G.R. Luthra, J.
(1) 1. The most important question involved is as to under what circumstances leave to defend should be given under Order 37 of the Code of Civil Procedure (hereinafter referred to as 'Code') as it stands after the amendment by Act No. 104 of 1976. Then the question involved is as to whether in the present case leave to defend should be given or not.
(2) The plaintiff brought a suit for the recovery of Rs. 22,27,000 from Allahabad Bank, defendant No. I on the basis of a guarantee of defendant No. 1, which was initially valid up to 31st March 1979 and was subsequently extended to 31st October 1979 and finally to 31st December 1979.
(3) There is no dispute in respect of some of the facts. The plaintiff, by an agreement dated July 13, 1977 contracted to supply various items of railway accessories to Iranian State Railways, Iran. Interalia, the plaintiff had to supply 6244 M.T. (15,12,000 pieces) of 'base plates' under that agreement. Plaintiff was approached by M/s. Kumardhubi Engineering Works Ltd., (hereinafter referred to as 'Kumardhubi'), a company with its registered office at Chartered Bank Building Calcutta and the latter proposed to manufacture and export for and on behalf of the former aforesaid base plates to the Iranian State Railways, Iran. Plaintiff issued to the said Kumardhubi a letter of Indent dated 16th November 1977 agreeing to manufacture and shipment by the latter of the aforesaid base plates to Iranian State Railways, Iran on the condition, interalia that the latter shall, either make a cash deposit in the amount of Rs. 20 lacs with the former, or, in lieu thereof, furnish unconditional bank guarantee in the amount of Rs. 40 lacs to ensure the due performance of the said contract. Kumardhubi did not deposit the amount and instead furnished a bank guarantee of Allahabad Bank, defendant No. 1. As already mentioned the guarantee was originally valid up to 3st March 1979 but the same was thereafter extended up to 31st October 1979 and afterwards up to 31st December 1979.
(4) It is alleged by the plaintiff that there was breach of agreement on the part of Kumardhubi because the latter instead of supplying the entire quantity dispatched only 151.509 M. T. of base plates on account of which the former suffered a loss to the tune of Rs. 46 lacs.
(5) Defendant No. 2 has been imp leaded because according to the plaintiff, although the bank guarantee was in favor of the plaintiff, yet it was addressed to defendant No. 2 and defendant No. 2 made a demand dated 22nd December 1979 by means of telegram as well as a letter to defendant No. I to pay the guarantee amount.
(6) As the defendant No. I refused to comply with the aforesaid demand, the plaintiff brought the suit as already mentioned. The plaintiff claimed Rs. 20 lacs on account of the principal and the remaining amount of Rs. 2,27,000 by way of interest at the rate of 18 per cent per annum from the date of the demand i.e. 22nd December 1979 till the date of the institution of the suit in terms of Section 3 of the Interest Act 1978.
(7) Procedure as required by Order 37 of the Code was followed and in response to an application for summons for judgment, defendant No. I brought the present application, which is registered as I.A. No. 95/81 Defendant No. I prays for leave to defend on a number of grounds, most important out of which will be mentioned hereinafter. That application is contested by the plaintiff. I have heard at great length the learned counsel for the parties.
(8) First, it is to be determined as to what should be the principle or principles following which leave to defened should be granted or refused. Reliance of learned counsel for defendant No. 1 is on a judgment of Supreme Court in M/s. Mechalec Engineers & Manufacturers Vs . M/s. Basic Equipment Corporation 0043/1976 : 1SCR1060 . Following was held by Supreme Court :
'(A)If the defendant satisfies the Court that he has a good defense to the claim on its merits the plaintiff is not entitled to leave to sign judgment and the defendant is entitled to unconditional leave to defend.
(B)If the defendant raises a triable issue indicating that he has a fair or bonafide or reasonable defense although not a positive good defense the plaintiff is not entitled to sign judgment and the defendant is entitled to unconditional leave to defend.
