon’ble Delhi High Court, propounder sought to prove the ‘Will’ by producing its certifying copy . The objectors admitted the execution of ‘Will’, but pleaded destruction of the ‘Will’ pursuant to Section 70 of the Indian Succession Act, 1925. Neither did the propounder prove the execution of the ‘Will’, nor did the objectors prove destruction of the ‘Will’. 

In such a situation, can the Court order probate of the ‘Will’?

The Hon’ble Delhi High Court answered this question in affirmative and held;

“32. However, notwithstanding such neglect on the part of the plaintiff in proving his case, I am inclined to hold the Will to have been validly proved  for the following reasons and owing whereto do not feel the need to consider  the application of the plaintiff for additional evidence, moved out of fright  rather than by addressing the reasons herein below mentioned:

(A) The defendants No.1&3 who really are the contesting defendants qua the Will having in their pleadings admitted as aforesaid the valid execution of the Will;

(B) The counsel for the defendants No.1&3 also, notwithstanding the  counsel for the plaintiff having not referred to any document sought to be proved as Will, while examining the attesting witness thereto, having proceeded to cross-examine him on the premise that the witness has deposed about the document on record; a perusal of the entire cross-examination shows that the counsel for the defendants No.1&3 proceeded on the premise that the document deposed by the said witness was the certified copy of the Will on record;

(C) PW-3 from the office of the Sub Registrar who had brought file from the office of the Sub Registrar containing a copy of the Will registered in that office having deposed that the same contained “the original signatures of the testator Sh. Shanti Sarup Chojar on both the pages along with the signatures of the witnesses” and he having not been controverted on the said aspect, though he stated that he could not identify the signatures; I am in this regard reminded of what the lawyers of a bygone era, steeped in trial and which art is now dying, used to say, that a Will mostly not proved in the classic sense by the Advocate for the propounder thereof but is nevertheless proved by unnecessary and excessive cross-examination by the Advocate for the party challenging the Will;

(D) It has been held in Prithi Chand Vs. State of Himachal Pradesh (1989)  1 SCC 432, Kewal Krishan Mayor Vs. Kailash Chand Mayor 95 (2002) DLT 115, Continental Telepower Industries Ltd. Vs. UOI MANU/DE/1691/2009 and Narender Nath Nanda Vs. The State MANU/DE/1626/2010 that a document containing carbon copy of the signatures is also primary evidence;

(E) It has been held in Y. Narsimha Rao Vs. Y. Venkata Lakshmi (1991) 3 SCC 451 that even a photocopy of the original is secondary evidence. The certified copy of the Will on record is a photocopy of the original;

(F) The mistakes in proof are of the Advocate of the plaintiff. It is the settled principle in law (see Rafiq Vs. Munshilal (1981) 2 SCC 788) that a litigant ought not to suffer for mistake of his Advocate. The mistake here is undoubtedly of counsel in proving the Will in the classic sense. Though in some subsequent decisions it has been held that a litigant is bound by mistakes of his Advocate but the mistakes here are such, qua which the plaintiff could not have taken any remedial action.

 I on appreciation of the pleadings, evidence and the documents on record, am satisfied of the existence and validity of the Will and hold that the Will dated 18.11.1991 of the predecessor in title qua the suit property stands proved.”

   

Banking – Civil Court’s jurisdiction not barred in cases, wherein, prima faice fraud is proved & No limitation prescribed to set aside fraudulent transactions

Section 9 of the Code of Civil Procedure, 1908 stipulates that courts have jurisdiction to try all suits of a civil nature excepting suits of which their cognizance is either expressly or impliedly barred. 

While so, Recovery of Debts due to Banks and Financial Institutions Act, 1992 ‘RDDB & FI Act’ was enacted by the legislature to enable the banks, including financial institutions to recover their debts from the borrowers who have defaulted in speedy manner. Therefore, Debt Recovery Tribunals are established to adjudicate the claims of the banks. Summary procedure is followed. 

Accordingly, Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ‘SARFAESI’ was enacted to enable the banks to sell the secured assets without the intervention of courts. But, any person aggrieved by the actions of the authorised officer of the secured creditor can approach Debts Recovery Tribunal under Section 17 of the SARFAESI Act. 

