Point of Law: Definition of ‘fraud’ provided under Section 17 of Indian Contract Act, 1872.

JUDGMENT :

This appeal by the plaintiff is directed against the judgment and decree dated March 06, 2010 in O.S. No. 6190/2003 passed by the 42nd Additional City Civil and Sessions Judge, Bangalore, dismissing the suit for recovery of money against first defendant.

2. Brief facts of the case are, plaintiff, NTC[National Textile Corporation] is a Government of India undertaking[Incorporated under Companies Act, 1956]. NTC and second defendant entered into a Depot Agreement dated January 01, 2000, where under second defendant had given a cash security deposit of Rs.4,00,000/- and a bank guarantee for a sum of Rs.13,00,000/- in favour of NTC from Vijaya Co-operative Bank Limited, Ashram Road, Ahmedabad. NTC also obtained “Special Contingency Insurance Policy” (hereinafter referred to as ‘the Policy’) for the period from April 1, 2000 to March 31, 2001 from first defendant- United Insurance Company (hereinafter referred to as ‘insurer’) for Rs.2,85,00,000/- to cover against any loss or damages to its property at any time during the currency of respective agreements with various depot keepers.

3. NTC’s case is, second defendant was appointed as depot keeper for the State of Gujarat for sale of mill yarns subject to the control and approval by NTC. Second defendant started defaulting in payments and as on August 20, 2000 a sum of Rs. 29,90,000/- was due to NTC. NTC invoked the bank guarantee. The bank did not honour the same on a ground that it was a fake one. NTC adjusted the security deposit of Rs.4,00,000/- and lodged a complaint before the concerned jurisdictional police station. It also filed a claim before the insurer to pay the loss suffered. The insurer refused to settle the claim on the ground that the claim is inadmissible. With these averments, NTC has brought the instant suit with a prayer inter alia to direct the defendants to pay a sum of Rs.25,00,000/- along with interest from the date of rejection of claim till the date of payment.

4. Insurer resisted the suit by filing written statement contending inter alia that NTC had failed to take reasonable care and caution to verify the bank guarantee. The amount claimed by NTC is not in respect of the goods supplied during the Policy period. The Policy covers risks in respect of claims arising out of transactions that took place during the period when the insurance Policy was in force. NTC had allowed the outstanding payment to be carried forward from year to year without taking any action. The loss caused was a trade loss and therefore, inadmissible.

5. With the above pleadings, parties went to the trial. Based on the pleadings, the learned Trial Court has framed following issues:

1. Whether the plaintiff proves that the suit claim is well within the scope of insurance policy taken by it from defendant no.1 as pleaded in the plaint?

2. Whether the plaintiff proves that the defendants are liable to pay the sum of Rs. 25,00,000/- as claimed in the suit?

3. Whether defendant no.1 proves that the suit of plaintiff is not maintainable in law and the same is liable to be dismissed for the reasons stated in the written statement?

4. Whether the plaintiff is entitled for the current interest rate at the prevailing banking rate as claimed in the suit?

5. What order or decree?

6. On behalf of plaintiff-NTC, one witness was examined as P.W.1 and Exs. P1 to P11 marked. First defendant-insurer examined two witnesses viz. D.W.1 and D.W.2 and got marked Exs. D1 to D3. Answering issue No. 1 in the negative, issue Nos. 3 and 4 in the affirmative and issue no. 2 in the affirmative only against second defendant, the Trial Court has decreed the suit.

7. Shri. S.S. Ramdas, learned Senior Advocate for NTC, submitted that:

•

the second defendant with dishonest intention had given a fake bank guarantee which amounted to a criminal act and it is covered by the Policy;

• the monetary loss suffered by NTC is not a trade loss, but a loss that occurred due to the dishonest act of second defendant;

• insurer is duty b