(C)If the defendant discloses such facts as may be deemed sufficient to entitle him to defend, that is to say, although the affidavit does not positively and immediately make it clear that he had a defense yet, shows such a state of facts as leads to the inference that at the trial of the action he may be able to establish a defense to the plaintiff's claim the plaintiff is not entitled to judgment and the defendant is entitled to leave to defend but in such a case the Court may in its discretion impose conditions as to the time or mode of trial but not as to payment into court or furnishing security.
(D)If the defendant has no defense or the defense setup is illusory or sham or practically moonshine, then ordinarily the plaintiff is entitled to leave to sign judgment and the defendant is not entitled to leave to defend.
(E)If the defendant has no defense or the defense is illusory or sham or practically moonshine, than although ordinarily the plaintiff is entitled to leave to sign judgment the Court may protect the plaintiff by only allowing the defense to proceed if the amount claimed is paid into court or otherwise secured and give leave to the defendant on such condition and thereby show mercy to the defendant by enabling him to try to prove a defense.'
It is apparent from the above that effect of the said authority is that unconditional leave to defend should be given in all cases except the one in which defendant has no defense or has a sham, illusory or moonshine defense and that even in cases where there is no defense or the defense put forward is sham, illusory or moonshine leave to defend may be granted as a measure of mercy subject to attaching of a condition of deposit of whole or part of amount claimed or furnishing of a security or the like.
(9) But I agree with the contention of the learned counsel for the plaintiff to the effect that the aforesaid judgment of the Supreme Court was on those provisions of Order 37 of the Code which existed before the amendment of the Code by Act 104 of 1976 that substantial change was brought about by the aforesaid amendment and that thereforee, principles for granting leave to defend should be enunciated on the basis of present provisions of Order 37 of the Code. Previously the relevant provision (Rule 3 of Order 37) read as under :
'3(1)The court shall, upon application by the defendant, give leave to appear and to defend the suit upon affidavits which disclose such facts as would make it incumbent on the holder to prove consideration, or such other facts as the court may deem sufficient to support the application.
(2)Leave to defend may be given unconditionally or subject to such terms as to payment into court, giving security, framing and recording of issues or otherwise as the court thinks fit.'
That provision has at present been completely substituted by sub rule (5) of Rule 3 of Order 37 of the Code which reads as under :
'(5)The defendant may, at any time within ten days from the service of such summons for judgment, by affidavit or otherwise disclosing such facts as be deemed sufficient to entitle him to defend, apply on such summons for leave to defend such suit, and leave to defend may be granted to him unconditionally or upon such terms as may appear to the Court or Judge to be just :
provided that leave to defend shall not be refused unless the Court is satisfied that the facts disclosed by the defendant do not indicate that he has a substantial defense to raise or that the defense intended to be put up by the defendant is frivolous or vexatious;
provided further that, where a part of the amount claimed by the plaintiff is admitted by the defendant to be due from him, leave to defend the suit shall not be granted unless the amount so admitted to be due is deposited by the defendant in Court'.
It is appearent from the above, that the present provision is totally different in phraseology and language from previous one. That being so after the amendment of the Code in 1976 the aforesaid Supreme Court authority ceases to have any application except for giving some guidence.
(10) As already mentioned relevant provision is sub rule 5 of rule 3 of order 37 of the present Code which has been reproduced. It appears from the opening words of the said provision that court has discretion to grant leave to defend unconditionally or upon such terms as may appear to the court or Judge to be just. Existence of discretion is discernable from the word 'may' occurring before the words 'be granted'. However, if is well established principle of law that exercise of discretion should be judicial i.e. based on sound principles and not arbitrary or whimsical.