Civil Court jurisdiction is expressly barred under RDDBI & FI Act and SARFAESI Act as well. However, Courts have repeatedly held that jurisdiction of civil courts cannot be ousted in cases wherein Debt Recovery Tribunals are not competent to adjudicate the subject matter of such cases. For instances Debt Recovery Tribunals are not competent to adjudicate the allegations of fraud, partition, etc.,

Recently, the Hon’ble Madras High Court in the case of INDIABULLS HOUSING FINANC LTD Vs. UMA MAHESWARI also held that in cases, wherein, prima facie fraud is proved, Civil Courts alone have jurisdiction. The Hon’ble High Court held “17. As stated supra, the respondent/plaintiff filed a copy of the passport which would prove that she had not visited India during November and December, 2006 when the loan documents alleged to have been executed by her and also the other letters alleged to have been written by the plaintiff during the relevant period and the applicant also did not state specifically that the plaintiff was present while executing the loan agreement and only contended that the signature was compared with her admitted signatures and loan was sanctioned.

18. Therefore, according to me, prima facie, a case of fraud has been made out by the respondent/plaintiff and therefore, the Civil Court's jurisdiction is not barred by virtue of Section 37 of the SARFAESI Act and on that ground, the suit cannot be rejected.”

The Hon’ble High Court further held in cases wherein fraud is proved, all transactions as a result of fraud become void, therefore, to set aside a void transaction, there is no period of limitation. The relevant portion is extracted herein under;

“19. It is also held by the Hon'ble Supreme Court and other High Courts that the fraud vitiates the entire transaction and once the respondent/plaintiff is able to prove fraud, the entire transaction becomes void and it goes to the very root of the case of the fourth defendant/applicant herein and therefore, when the allegations of fraud are made out, the transaction becomes void and to set aside the void transaction, there is no period of limitation. Hence, the contention of the applicant that the suit is barred under Articles 56, 58 and 69 of the Limitation Act cannot be accepted.”

  

Trademark infringement – Can a picture of an ‘Elephant’ alone mislead the prospective customers?

Recently, the Hon’ble Madras High Court in SAURASHTRA CEMEMNT LIMITED Vs ZUARI CEMENT LIMITED answered the question in negative and held “20. Bearing the aforesaid principles in mind, if we look at the facts of the present case, in my opinion, it cannot be contended that the respondent has infringed the trade mark of the applicant. It is admitted that the respondent is using different photographs and live elephant in various postures taken in 2D or 3D forms in their advertisement and it is also admitted that the respondent is not using or showing any pencil caricature or drawing of an elephant in their advertisement. The only contention raised by the applicant is that the respondent is also manufacturing cement and while popularizing their brand, they are using the image of the elephant which is the registered trade mark of the applicant and therefore, the respondent must be injuncted.”.

The Hon’ble further held “…Where a distinctive label is registered as a whole, such registration cannot possibly give any exclusive statutory right to the proprietor of the trade mark to the use of any particular word or name contained therein apart from the mark as a whole. In this case, even according the applicant, they registered the trade mark, “elephant'' and as per the Registration No.305029, they registered mark, “elephant'' and the label is the picture of a gunny bag with the words ''elephant brand'' on the top with the recognized Portland Cement, beneath the same also, a caricature of an elephant in pencil drawing was registered and in respect of "HATHI" CEMENT in various languages a drawing or caricature of the elephant inside a triangle with the name "HATHI" CEMENT was registered in various languages. On the other hand, it is seen from the typed set of papers filed by the respondent, the respondent is using live elephant in different forms in their advertisement just like sitting in swing, sipping coffee on wall and showing herds of elephant and in none of their advertisements as filed in the typed set of papers, the respondent is using the whole label which was registered by the applicant to portray their product. In all its advertisements, the respondent clearly mentioned its brand name, ''Zuari Cement'' conspicuously and according to me, it will not mislead any comman man to think that the product of the respondent is that of the product of the applicant. Further, as rightly submitted by the learned counsel for the respondent that elephant denotes strength and symbol of God and merely because the applicant registered the word ''ELEPHANT'' or "HATHI" and also pencil drawing of an elephant, they cannot claim exclusive use of the photographs of the elephant for their product and any one intending to give an impression about their product regarding its strength is entitled to use the photograph of an elephant so long as they are not copying the entire label of the applicant, which was registered.”

