The Karnataka High Court's judgment in Texport Overseas Pvt. Ltd. v. Canara Bank reaffirms the fundamental principle that the burden of proof lies on the party asserting a claim, particularly in banking contracts. The Court set aside the Debt Recovery Appellate Tribunal's (DRAT) order, which had erroneously placed the burden on the defendants to disprove the existence of Forward Purchase Contracts (FPCs), holding that the bank failed to discharge its initial burden under Sections 101 and 102 of the Indian Evidence Act, 1872. The judgment underscores the necessity of written evidence for banking transactions and the consequences of procedural lapses by financial institutions.
Background & Facts
The Dispute
The dispute arose from 48 Forward Purchase Contracts (FPCs) allegedly booked by M/s. Nisha Designs (later taken over by Texport Overseas Pvt. Ltd.) with Canara Bank’s Overseas Branch between April 2008 and August 2008. The Bank claimed that these contracts were neither utilized nor cancelled by the petitioners, resulting in a loss of Rs. 14,55,60,750 (principal) and Rs. 4,85,54,190 (interest), totaling Rs. 19,41,14,940. The petitioners denied booking these contracts and contended that the Bank’s claim was baseless and barred by limitation.
Key Facts
15.03.2008: Texport Overseas Pvt. Ltd. took over the business of M/s. Nisha Designs, including its liabilities and assets.
25.04.2008: The petitioners informed Canara Bank of the takeover and requested the transfer of FPCs booked from July 2007 onwards to Texport Overseas Pvt. Ltd.
19.12.2009: The Bank issued a notice to the petitioners, alleging non-utilization of 48 FPCs and demanding cancellation within 7 days, failing which the Bank would cancel the contracts and recover the loss.
2009-2011: The petitioners obtained an ex-parte injunction from the City Civil Court under Section 9 of the Arbitration and Conciliation Act, 1996, restraining the Bank from debiting the claimed amounts. The High Court later appointed an arbitrator, who dismissed the proceedings for lack of jurisdiction.
12.06.2019: The City Civil Court dismissed the appeal under Section 37(2)(a) of the Arbitration Act, which is the subject of WP No. 24893/2016.
Procedural History
The litigation progressed through multiple forums:
12.06.2011: The Bank filed OA No. 742/2011 before the Debt Recovery Tribunal (DRT), Bengaluru, seeking recovery of Rs. 19,41,14,940.
15.11.2019: The DRT dismissed the Bank’s application, holding that the Bank failed to prove the existence of the FPCs due to lack of written contracts, authorization letters, or corroborative evidence.
04.01.2018: The Debt Recovery Appellate Tribunal (DRAT), Chennai, allowed the Bank’s appeal (RA No. 82/2017) in part, directing the petitioners to pay the principal amount but denying interest on the ground of procedural lapses by the Bank.
2018-2019: The petitioners challenged the DRAT’s order in WP No. 3120/2018, while the Bank challenged the denial of interest in WP No. 27021/2019.
Relief Sought
WP No. 24893/2016: Quashing of the City Civil Court’s order dated 18.04.2016 in Misc. Appeal No. 32/2014, which dismissed the petitioner’s appeal against the arbitrator’s decision.
WP No. 3120/2018: Quashing of the DRAT’s order dated 04.01.2018 in RA No. 82/2017, which directed payment of the principal amount.
WP No. 27021/2019: Setting aside the DRAT’s order to the extent it denied interest on the principal amount.
The Legal Issue
The central question was: Whether the DRAT erred in reversing the DRT’s order by placing the burden on the petitioners to disprove the existence of the FPCs, despite the Bank’s failure to discharge its initial burden of proof under Sections 101 and 102 of the Indian Evidence Act?
Arguments Presented
For the Petitioners
The Bank failed to prove the existence of the 48 FPCs due to the absence of written contracts, authorization letters, or corroborative evidence.
The burden of proof lay squarely on the Bank under Sections 101 and 102 of the Evidence Act, and the DRAT erred in placing a negative burden on the petitioners.
The Bank’s witnesses (AW1, AW2, AW3) admitted that FPCs must be concluded in writing, yet no such documents were produced.
Mrs. Vijaya Kamath, the Bank’s employee responsible for booking FPCs, was not examined before the DRT, leading to an adverse inference under Section 114 of the Evidence Act.
The Bank’s reliance on circumstantial evidence (Inward Register, Commission Payment Register, and a CD of voice recordings) was insufficient without primary evidence of a concluded contract.
The Bank’s delay in cancelling the FPCs (beyond the 7-day RBI guideline) was fatal to its claim.
For the Respondent (Canara Bank)
The DRAT’s order was justified as the petitioners failed to prove that Mr. Dinesh Singh (alleged employee) was not authorized to book FPCs on their behalf.
The transactions were recorded in the Bank’s registers, and the normal practice of booking FPCs on oral instructions should be recognized.
The Bank was entitled to damages but not interest due to procedural lapses by its officials.
The matter should be remanded to the DRAT or DRT for fresh consideration, allowing the Bank to examine Mrs. Vijaya Kamath and adduce additional evidence.
