The Karnataka High Court (Bengaluru Bench) has held that where a Commercial Court records a finding that the defendant has disclosed a substantial defence within the meaning of Order XXXVII Rule 3(5) of the CPC, the defendant is entitled to unconditional leave to defend. The Court cannot, after recording such a finding, impose onerous conditions such as requiring the defendant to furnish a bank guarantee securing the plaintiff’s claim.
The Court clarified that the discretion under Rule 3(5) of the CPC is structured by the quality of the defence: refusal of leave for illusory defences, conditional leave for doubtful defences, and unconditional leave for substantial defences. The jurisdiction cannot be used as a substitute for attachment before judgment, and the legislative classification cannot be diluted by importing equitable considerations alien to the statutory scheme.
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A Single Judge Bench of Justice Lalitha Kanneganti observed that amended Order XXXVII Rule 3(5) CPC consciously classifies defences into three categories, frivolous/ vexatious/ illusory (leave refused), plausible but doubtful/ improbable (conditional leave), and substantial (unconditional leave). The discretion conferred on the Commercial Court is structured and guided by the quality of the defence disclosed, and is neither absolute nor unstructured.
Noticing that finding of substantial defence and imposition of bank guarantee are inherently inconsistent, the High Court found that the Commercial Court unequivocally recorded that the defendant disclosed a substantial defence requiring a full-fledged trial, yet proceeded to impose a condition of furnishing a bank guarantee for Rs. 5 crores. The High Court held that these two positions cannot legally coexist, once the defence is categorised as substantial, the legislative consequence is unconditional leave.
The Court also said that Order XXXVII is not a substitute for attachment before judgment: The object of conditional leave is to regulate the defendant’s right to defend where the defence is doubtful or lacking credibility, not to secure the plaintiff’s monetary claim. If the plaintiff seeks security for a prospective decree, a separate and distinct remedy exists. The jurisdiction under Rule 3(5) cannot be converted into a security mechanism for the plaintiff.
The respondent argued that the defendant, despite claiming Rs. 50 crores in damages, had not filed a counter-claim and therefore could not seek relief. The High Court rejected this, holding that a counter-claim enables a defendant to obtain an affirmative decree, but its absence does not prevent the defendant from disputing the plaintiff’s entitlement or pleading that the plaintiff’s own breach disentitles it to relief.
The Court explained that the legislature has itself balanced the rights of plaintiff and defendant by prescribing different consequences based on the nature of the defence. The Commercial Court cannot substitute this legislative mandate with its own perception of an equitable arrangement. Accepting the contrary interpretation would obliterate the statutory distinction between substantial and plausible-but-doubtful defences, rendering the classification redundant.
Briefly, the respondent, M/s Godrej Properties Limited, filed a commercial suit before the Commercial Court. The petitioner, T.S. Sateesh, who is the defendant in the underlying suit, sought for leave to defend the suit. The Commercial Court allowed the application for leave to defend but imposed a condition that the petitioner/defendant shall furnish a Bank Guarantee for Rs. 5 crores within 30 days from the date of the order. Aggrieved by this conditional grant of leave, the petitioner approached the Karnataka High Court seeking modification of the impugned order to the extent of the condition imposed, and praying for unconditional leave to defend.
The underlying dispute involves a sum of Rs. 5 crores paid as advance by the petitioner to the respondent under a term sheet and agreement. The petitioner’s defence rests on two principal grounds: first, that the suit is barred by limitation, which is both a question of law and fact requiring adjudication after a full-fledged trial; and second, that the petitioner had every right to forfeit the advance amount of Rs. 5 crores on account of the respondent’s violation of the terms of the term sheet and failure to perform obligations thereunder. The petitioner further claims entitlement to damages of Rs. 50 crores for the alleged loss caused by the plaintiff. The respondent’s case, on the other hand, is that the petitioner, in order to repay the Rs. 5 crores, had issued a cheque which was dishonoured, and the Commercial Court noted that if the defendant genuinely had the right to forfeit the amount, the question of why he issued a cheque for Rs. 5 crores to the plaintiff is a matter that needs to be examined during trial.
The Commercial Court acknowledged that the defendant’s assertion of his right to forfeit the advance amount of Rs. 5 crores, on the ground that the plaintiff violated the terms of the term sheet and failed to perform obligations, is a substantial defence that needs to be tested during the course of the trial. The Court also observed that the defendant’s claim that he invested the amount from his own pocket and is therefore entitled to forfeit the advance requires examination at trial. Despite recording these findings, the Commercial Court proceeded to balance the rights of both parties by imposing conditions regarding security, and accordingly allowed application on the condition that the defendant shall furnish a Bank Guarantee for Rs. 5 crores.