Considering the significance of ‘Elephant’, the Hon’ble Court held, “Further, elephant is a revered animal as per Hindu mythology and it depicts “Lord Ganesha''. Therefore, every one has got a right to use the image of an elephant for their product and only restriction imposed on the other people is that they should not copy the trade mark of the applicant so as to cause infringement as per Section 29 of the Trade Marks Act, 1999. Therefore, according to me, prima facie, the applicant has not proved that the picture of elephant in the advertisement of the respondent would amount to infringement as per Section 29 of the Trade Marks Act, 1999. According to me, the use of the picture of live elephant in the advertisement is also in accordance with the honest practices in the industrial or commercial matters and the respondent has not taken unfair advantage of the distinctive character or used prelica of the applicant's trade mark and therefore, the respondent cannot be said to have infringed the trade mark of the applicant.”

Section 138, Negotiable Instrument Act, 1881 – 'Burden of Proof'

Section 138 of the Negotiable Instruments Act, 1881 (‘Act’) stipulates that when a ‘person’ draws a ‘cheque’ on an account maintained by him with a bank pursuant to a legally recoverable debt towards another person, and if such ‘Cheque’ is returned by the bank unpaid for reasons stated in the Act, such ‘person’ is deemed to have committed an offence punishable with imprisonment or with fine.    

Section 139 of the Act creates a presumption in favour of the holder of the cheque i.e., cheque is received for discharge of a debt, in whole or in part, unless contrary is proved. But, it is the complainant, who has to prima faice prove the existence of a legally recoverable debt. Reference, can be made to the recent decision of the Hon'ble Orissa High Court in I.B. Enterprises Vs Konark Supply Agency. In this case, the Complainant alleged that he made some supplies to the Accused, and in return, Accused handed over him the cheque. The Hon'ble rejected the case of the accused since he did not produce any bills or books of accounts. The relevant portion is extracted herein under;

"In the case at hand, from the evidence of the complainant, it appears that in order to establish the offence under Section 138 of the N.I. Act against the accused-petitioner, while it is claimed that the material was duly supplied to the accused by issuing bills in favour of the accused (all those bills were given to his conducting advocate to be filed in the court of law, if required). The aforesaid fact by itself would indicate that neither the bills nor books of accounts were ever produced before the trial court and the court proceeded on a presumption under Section 118 of the Act which was not capable of replacing evidence since the petitioner (accused) had discharged his initial onus by raising his defence of advance payment and non-supply and thereby discharging the initial onus of proof regarding the existence of consideration being improbable or doubtful and consequently the onus stood shifted to the plaintiff to prove it as a matter of fact. In the case at hand, neither the books of accounts nor the bills were ever produced in course of the trial and both the trial court as well as appellate court proceeded merely on the basis of a presumption, which in the fact situation of the present case was not available to be relied upon."
  
 Also, the Complainant should prove his financial capacity to extend the hand loan. Recently, in a case titled as RAMDAS Vs KRISHNANAND, wherein, the Complainant alleged that the accused took hand loan from the Complainant, and in discharge of the hand loan, the accused issued a cheque to the tune of Rs. 5 lakhs to the complainant and subsequently, the cheque dishonored. The Hon’ble Supreme Court of India, rejecting the allegations of the Complainant held ‘The complainant himself stated in the cross-examination that after the Cheque was returned without payment, he has not made any enquiry with the Bank as to whether sufficient funds were available or not in the account of the accused. In the absence of any authenticated and supporting evidence, we cannot believe that the complainant-respondent who is employed under the appellant-accused, has raised an amount of Rs.1,75,000/- that too by obtaining loan of Rs.1,50,000/- from a Bank, only to give hand loan to his employer. As the complainant himself admitted that his net savings in a year comes to about Rs. 10,000/-, it is not trustworthy that he was in a position to extend hand loan of such big amount to the appellant.”

Arbitration – Can a non-signatory initiate arbitration?