The Court's Analysis
The High Court conducted a detailed analysis of the evidence and legal principles:
Burden of Proof:The Court relied on Sections 101 and 102 of the Evidence Act, which place the initial burden on the party asserting a claim. The DRAT erred in placing a negative burden on the petitioners to disprove the existence of the FPCs. The Court cited its own judgment in K.F. Noor Basha v. S. Moinudeen and the Supreme Court’s ruling in Anil Rishi v. Gurbaksh Singh, emphasizing that the burden of proof cannot shift to the defendant unless the plaintiff discharges its initial burden.
Requirement of Written Contracts:The Court noted that FPCs are contracts and must be concluded in writing as per RBI guidelines and the Bank’s internal circulars. The Bank’s witnesses (AW1, AW2, AW3) admitted that FPCs require written confirmation, yet no such documents were produced. The Court observed:
"The Bank has failed to produce any concluded contract in respect of the alleged 48 FPCs, nor any authorization letter or resolution empowering Mr. Dinesh Singh to act on behalf of the petitioners."
Adverse Inference:The Court upheld the DRT’s adverse inference under Section 114 of the Evidence Act against the Bank for not examining Mrs. Vijaya Kamath, the material witness responsible for booking FPCs. The DRT’s finding that the Bank withheld evidence to avoid cross-examination was affirmed.
Circumstantial Evidence Insufficient:The Bank relied on circumstantial evidence (Inward Register, Commission Payment Register, and a CD of voice recordings). However, the Court held that circumstantial evidence cannot substitute primary evidence of a concluded contract. The Court cited the Supreme Court’s rulings in Chandradhar Goswami v. Gauhati Bank Ltd. and CBI v. V.C. Shukla, which establish that entries in books of account cannot fix liability without independent proof of their trustworthiness.
Procedural Lapses by the Bank:The Court criticized the Bank for failing to cancel the FPCs within the 7-day RBI guideline, allowing them to remain outstanding for over a year. This lapse was held to be fatal to the Bank’s claim, as it violated RBI guidelines and the Bank’s own internal circulars.
DRAT’s Order Perversity:The Court found the DRAT’s order perverse for:
Ignoring the DRT’s well-reasoned findings based on evidence.
Placing a negative burden on the petitioners without the Bank discharging its initial burden.
Relying on circumstantial evidence while admitting the absence of written contracts.
Failing to consider the adverse inference drawn against the Bank for not examining Mrs. Vijaya Kamath.
The Verdict
The High Court set aside the DRAT’s order dated 04.01.2018 in RA No. 82/2017 and confirmed the DRT’s order dismissing the Bank’s claim. The Court held:
The Bank failed to prove the existence of the 48 FPCs due to lack of written contracts, authorization letters, or corroborative evidence.
The burden of proof lay on the Bank under Sections 101 and 102 of the Evidence Act, and the DRAT erred in placing a negative burden on the petitioners.
The DRAT’s order was perverse and lacked legal reasoning, warranting interference under Article 226 of the Constitution.
WP No. 3120/2018 (filed by the petitioners) was allowed, while WP No. 27021/2019 (filed by the Bank) was dismissed as infructuous.
WP No. 24893/2016 (challenging the City Civil Court’s order) was dismissed as it did not survive for consideration.
What This Means For Similar Cases
Burden of Proof Lies on the Claimant
Banks and financial institutions must discharge their initial burden of proof under Sections 101 and 102 of the Evidence Act before seeking relief.
Negative burden (requiring the defendant to disprove a claim) is not permissible unless the plaintiff proves its case.
Practitioners should cite Anil Rishi v. Gurbaksh Singh and K.F. Noor Basha v. S. Moinudeen to argue against unjustified burden-shifting.
Written Contracts Are Mandatory for Banking Transactions
Forward Purchase Contracts (FPCs) and similar financial agreements must be concluded in writing as per RBI guidelines and internal bank circulars.
Oral instructions or telephone bookings are not sufficient to establish liability, especially in disputes involving large sums.
Banks must maintain and produce all relevant documents, including:
Booking request/application from the customer.
Confirmation/contract note issued by the bank.
Signed acknowledgment from the customer.
Confirmed export orders/LCs (Letter of Credit).
Adverse Inference for Withholding Evidence
Failure to examine material witnesses (e.g., Mrs. Vijaya Kamath) can lead to an adverse inference under Section 114 of the Evidence Act.
Courts may draw adverse conclusions if a party withholds evidence to avoid cross-examination.
Practitioners should argue for adverse inference when the opposing party fails to produce key witnesses or documents.
Circumstantial Evidence Alone Is Insufficient
Registers, account statements, or voice recordings cannot substitute primary evidence of a concluded contract.
Circumstantial evidence must be corroborated by direct evidence to fix liability.
Courts will ignore circumstantial evidence if primary evidence is lacking, as held in Chandradhar Goswami v. Gauhati Bank Ltd. and CBI v. V.C. Shukla.
Procedural Compliance Is Non-Negotiable
Banks must strictly adhere to RBI guidelines, internal circulars, and statutory timelines (e.g., 7-day cancellation period for FPCs).
Procedural lapses (e.g., delay in cancelling contracts) can be fatal to a claim, even if the substantive dispute is genuine.
Practitioners should highlight procedural violations to challenge a bank’s claim, especially in recovery proceedings before the DRT.