(11) Language of the first proviso says that leave to defend shall not be refused unless the facts disclosed by the defendam do not indicate existence of a 'substantial defense' or the defense intended to be put up by the defendant is frivolous or vexatious. In other words, it means that if the defense intended to be put up by the defendant infrivolous or vexatious leave to defend must be refused. It further means that leave may in the discretion of the court, also be refused it the defendant has no 'substantial defense' to raise. The net result is that an unconditional leave to defend must be granted if the facts disclosed by the defendant indicate that he has a 'substantial defense' to raise. The word 'substantial' is now to be interpreted. Ordinary dictionary meaning, relevant to the present situation, as per the Concise Oxford dictionary 6th Edition is that 'substantial' is one having substance, or having real importance or value or sound and is not illusory or fimsy. thereforee any defense which is flimsy or illusory is not a 'substantial defense'. A substantial defenses is one which has substance or is sound and has real importance or value. thereforee, a defense, which can be called as substantial is one which has good chances of success or which has good potentiality to dislodge the plaintiff or which is bonafide and honest one and raises. such questions of law or of facts which require thorough security.
(12) Learned counsel for the plaintiff, however, contends that substantial defense means a good defense on merits which is honest and bonafide and which requires determination of such questions of fact as demands a full and complete trial. He gave an instance that where a defense involves a pure interpretation of law and construction of admitted documents, leave to defend should be given only when the court is of the view that such defense is bound to succeed.
(13) But I do not agree with the said contention of the learned counsel. The net result of the aforesaid argument of the learned counsel for the plaintiff is that leave to defend should be given only when the facts disclose an unsurmountable or invincible or invulnerable defense and not merely substantial defense. Further another result of that argument is that in cases involving question of law or interpretation of admitted documents leave to defend should be given only in these cases, where in the view of the court, decision without any doubt goes in favor of a defendant. That will create an absurd situation. A court would first of all decide a case in favor of the defendant express that view in unmistakable terms, yet would merely content itself to grant a leave to defend and not throw out the suit of the plaintiff. Hence aforesaid argument is obviously not acceptable.
(14) There are provisions contained in Chapter Xv of Delhi High Court (Original Side) Rules 1967 (hereinafter referred to as Original Side Rules) in respect of following of summary procedure. Rule 4 of Chapter Xv of the said rules deals with the matter as to when leave to defend is to be given. That provision is more or less the same as the provisions of rule 3 of Order 37 of the Code before amending Act 1976. However, the application of that Chapter Xv is only confined to the suits upon bills of exchange, Hundies or promissory notes. The present suit is based on guarantee. thereforee, the original side rules have no application in the present case and hence they cannot give any guidence. Originally scope of Order 37 of the Code was also limited to the suite upon Bills of Exchange, Hundies or Promissory notes. That scope was enlarged when the Amended Act 104 of 1976 came into force and it is now only that summary procedure of Order 37 of the Code can be availed of in respect of suits for recovery of money based on guarantees, written contracts and enactmants.
(15) As a result of the above discussion, the following principles, in respect of grant or Leave to defend, on the basis of present provision of Order 37 of the Code, emerge :
(A)It is discretionery with the court either to refuse or to grant leave to defend unconditionally or upon such terms as may appear to the court to be just. But the aforesaid exercise of the discretion should be judicial and not arbitrary and whimsical.
(B)In case the defense intended to be put up is frivolous or vexatious, leave to defend must be refused.
(C)An unconditional leave to defend must be given if the facts disclosed by the defendant indicate that he has a substantial defense to raise, which means that defense so raised has good chance of success or has good potentiality to dislodge the plaintiff or which is bonafide and honest one and raises such question of law or of facts which require thorough judicial security.
(D)If the facts set up by the defendant do not disclose a substantial defense, leave should normally be refused or else on account of mercy as provided for in the Supreme Court Judgment 0043/1976 : 1SCR1060 or due to a desire to exclude even remote chance of injustice to the defendant, leave to defend may be granted subject to the condition of deposit of amount claimed by the plaintiff or furnishing a security in respect of that amount or deposit of part of that amount and furnishing security for the payment of balance.
(E)Where a part of the amount claimed by the plaintiff is admitted by the defendant to be due from him, leave to defend the suit shall not be granted unless the amount so admitted to be due is deposited by the defendant in court.
