Supreme Court Clarifies Res Judicata Exceptions in Banking Dispute: Canara Bank vs. N.G. Subbaraya Setty (2018)

Date of the Judgment: April 20, 2018
Citation: (2018) INSC 347
Judges: Justice R.F. Nariman, Justice Adarsh Kumar Goel. The judgment was authored by Justice R.F. Nariman.

Can a court enforce a contract that goes against the law? The Supreme Court of India recently addressed this critical question in a case involving Canara Bank and a dispute over a trademark assignment. The core issue revolved around whether a previous court decision validating an illegal contract should prevent a subsequent court from correcting that error. This judgment clarifies the exceptions to the legal doctrine of res judicata, ensuring that courts do not perpetuate illegalities.

Case Background

In 2001, N.G. Subbaraya Setty (Respondent No. 1) obtained a credit facility from Canara Bank (the Appellant). His son, Respondent No. 2, acted as a guarantor. When Respondent No. 1 defaulted on payments, the bank initiated proceedings before the Debt Recovery Tribunal (DRT) in Bangalore in 2002.

To settle the dues, Respondent No. 1 entered into an assignment deed with the bank on October 8, 2003, assigning the trademark “EENADU” for agarbathies (incense sticks) for ten years. The bank agreed to pay a monthly sum, part of which would be credited towards the loan, and the rest to be paid to Respondent No. 1.

However, on January 27, 2004, the bank cancelled the assignment deed, stating that it could not hold patent rights as per the Banking Regulation Act, 1949.

Respondent No. 1 then filed a suit (O.S. No. 2832 of 2004) against the bank, challenging the cancellation and seeking recovery of dues. The bank, in turn, filed a suit (O.S. No. 7018 of 2004) seeking a declaration that the assignment deed was void due to mistake, undue influence, and fraud.

The suits were consolidated, and the court ruled that the assignment deed was valid and the bank had no right to cancel it. The court dismissed the bank’s suit and initially rejected Respondent No. 1’s claim for money. Subsequently, a review petition by Respondent No. 1 was allowed, and the court ordered the bank to pay the dues of Rs. 2,16,000.

Based on the assignment deed, Respondent No. 1 filed another suit (O.S. No. 495 of 2008) against the bank for recovery of further dues. The trial court decreed the suit, citing the earlier judgment as res judicata. The High Court of Karnataka upheld this decision, leading to the present appeal before the Supreme Court.

Timeline:

Course of Proceedings

The initial suits, O.S. No. 2832 of 2004 (filed by Respondent No. 1) and O.S. No. 7018 of 2004 (filed by the bank), were consolidated and decided together by the trial court. The court ruled that the assignment deed was not vitiated by fraud or undue influence, and the bank’s cancellation was illegal. The court also held that it had jurisdiction to entertain the suits despite the DRT proceedings.

Respondent No. 1’s claim for a money decree for Rs.2,16,000/- was dismissed. However, this was later reversed in a review petition.

In the subsequent suit, O.S. No. 495 of 2008, the trial court held that the previous judgment was res judicata and decreed the suit in favor of Respondent No. 1. The High Court of Karnataka upheld this decision, leading to the present appeal before the Supreme Court.

Legal Framework

The Supreme Court considered the following legal provisions:

• Section 11 of the Code of Civil Procedure, 1908: This section codifies the doctrine of res judicata, preventing courts from retrying issues that have been finally decided in a previous suit between the same parties.
  
  “11. Res judicata – No Court shall try any suit or issue in which the matter directly and substantially in issue has been directly and substantially in issue in a former suit between the same parties, or between parties under whom they or any of them claim, litigating under the same title, in a Court competent to try such subsequent suit or the suit in which such issue has been subsequently raised, and has been heard and finally decided by such Court.”
• Section 45 of the Trade Marks Act, 1999: This section deals with the registration of assignments of trademarks. Sub-section (2) states that an unregistered assignment document cannot be admitted as evidence in court to prove title to a trademark unless the court directs otherwise.
  
  “45. Registration of assignments and transmissions (2) Except for the purpose of an application before the Registrar under sub-section (1) or an appeal from an order thereon, or an application under section 57 or an appeal from an order thereon, a document or instrument in respect of which no entry has been made in the register in accordance with sub-section (1), shall not be admitted in evidence by the Registrar or the Appellate Board or any court in proof of title to the trade mark by assignment or transmission unless the Registrar or the Appellate Board or the Court, as the case may be, otherwise directs.”
• Sections 6 and 8 of the Banking Regulation Act, 1949: Section 6 lists the forms of business a banking company may engage in, and Section 8 prohibits banks from trading in goods, except in specific circumstances. Section 46(4) imposes penalties for contravention of the Act.
  
  “6. Forms of business in which banking companies may engage (2) No banking company shall engage in any form of business other than those referred to in sub-section (1).”
  