There are many instances, whereby, parties who are non-signatory to the arbitration agreement are also subjected to Arbitration. In most of the cases, any of the party to arbitration agreement initiates the Arbitration process. But can a non-signatory to the arbitration agreement commence the Arbitration process?  

This question was answered in affirmative by the Hon’ble Bombay High Court in Tata Capital Financial Services Limited Vs Net 4 India Limited & others. In this case, 1^st Respondent owned some debt to one ‘X’. The agreement between 1^st Respondent and ‘X’ contained arbitration agreement. Subsequently, dent was assigned to the Petitioner, who sought for interim relief under Section 9 against the 1^st Respondent. The 1^st Respondent resisted the claim of the Petition pleading no privity of contract between him and the Petitioner, therefore, Petitioner cannot initiate arbitration. Rejecting the contention of the 1^st Respondent, the Hon’ble High Court held “In my view since the petitioner had stepped into the shoes of said M/s.Connect Residuary Private Limited and the said agreement between the said M/s. Connect Residuary Private Limited and the respondent no.1 stood assigned in favour of the petitioner, all the rights and obligations of the said M/s. Connect Residuary Private Limited including right to invoke arbitration agreement stood assigned in favour of the petitioner. In my view this court thus has jurisdiction to entertain and dispose of this petition.”  

Gift – Whether conditional gift permissible?

Section 122 of the Transfer of Property Act, 1882(‘Act’) defines Gift. Section 123 of the Act stipulates as to how transfer of Gift is to be effected.

The issue that recently arose in Renikuntla Rajamma (d) by LRs.Vs K. Sarwanamma with regard to ‘Gift’ before the Hon’ble Supreme Court of India is ‘Whether conditional gift is permissible under the provisions of the Act?’ The answer is in affirmative.

The Hon’ble Supreme Court of India, while interpreting section 122 to 129 of the Act held “Such transfer in the case of immovable property no doubt requires a registered instrument but the provision does not make delivery of possession of the immovable property gifted as an additional requirement for the gift to be valid and effective. If the intention of the legislature was to make delivery of possession of the property gifted also as a condition precedent for a valid gift, the provision could and indeed would have specifically said so. Absence of any such requirement can only lead us to the conclusion that delivery of possession is not an essential prerequisite for the making of a valid gift in the case of immovable property.”

Ex Parte decree – Whether ‘refusal’ to accept summons is ‘valid’ service on Defendant?

When summons are issued to a Defendant in a civil suit, and such Defendant chooses not to appear and contest the suit, the Court may, after considering the available evidence, pass a judgment and decree in favour of the Plaintiff. However, law still provides an opportunity to the Defendant to contest the suit provided he prefers an Application under Order 9 Rule 13 of the Code of Civil Procedure, 1908, praying the Court to set aside the ex parte decree passed against him. The Defendant has to convince the Court that the summons was not duly served, or that he was prevented by any sufficient cause from appearing when the suit was called on for hearing. There are instances, wherein, summons sent is retuned with endorsement ‘Refused’ or ‘No such person available’ or ‘Left’. The issue that arises is whether summons returned endorsement 'Refused' or 'No such person available' or 'Left' is a valid service or not?

In one such case, summons sent to Defendant was returned with an endorsement ‘Refused’. District Court set the Defendant ex parte and proceeded to pass ex parte decree and judgment against the Defendant. Thereafter, the Defendant filed an Application to set aside the ex parte decree on the ground that summons were not served to him, however, the District Court dismissed the Application holding that service of summons on Defendant was a valid one. 

However, on appeal titled as Tongbram Chandrakala Devi Vs The Luxmi Development Institute, the Hon'ble Manipur High Court reversed the decision of the District Court while stating “it was a case where trial court proceeded exparte only on the basis of endorsement “refusal” alleged to have been made by defendant on the summons, that such endorsement of “refusal” also did not appear to be wholly conclusive and was rebuttable one at the instance of petitioner….”. The Hon'ble High Court further held “It is for this reason, the endorsement of “refusal” does not appear to be conclusive in nature and cannot be relied on for holding the service to be good.” The Hon'ble High Court allowed the Defendant to consent the suit on merits.