(16) Now the question is whether on the above principles, leave should be granted in the present case or not. The first ground taken up by the defendant No. I is that the guarantee was never in favor of the plaintiff but was in favor of Punjab National Bank, defendant No. 2 and that thereforee, plaintiff is not entitled to claim anything from defendant No. I Reply of the plaintiff is that the guarantee was in his favor, that defendant No. 2 was merely acting as an agent of the plaintiff and that in the alternative plaintiff was beneficiary of the guarantee on account of which could get the same unforced.
(17) Plaintiff attached with the plaint a photostat copy of the original bank guarantee valid up to 31st March 1979, another photo-stat copy of a letter dated 28th March 1979 extending the guarantee to 31st October 1979 and third photostat copy of a letter dated 29th October 1979 extending the guarantee up to 31st December 1979. Original guarantee is addressed to Punjab National Bank. Parliament Street. New Delhi, A|C Harparshad and Co. Ltd. (plaintiff) The letter dated 28th March 1979 is addressed to the plaintiff while the last letter dated 29th October 1979 (extending the guarantee to 31st December 1979) is addressed to Punjab National Bank, Parliament Street, New Delhi, A]c of the plaintiff.
(18) The learned counsel for the plaintiff contended that it was clear from a bare reading of the original guarantee that the same referred to the contract between the plaintiff and Kumar-dhubi, that although it was addressed to Punjab National Bank, yet body of the same referred to the plaintiff by describing it as 'you' or 'your', that further the guarantee was described as in respect of the AC of the plaintiff and that thereforee, it was clear that the guarantee was in favor of the plaintiff. Learned counsel for the plaintiff further urged that the letter of extension of guarantee dated 28th March 1979 clinched the issue in as much as that letter was addressed to the plaintiff and not to Punjab National Bank.
(19) But the learned counsel for the defendant advanced weighty arguments. He pointed out that body of the original guarantee did not refer all the time to the plaintiff as 'you' or 'your' but that the same referred to the said company in third person also by way of describing its name and that that fact coupled with the fact that the guarantee was addressed to Punjab National Bank clearly indicated that the guarantee was neither in favor of nor for the benefit of the plaintiff but was in favor of and for the benefit of Punjab National Bank, defendant No. 2. The learned counsel also took support from the fact that the plaintiff never put in any claim or demand with defendant No. I for the enforcement of the guarantee and that it was defendant No. 2 who lodged a claim on December 22, 1979, that learned counsel emphasised that that circumstance clearly indicated that not only that the guarantee was in favor of and for the benefit of Punjab National Bank but both Punjab National Bank and the plaintiff were acting on that belief.
(20) The learned counsel for the plaintiff contended that in any case Punjab National Bank was working as an agent of the plaintiff and that thereforee, the guarantee was in favor of and could be availed of by the plaintiff. Learned counsel relied upon judgment of Supreme Court in Radhakrishna Sivadutt Rai & others. Vs . Tayeballi Dawoodbhai : AIR1962SC538 . In that case Along with the name of a person in the sale notes words 'A|c Khaitan & Sons Ltd.' appeared. It was held that that person was acting as an agent for a disclosed principal, namely, 'Khaitan & Sons Ltd.' Learned counsel contended that in the present case name of the plaintiff Along with the words 'A|c' below the name of Punjab National Bank clearly indicated that Punjab National Bank was acting as an agent of a disclosed principal i.e. plaintiff.
(21) The matter as to whether defendant No. 2 was an agent or not of the plaintiff also requires thorough consideration and scrutiny and also defense is bonafide. Without prejudice to the decision of the case on merits, the authority of the Supreme Court relied upon by the learned counsel does not apply to the facts of the presant case. The present case relates to interpretation of a guarantee. Sale note is entirely different document from a guarantee.
(22) The second defense raised by the defendant is that according to letter dated 29th October 1979 (extending guarantee up to 31st December 1979) it was incumbent upon the plaintiff to have brought a suit for recovery of the amount on or before 31st December 1979, that he failed to do so and that said failure entailed forfeiture of the guarantee and discharge of defendant No. I from all liabilities there under. The learned counsel for the defendant explained that in the present case, suit was brought on 19th September 1980 which was much after 31st December 1979 and that thereforee, defendant No. I could not be saddled with any liability. The relevant portion of the aforesaid letter dated 29th October 1979 reads as under :
'not with standing anything contained in the guarantee, our liability under it shall be restricted to Rs. 20,00,000 (Rupees Twenty lacs only) and the guarantee shall remain in force until 31-12-1979. Unless a suit or action to enforce your claim or claims is filed against us on or before 31-12-1979 all your rights under the guarantee shall be forfeited and we shall be relieved of or discharged from all liabilities there under.'
Learned counsel for the defendant relied upon a judgment of Supreme Court in The Vulcan Insurance Co. Ltd. Vs . Maharaj Singh and another : 2SCR62 and my judgment in New Delhi Municipal Committee v. M/s. Tirath Ram Ahuja (P) Ltd. and another Air 1980 Delhi 185. The Supreme Court held that a clause in the Insurance Policy to the effect that in no case the company would be liable for any loss or damage after the expiration of 12 months from the happening of the loss or damage unless claim was a subject of pending action or arbitration, was not hit by Section 28 of the Contract Act and was valid and that the liability of for loss and damage ceased to exist after the expiry of 12 months. Similarly it was held by me that the very right to refer to arbitration was to be alive for 28 days after the issue of the final certificate by architect and that as those 28 days had elapsed such right ceased to exist. Learned counsel for defendant No.1 contended that in the present case according to the clause reproduced already, all the rights under the guarantee stood forfeited and defendant No. 1 stood discharged from all liabilities on account of failure of the plaintiff or Punjab National Bank to bring a suit or action up to 31st December 1979.
(23) Learned counsel for the plaintiff contended that the word, 'action' did not mean any legal action or legal proceedings, that the same merely meant doing of an act, that in the present case Punjab National Bank made a demand on December 22, 1979 of the amount on the basis of the guarantee which was much prior to 31st December 1979 and that thereforee, the mischief of the aforesaid clause was not attracted. He also argued that the letter dated 29th October 1979 containing the aforesaid mischievious clause was to be read and interpreted subject to the original guarantee where no such provision was existing and that thereforee, the said provision was not binding. Learned counsel relied upon a judgment of Supreme Court in State of Maharashtra V. Dr. M. N. Kaul (dead) : AIR1967SC1634 which lays down that when there is ambiguity in a guarantee, that guarantee should be construed against the guarantor and the recital clause be read for controlling the operative part of the guarantee. Learned counsel argued that the original guarantee was to the effect that same would be payable on demand, that that stipulation should be used for controlling the construction of the letter dated 29th October 1979 and in that way it should be held that the guarantee was not subject to the clause limiting time for bringing suit for action.
(24) Without prejudice to the decision on merits, the arguments of the learned counsel turn the defendant are weighty. There are good chances of success of defendant. Further, the case set up by the defendant requires very thorough scrutiny. On the face of it the word 'action' in the context in which it occurs cannot be said to mean only doing of an act by the plaintiff or Punjab National Bank because the words 'filed against' give an indication that the said action could be taken by way of filing some legal proceedings. Then it will be too hasty to say that we should disregard the letter dated 29th October 1979 including the clause relied upon by the defendant and look only to the wording of the original guarantee for the purpose of finding Out as to what the obligations of defendant No. 1 are Rather that matter requires thorough consideration.
(25) The defendant has raised a number of other defenses. For instance he has denied that the plaint has been signed and verified by an authorise person on behalf of the plaintiff company.
(26) It is apparent that the defendant is entitled to have an unconditional leave to defend. Hence I am of the opinion that those two defense discussed already as well as other defenses should beallowed to be raised and then the decision on merits can be arrived at. I, thereforee accept the application of defendant No.1 and allow unconditional leave to defend as prayed for.