  “8. Prohibition of trading Notwithstanding anything contained in section 6 or in any contract, no banking company shall directly or indirectly deal in the buying or selling or bartering of goods, except in connection with the realisation of security given to or held by it, or engage in any trade, or buy, sell or barter goods for others otherwise than in connection with bills of exchange received for collection or negotiation or with such of its business as is referred to in clause (i) of sub-section (1) of section 6”
  
  “46. Penalties (4) If any other provision of this Act is contravened or if any default is made in- (i) complying with any requirement of this Act or of any order, rule or direction made or condition imposed there under, or (ii) carrying out the terms of, or the obligations under, a scheme sanctioned under sub-section (7) of section 45, by any person, such person shall be punishable with fine which may extend to one crore rupees or twice the amount involved in such contravention or default where such amount is quantifiable, whichever is more, and where a contravention or default is a continuing one, with a further fine which may extend to one lakh rupees for every day, during which the contravention or default continues.”

Arguments

Appellant (Canara Bank) Arguments:

• The bank argued that the plea of res judicata was not specifically raised in the plaint of the 2008 suit, and no issue was framed on it. Therefore, it was impermissible for the courts to consider this plea.

• The assignment deed was in violation of the Trade Marks Act, 1999, specifically Section 45, as it was not registered. Thus, it could not be admitted as evidence.

• The assignment deed was also in violation of the Banking Regulation Act, 1949, specifically Sections 6 and 8, which prohibit banks from engaging in trading activities. The bank’s cancellation of the deed was based on this statutory prohibition.

• The bank highlighted that the Bank Manager who signed the assignment deed was dismissed due to disciplinary proceedings, and that the respondents were convicted in a criminal case for fraud related to the assignment deed.

• The bank relied on the judgment of Mathura Prasad Bajoo Jaiswal & Ors v. Dossibai N. B. Jeejeebhoy, (1970) 1 SCC 613, to argue that statutory prohibitions cannot be overridden by the doctrine of res judicata.

Respondent (N.G. Subbaraya Setty & Anr.) Arguments:

• The respondents argued that the judgment of April 27, 2013, which upheld the validity of the assignment deed, was final and binding between the parties. This judgment was delivered after the dismissal of the Chief Manager and the Sessions Judge’s judgment convicting the respondents.

• The respondents contended that the bank itself sought the assignment, and there was no fraud, misrepresentation, or undue influence. The cancellation of the assignment deed was therefore illegal.

• The respondents argued that the bank’s belated review petition against the April 27, 2013 judgment was an abuse of process and could not affect the res judicata status of the judgment.

• The respondents claimed that neither Section 45 of the Trade Marks Act nor Sections 6 and 8 of the Banking Regulation Act had only one interpretation, and that the assignment deed was not illegal.

Amicus Curiae (K.V. Viswanathan) Arguments:

• The Amicus Curiae argued that the belated review petition against the judgment dated 27.4.2013 would not take away the res judicata effect of the judgment.

• He clarified that if an appeal is filed within limitation, the res never becomes judicata. Until the limitation for filing an appeal is over, the res remains sub judice.

• He emphasized that the court can consider whether the delay in filing the appeal is without sufficient cause and an abuse of process.

• He cited judgments to show that in the United States, res judicata attaches the moment a judgment is pronounced, despite the fact that an appeal may be filed against the said judgment.

Issues Framed by the Supreme Court:

The Supreme Court did not explicitly frame issues in a separate section. However, the core issue was:

1. Whether the doctrine of res judicata applies to a prior judgment that upheld a contract in violation of statutory prohibitions under the Trade Marks Act, 1999 and the Banking Regulation Act, 1949.

Treatment of the Issue by the Court:

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

Judgment

Ratio Decidendi

The ratio decidendi of this judgment is that the doctrine of res judicata does not apply to a prior judgment that upholds a contract or transaction that is in violation of a statutory prohibition. An erroneous decision on a question of law, especially one that sanctions something illegal, cannot operate as res judicata. The Court has a duty to enforce statutory prohibitions.

Obiter Dicta

The Court did not have any specific obiter dicta in this case.

Analysis

This judgment is significant for clarifying the exceptions to the doctrine of res judicata. The Supreme Court has clearly stated that even if a matter has been decided earlier, a court cannot perpetuate an illegality by applying the principle of res judicata.

The judgment reinforces the principle that statutory prohibitions must be given effect to, and that no estoppel can arise on a pure question of law. This ensures that courts do not become instruments for enforcing contracts that are contrary to public policy and statutory provisions.

The Court’s reliance on the principle established in Mathura Prasad Bajoo Jaiswal & Ors v. Dossibai N. B. Jeejeebhoy further solidifies the position that an erroneous decision on a point of law cannot be res judicata.

The case also highlights the importance of proper pleading and framing of issues, although the Court did not strictly adhere to this in the present case.

Flowchart of the Case: