Foreign currency Derivate is legal and not a wagering contract

In this case Madras high court ruled in favour of Axis Bank Ltd in a dispute between it and Coimbatore-based Rajshree Sugars and Chemicals Ltd. The high court has held that the derivative contract is not a wagering contract, which means it is not illegal. It has also been held that amount due to the bank (Rs46-50 crore) is a debt as defined under the Debt Recovery Tribunal Act and hence the bank can approach the Debt Recovery Tribunal (DRT).

Court held that the contract entered into between the said company and the bank is not a void or voidable contract nor was it considered to involve any kind of fraud in the said derivative contracts.

HIGH COURT OF JUDICATURE AT MADRAS
DATED : 14-10-2008
CORAM
THE HON’BLE MR. JUSTICE V. RAMASUBRAMANIAN
O.A. Nos.251 and 252 of 2008 in C.S.No.240 of 2008,
O.A. Nos.526 and 527 of 2008 in C.S. No.240 of 2008
A. Nos.1926, 1927, 2446 and 2447 of 2008 in C.S. No.240 of 2008

M/s.Rajshree Sugars & Chemicals Limited
Vs. 
1.M/s.AXIS Bank Limited formerly known UTI Bank Limited, 
2.M/s.AXIS Bank Limited

V. RAMASUBRAMANIAN, J.
“$ 700 Billion bail out plan, Wall Street vanished, Lehman Brothers went belly up, “Bear Stearns consumed”, “U.S. National Debt Clock runs out of digits” and AIG gone up in smoke are some of the captions which have hit the headlines in recent times. All of those news items have a common denominator, called derivativesand this case is all about derivatives.

2. Since this appears to be the first case of its kind in India (subject to correction) where derivatives contracts are challenged as illegal and void and also since the jargon is not too familiar even to P.Ramanatha Iyer (of Law Lexicon) and Black (of Law Dictionary), a brief prelude has become necessary before we plunge into details.

PRELUDE ABOUT DERIVATIVES

3. Derivatives are time bombs and financial weapons of mass destruction said Warren Buffett, one of the worlds greatest investors, who overtook Microsoft Maestro in 2008 to become the richest man in the world and who is known as the Sage of Omaha or Oracle of Omaha. Derivatives, according to him, can push companies on to a spiral that can lead to a corporate melt down. He compared derivatives business to hell, easy to enter and almost impossible to exit. In response to a query as to whether a nuclear war would be the worst case scenario, a famous daily web log commented that the economic collapse triggered by the popping of the derivatives bubblepresented the worst case scenario.

4. True to the above criticism, the world of finance and investments, was swept by many a tsunami in the past decade and a half. Some of the derivatives disasterswhich plunged several institutions and millions of investors into severe crisis (and even led to the homicide by a 46 year old former IITian of his entire family followed by his suicide in US) are as follows:-

(i) The bankruptcy of Orange County, CA in 1994, the largest municipal bankruptcy in U.S. history. On December 6, 1994, Orange County declared Chapter 9 bankruptcy, after losing about $1.6 billion through derivatives known as “reverse floaters” whose values move inversely with market interest rates.

(ii) The collapse of the 233 year old Barings Bank when Nick Leeson, a trader at Barings Bank, made poor and unauthorized investments in index futures. Through a combination of poor judgement, lack of foresight, a naive regulatory environment and unfortunate outside events like the Kobe earthquake, Leeson incurred a huge loss that bankrupted the centuries-old financial institution. The loss suffered by the Bank was estimated at $ 27 billion.

(iii) The crumbling of the heavy-into-hedges trading firm known as Long Term Capital Management under the weight of derivatives worth $ 1.4 trillion, in 1998. But it was bailed out by the joint efforts of the US Federal Reserve and a few Banks in order to minimise public outcry.

(iv) The hedge fund fiasco of Amaranth Advisors in September 2006, to the extent of about $ 6 Billion, due to miscalculation of the price of natural gas futures.

(v) The collapse of the largest investment Bank Lehman Brothers and the leading American insurer AIG, due to extensive exposure to Credit Default Swaps (CDS) threatening a potential collapse of the United States financial system in 2008, leading to a $ 700 Billion Bail out plan whereby the U.S. Treasury agreed to buy out the underlying defaulted and endangered debt instruments from banks, brokerages and other financial institutions in an attempt to keep the country’s credit market from shutting down and creating a global economic crisis.

5. What are these derivatives which have gained such a great deal of notoriety? In simple terms, derivatives are financial instruments whose values depend on the value of other underlying financial instruments. The International Accounting Standard (IAS) 39, defines “derivatives” as follows:-

“A derivative is a financial instrument:

(a) whose value changes in response to the change in a specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, a credit rating or credit index, or similar variable (sometimes called the ‘underlying’);

(b) that requires no initial net investment or little initial net investment relative to other types of contracts that have a similar response to changes in market conditions; and

(c) that is settled at a future date.”

Actually, derivatives are assets, whose values are derived from values of underlying assets. These underlying assets can be commodities, metals, energy resources, and financial assets such as shares, bonds, and foreign currencies.

6. Derivatives can be used as insurance cover against certain types of business risks such as fluctuations in the rate of foreign exchange, fluctuations in the rate of interest on borrowings, fluctuations in the value of specified assets etc. To take an example, it is common knowledge that the price of gold keeps fluctuating. If a manufacturer of gold jewellery anticipates that he would require a particular quantity of gold at a specified distance of time, he may enter into a contract with the seller of gold bars for the supply of the same at a future date, at the rate specified in the contract. This contract reduces the risk for the buyer, against a possible steep rise in the price of gold. It equally reduces the risk of the seller against a steep fall in the price. Thus the contract acts as an insurance cover. When the transaction goes through without any dispute, the contract is fulfilled. But when the transaction fails and the motive behind the transaction is not necessarily the sale and supply of gold, but the receipt or payment of the difference in the price (difference between the prevailing price and the price fixed in the contract), many eyebrows are raised and many questions are asked. This is the point where the transaction takes a detour from a simple contract of insurance.

7. There are atleast 4 categories of derivatives, commonly in use. Some of them are traded through exchanges and they are known as Exchange-Traded-Derivatives(ETD). Others are traded directly between the parties and they are known as Over-The-Counter (OTC) derivatives. The 4 categories of derivatives are as follows:-

(1) Forwards: A contract between two parties. One party agrees to buy a commodity or financial asset on a date in the future at a fixed price, while the other agrees to deliver that commodity or asset at the predetermined price. These are not traded on exchanges because they are negotiated directly between two parties.

(2) Futures: A contract essentially the same as a forward contract, except that the deal is struck via an organized and regulated exchange. There are three key differences between forwards and futures. (i) Futures contract is guaranteed against default (ii) They are standardized and (iii) They are settled on a daily basis.

(3) Swaps: A swap is an agreement made between two parties to exchange payments on regular future dates. Swaps are OTC (Over the counter) products. Swaps are used to manage or hedge risk associated with volatile interest rates, currency exchange rates, commodity prices and share prices. Swaps can be considered as series of forward contracts.

(4) Options: An ‘option’ gives the holder the right to buy or sell an underlying asset at a future date at a predetermined price. A call option is the right to buy. The buyer of a “call option” has the right, but not the obligation to buy an agreed quantity of a particular commodity or financial instrument (underlying instrument), from the seller (or writer) at a certain time (the expiration date) for a certain price (strike price). The buyer pays a premium for this right. In contrast, a put optionis the right to sell. The buyer of a “put option” has the right, but not the obligation to sell an agreed quantity of a particular commodity or financial instrument (underlying instrument), to the seller (or writer) at a certain time (the expiration date) for a certain price (strike price). We have a variety of options such as American and European options, depending upon the time of exercise of the right. Both call option and put option can be combined to achieve “zero cost option.”

8. Trading in these markets are regulated internationally by Commodity Futures Trading Commission (CFTC) and International Swaps and Derivatives Association (ISDA) and the National Futures Association (NFA). Experts in the field of economics, finance and investment feel that derivatives are valuable because they provide efficient ways to manage and transfer risk. A business owner who is exposed to changes in market prices can enter into an appropriate derivatives contract and the risk can be assumed by a trader or speculator who is prepared to live with uncertainty in return for the prospect of achieving an attractive return. A large financial institution can withstand more risk than a small corporate and thus may choose to engage in derivatives products for a reasonable compensation. Nobel Laureate Kenneth Arrow predicted that this would increase economic prosperity since people would be more prepared to engage in risk-taking activities. It could also serve to improve the quality of prediction of future events in the world of finance and investments. Derivatives provide a global network for intelligent assessment, management, and distribution of risk on a large scale.

9. Broadly stated there are two distinct groups of derivatives contracts, which are distinguished by the way they are traded in the market:

(i) Over-The-Counter (OTC) derivatives, which are contracts that are traded (and privately negotiated) directly between two parties, without going through an exchange or other intermediary. Products such as swaps, forward rate agreements and exotic options are almost always traded in this way.

(ii) Exchange-traded derivatives (ETD) are those products that are traded via specialized derivatives exchanges or other exchanges. A derivatives exchange acts as an intermediary to all related transactions, and takes a margin from both sides of the trade to act as a guarantee. According to BIS, the combined turnover in the world’s derivatives exchanges totalled to USD 344 trillion during Q4 2005.

With the above prelude, let us now get into details.

FACTS OF THE CASE:

10. The plaintiff is a listed company, engaged in the manufacture and export of sugar to foreign countries. It has External Commercial Borrowings (ECB) from foreign Banks. As an exporter, the company has receivables in foreign currencies and as a borrower it has payables in foreign currencies. Since the rate of exchange of foreign currencies keep fluctuating, the plaintiff decided to hedge the risk against such fluctuations. Therefore, on 14.5.2004, the plaintiff herein entered into a I.S.D.A. (International Swaps and Derivatives Association) Master Agreement with UTI Bank Limited. The Master Agreement is in an internationally standardised format developed by the association and the normal practice in the trade is to keep the Master Agreement as the reservoir, from out of which several deals would flow. There is a Schedule attached to the Master Agreement, which is flexible and which gives a leverage for the parties to reduce the terms and conditions between the parties into specifics. Accordingly, a Schedule was annexed to the Master Agreement dated 14.5.2004. By Part 4 (i) of the said Schedule, the clause relating to “Governing Law and Jurisdiction” found in Section 13(b) of the Master Agreement was replaced with the following provisions:-

With respect to any suit, action or proceeding relating to this Agreement (“Proceedings”) each party irrevocably:

(i) submits to the jurisdiction of the High Court of Mumbai in India

(ii) waives any objection which it may have at any time to the laying of the venue of any Proceedings brought in any such Court and waives the right to object, with respect to such Proceedings, that such Court does not have jurisdiction over such party.

Nothing in this Agreement precludes either party from bringing Proceedings in any other Court, tribunal or appropriate forum in India nor will bringing of Proceedings in any one or more jurisdictions preclude the bringing of Proceedings in any other jurisdiction.

11. The aforesaid ISDA Master Agreement dated 14.5.2004 was signed for and on behalf of the plaintiff, by their Chief Financial Officer and Company Secretary by name Mr.P.K.Viswanathan, by virtue of the resolution of the Board of Directors dated 24.3.2004, authorising him for the purpose. The authorisation given to Mr.P.K.Viswanathan was not merely to sign the agreement but actually to deal with all matters concerning derivative transactions. The resolution of the Board of Directors dated 24.3.2004 also recorded the consent of the Board to enter into “interest rate and foreign currency derivatives including interest rate and currency option contracts”.

12. In pursuance of the ISDA Master Agreement dated 14.5.2004, atleast 10 deals were struck between the plaintiff and UTI Bank (which later became AXIS BANK LTD). Admittedly, 9 out of those 10 deals have already matured without any dispute on either side. But the plaintiff has come to court with regard to the 10th deal, bearing contract No. OPT 727. The disputed deal is a USD-CHF (U.S.Dollars-Swiss Franc) Option Structure, entered into by the said P.K.Viswanathan on behalf of the plaintiff on 22.6.2007 with the UTI Bank. The structure of the deal was as follows:-

(i) The plaintiff would receive USD 100,000 on 23.6.2008 if spot never trades at 1.2385 from trade date namely, 22.6.2007 till fixing date 1 namely, 19.6.2008.

(ii) During the reference period from 22.6.2007 to 19.6.2008, if USD-CHF never touches 1.1250 and 1.2385 and if it ever touches 1.2385, there is no exchange of principal, but if it ever touches 1.1250 and never touches 1.2385, the plaintiff should buy USD 20 million against paying CHF at 1.3300 .

During the reference period from 22.6.2007 to 15.6.2009, if USD-CHF never touches 1.1200 and 1.2385 or if it ever touches 1.2385, there is no exchange of principal, but if it ever touches 1.1200 and never touches 1.2385, the plaintiff should buy USD 20 million against paying CHF at 1.3300.

(iii) If the USD-CHF touches the level of 1.2385 ever during the period starting from 22.6.2007 to 15.6.2009, then the entire structure gets knocked out with no subsequent liability and the plaintiff would receive USD 100,000 on the spot date of touch. However if spot touches 1.2325, then the plaintiff would receive instant payment of USD 100,000, though the structure will not get knocked out.

13. In terms of the above deal, entered into on 22-6-2007, the defendant paid USD 100,000 to the plaintiff on 27-6-2007. The plaintiff received the said amount. However, after 6 months, the plaintiff sent a letter dated 12.12.2007 claiming that the entire structure as per the contract dated 22.6.2007 got knocked out with no liability to either of the parties. But, by a reply dated 7.1.2008, the Bank challenged the claim and contended that the contract was still alive and that the Bank was prepared to work out suitable risk mitigation structures.

14. Not satisfied with the stand taken by the Bank, the plaintiff has come up with the present suit seeking the following reliefs:-

(i) To declare that the deal confirmation of U.S. Dollar V/s Swiss Franc structure dated 22.06.2007 in OPT contract No.727 with the schedule thereon purportedly made by the CFO on behalf of the plaintiff with the defendant is void ab-initio, illegal, violative of RBI Guidelines, opposed to public policy and unenforceable and not binding on the plaintiff company.

(ii) To declare that the deal confirmation of U.S. Dollar V/s Swiss Franc contract dated 22.06.2007 in OPT Contract No.727 with the schedule thereon purportedly made by the CFO on behalf of the plaintiff with the defendant Bank is voidable at the instance of the plaintiff and the plaintiff has therefore avoided the contract and therefore the contract is not binding or enforceable against the plaintiff.

(iii) To declare that in the alternative to prayers (a) and (b), this Hon’ble Court be pleased to declare that the Contract is ultra vires the object Clause of the Memorandum of Association of the plaintiff and is, therefore, not binding upon the plaintiff and/or is not enforceable against the plaintiff.

(iv) For a permanent injunction restraining the defendants, their men, agents, servants from in any way acting in furtherance of contract in OPT No.727 dated 22.06.2007 with the schedule thereon by initiating any proceedings for recovering any amount from the plaintiff or seeking recovery of any amount from the plaintiffs under the contract and or initiating any measures or proceedings to recover any amount from the plaintiff under the contract.

(v) For a permanent injunction directing the defendants to deposit with the Registry of this Hon’ble Court all the papers and proceedings relating to the contract including transcripts of any tape recorded conversation.

15. Along with the suit, the plaintiff filed 2 applications viz.,

(i) O.A.No.251 of 2008, seeking an interim order of injunction restraining the respondents from in any way acting in furtherance of the contract in OPT Contract No.727 dated 22.6.2007 by initiating any proceedings for recovering any amount from the plaintiff or seeking recovery of any amount from the plaintiff or initiating measures or proceedings to recover any amount from the plaintiff under the contract and

(ii) O.A.No.252 of 2008, seeking an interim order of injunction directing the respondents to deposit in the Registry of this Court, all the papers and proceedings relating to the contract including the transcripts of any tape recorded conversation.

16. On 4.3.2008, this court granted an exparte ad-interim order in O.A.No.251 of 2008, directing both parties to maintain status-quo and ordered notice in both the applications. After service of notice, the respondents entered appearance and submitted that the order of status-quo crippled the respondents in their other transactions with other financial institutions and caused more hardship than even an order of injunction. Therefore, the interim order was modified on 11.4.2008 into one of an injunction restraining the respondents from enforcing the contract in so far as the plaintiff alone is concerned.

17. Subsequently, the defendants have come up with several applications, whose details are as follows:-

(i) O.A. No.526 of 2008 seeking an interim order of injunction restraining the plaintiff from alienating, encumbering, dealing with, disposing of, creating or extending any third party interests in or over the assets of the plaintiff.

(ii) O.A.No.527 of 2008 seeking an interim order of injunction restraining the plaintiff from entering into any transactions with other Banks/Financial Institutions and thereby creating any third party interests in the assets of the plaintiff.

(iii) A. No.1926 of 2008 to revoke the leave granted under Clause 12 of the Letters Patent.

(iv) A. No.1927 of 2008 seeking rejection of the plaint on the ground that the plaint does not disclose any cause of action to have arisen within the jurisdiction of this Court.

(v) A. No.2446 of 2008 seeking a direction to the plaintiff to give an undertaking to pay such sum by way of damages as the Court may award as compensation in the event of the defendant getting prejudiced by any adverse order passed by this Court and

(vi) A. No.2447 of 2008 seeking a direction to the plaintiff to furnish Bank Guarantee to the defendant in a sum of Rs.40 crores, to cover the monetary liability of the plaintiff under the transaction in question.

18. All the above applications were taken up together for hearing and I heard Mr.G.Masilamani, learned Senior Counsel for the plaintiff and Mr.V.Ramachandran, learned Senior Counsel for the defendant. Since there are 8 applications, out of which, 2 are by the plaintiff and 6 are by the defendant, I shall refer to the parties only by their description in the suit and not by their description in the applications.

19. Primarily the plaintiff assails the OPT contract on the grounds inter alia –

(a) that it is nothing but a “wagering contract” hit by Section 30 of the Indian Contract Act, 1872;

(b) that it was not supported by an underlying exposure and hence violative of the Master Circulars and the Regulations issued by the Reserve Bank of India and consequently hit by Section 23 of the Indian Contract Act, 1872;

(c) that the defendant-Bank failed to make a study of the risk management policy of the plaintiff-Company and the Chief Financial Officer-cum-Company Secretary of the plaintiff-Company also acted without authority in signing such a contract forbidden by law; and

(d) that when the whole contract is vitiated and unenforceable, the defendant-Bank is not entitled to claim any rights under the same.

20. Opposing the grant of any interim relief as also the final relief, Mr.V.Ramachandran, learned Senior Counsel appearing for the defendant-Bank contended –

(a) that the suit itself is not maintainable in view of the provisions of Section 18 of The Recovery of Debts Due to Banks and Financial Institutions Act, 1993;

(b) that no injunctive relief of the nature prayed for, can be granted in view of Section 41(b) of the Specific Relief Act, 1963;

(c) that the transactions in derivatives, have the sanction of law and hence not hit either by Section 23 or by Section 30 of the Indian Contract Act, 1872; and

(d) that the agreement was executed on behalf of the plaintiff-Company by a person who was duly authorised by a resolution of the Board and hence the plaintiff-Company is bound by the agreement.

MAINTAINABILITY OF THE SUIT:

21. Since the defendant-Bank has raised the question of maintainability of the suit in view of the bar of jurisdiction of civil courts under section 18 of Act 51 of 1993 and the question of entitlement of the plaintiff to an injunctive relief in view of Section 41(b) of the Specific Relief Act, 1963, it is necessary to consider them at the threshold before delving deep into the nature of derivative transactions and their validity with respect to the statutory provisions. Therefore I shall first take up the issue of maintainability of the suit.

22. It is contended by the learned Senior Counsel for the defendant-Bank that the defendant is a Banking Company within the meaning of the Banking Regulation Act, 1949 and hence it is a Bank within the meaning of Section 2(d) of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, hereinafter called ‘Act 51 of 1993’. Consequently, if the contingency provided in the contract in question gives rise to a claim for money by the Bank upon the plaintiff, it would come within the definition of the word “debt” under Section 2(g) of Act 51 of 1993. Therefore the learned Senior Counsel contended that the defendant will be entitled to file an application for recovery of such a debt before the appropriate Tribunal, as and when the contingency arises. It is only when an application is filed by the Bank against the plaintiff before the Tribunal, that the plaintiff would be entitled, by virtue of the provisions of Section 19(6), 19(7), 19(8) and 19(9) of Act 51 of 1993, to raise all the issues now raised by them, either by way of defence or by way of set off or by way of counter claim. Since Act 51 of 1993 enables the Tribunal to try a claim for set off or a counter claim in a written statement as a cross suit (by virtue of sub Sections (7) and (9) of Section 19), the plaintiff ought not to have rushed to this Court especially when there is a statutory bar of the jurisdiction of Civil Courts under Section 18.

23. In response, Mr.G.Masilamani, learned Senior Counsel for the plaintiff contended that when the whole transaction is assailed as null and void and illegal, no rights and obligations flowed out of such a contract and that therefore the question of the defendant invoking the provisions of Act 51 of 1993 did not arise. Moreover, every liability of a person to a Bank (assuming that there is a liability), cannot be categorised as a “debt” within the meaning of Section 2(g) of the Act. Suppose a Bank enters into an agreement with a third party for the purchase of a property or entrusts the work of construction of a building to a contractor and a breach of the contract is committed by the other party leading to a claim either for specific performance or for recovery of money, could it also be termed as a “debt” and would the Bank be entitled to recover the amount due under such transactions, through the Tribunal? Therefore the learned Senior Counsel for the plaintiff contended that the bar of jurisdiction of Civil Courts under Section 18, could not apply to the case on hand.

24. I have carefully considered the rival contentions. The definition of the word “debt” in Section 2(g) of the Act includes any liability claimed as due from any person, by a Bank, during the course of any business activity undertaken by the Bank. Therefore, if the claim of the Bank has arisen during the course of any business activity undertaken by the Bank, then the amount so claimed by the Bank would certainly come within the meaning of the word “debt” as defined in Section 2(g). Section 6 (1) of the Banking Regulation Act, 1949, enables a Banking Company to engage in any one or more of the forms of business enumerated in clauses (a) to (o), in addition to the business of Banking. Sub Section (2) of Section 6 prohibits a Banking Company from engaging in any form of business other than those enumerated in Sub Section (1). Therefore if a transaction falls within any one of the forms of business covered by Section 6(1) of the Banking Regulation Act, 1949, it would certainly be a business activity undertaken by the Bank. Consequently, a claim that arises during the course of such a business activity undertaken by the Bank, would come within the definition of the word “debt” in Section 2(g).

25. Transactions in derivatives, fall within the category of “business activity undertaken by the Bank” as they are covered by Section 6(1) of the Banking Regulation Act, 1949. Therefore I have no difficulty in coming to the conclusion that if the transaction in question gives rise to a claim by the Bank, of any liability, on the part of the plaintiff, the defendant-Bank may certainly be able to invoke the provisions of Act 51 of 1993. Since the word “debt” is defined to include any claim arising out of the business activity of the bank, it is not necessary that only in those cases where there is an act of lending and borrowing that the provisions of Act 51 of 1993 could be invoked by the Bank. Therefore I have no difficulty in accepting the first limb of the argument of Mr.V.Ramachandran, learned Senior Counsel appearing for the respondent Bank, that if the transaction in question gives rise to a claim by the Bank, the Bank has to go before the Debts Recovery Tribunal.

26. However it does not mean that as a corollary, the present suit is barred by Section 18 of Act 51 of 1993. Even in cases where the transaction between a Bank and its customer is one of mere lending and borrowing, it is not as though a Civil suit at the instance of the borrower, is barred, in all contingencies, without exception. In Mardia Chemicals Ltd Vs. Union of India {2004 (4) SCC 311}, the Supreme Court held in paragraph-80.5 as follows:-

“80.5. As discussed earlier in this judgment, we find that it will be open to maintain a civil suit in Civil Court, within the narrow scope and on the limited grounds on which they are permissible, in the matters relating to an English mortgage enforceable without intervention of the Court.”

27. Again in Indian Bank Vs. ABS Marine Products Pvt Ltd {2006 (5) SCC 72}, the Supreme Court held that it is not necessary for a borrower to file a counter-claim in the same application for recovery of money filed by the bank before the Tribunal and that a borrower is well entitled to file an independent suit before a Civil Court for damages. Such a suit was also held to be not liable to be transferred to the Tribunal against the wishes of the borrower, when on facts, they were not inextricably connected. In paragraph-15 of the said judgment, the Supreme Court held “that the jurisdiction of Civil Courts is not barred in regard to any suit filed by a borrower or any other person against a bank for any relief.” Again in paragraph-16 of the said judgment, the law on the point was made clear in the following words:-

“What is significant is that Sections 17 and 18 have not been amended. Jurisdiction has not been conferred on the Tribunal, even after amendment, to try independent suits or proceedings initiated by borrowers or others against banks/financial institutions, nor the jurisdiction of Civil Courts barred in respect of such suits or proceedings.”

28. However, Mr.V.Ramachandran, learned Senior Counsel for the defendant-Bank contended that once the right of the bank to file an application before the Debt Recovery Tribunal under Act 51 of 1993 is recognised, then it follows automatically that the claim in the present suit would only amount to a counter claim or a set off and that the present claim of the plaintiff cannot be tried independently as a suit, with multiple forums adjudicating upon the same dispute in multiple proceedings. In support of his said contention, the learned Senior Counsel relied upon the provisions of Sections 19(6) to 19(9) of Act 51 of 1993 and also the decisions of the Supreme Court in Union Bank of India Vs. Abhijit Tea Co. Pvt. Ltd {2000 (7) SCC 357}, State Bank of India Vs. Ranjan Chemicals Ltd {2007 (1) SCC 97}, Industrial Investment Bank of India Vs. Marshal’s Power and Telecom (I) Ltd {2007 (1) SCC 106} and Durga Hotel Complex Vs. Reserve Bank of India {2007 (5) SCC 120}.

29. In Abhijit Tea Co. case, the Supreme Court referred to the provisions of Sections 19(6) to 19(11) of the Act and concluded that when the pleas raised by the borrower are inextricably connected with the claim of the bank, they would fall within the categories of set off or counter claim and that therefore the suit filed by the borrower should be transferred to the Tribunal. But in ABS Marine case, the Apex Court explained the ratio in Abhijit Tea Co., case, in paragraph-25 as follows:-

“Suffice it to clarify that the observations in Abhijit that an independent suit of a defendant (in the bank’s application) can be deemed to be a counter claim and can be transferred to the Tribunal, will apply only if the following conditions were satisfied:-

(i) The subject matter of the bank’s suit, and the suit of the defendant against the bank, should be inextricably connected in the sense that decision in one would affect the decision in the other.

(ii) Both parties (the plaintiff in the suit against the bank and the bank) should agree for the independent suit being considered as a counterclaim in the bank’s application before the Tribunal, so that both can be heard and disposed of by the Tribunal.”

30. Ranjan Chemicals Ltd was a case primarily arising out of the refusal of a Civil Court to transfer a suit filed by the borrower to the Tribunal, for being tried jointly with an application of the bank pending before the Tribunal. It was found in paragraph-12 of the said decision that in both the proceedings, the rights and liabilities of parties arose out of the same transaction and that the same basic evidence was to be taken in both cases. Therefore the Supreme Court ordered the transfer and joint trial. This decision was followed in Marshal’s Power case.

31. In Durga Hotel Complex case, a customer approached the Banking Ombudsman, notified by the Reserve Bank of India in exercise of the power conferred by Section 35A of the Banking Regulation Act, 1949, even before the Bank initiated any action. But before the Ombudsman could pass an award, the Bank filed an application before the Tribunal for the issue of a certificate of recovery. Therefore the High Court took the view that the Ombudsman had lost jurisdiction to render the award. Two questions arose before the Supreme Court namely (i) as to whether the Ombudsman’s jurisdiction was ousted by the Bank filing an application before DRT and (ii) as to whether the claim before the Ombudsman came within the purview of the scheme framed by the Reserve Bank of India. While answering both questions in favour of the Bank, the Supreme Court held that by virtue of Clause 16(3) of the scheme, no complaint would lie before the Ombudsman, once the foundation for such a complaint is lost, on account of the Bank filing an application before the Competent Forum on the same subject matter.

32. It is seen from all the cases that followed ABS Marine that the ratio in ABS Marine was not expressly overruled by any subsequent decision. Therefore, it is clear that a civil suit is maintainable. But the question as to whether the civil suit is liable to be transferred to the Tribunal after an application is filed by the Bank before the Tribunal (in the light of the ratio laid down in Ranjan Chemicals case and Marshal’s Power case), is actually premature at this stage, since the Bank has not filed any application before the DRT as on date.

33. That the present suit is vulnerable for an order of transfer, if and when the Bank files an application before the DRT, cannot make the suit non maintainable. In all the decisions of the Supreme Court relied upon by the learned Senior Counsel for the defendant-Bank, the suits were not thrown out as not maintainable. They were only transferred to the Tribunals for being treated as set off or counter claim and for being tried along with an application of the Bank. Therefore, I hold that the present suit is very much maintainable.

34. It is interesting to note that even if the defendant in an application before the DRT claims set off or makes a counter claim, it is not necessary for the Tribunal to deal with them together. Sub Section (11) of Section 19 confers an element of discretion upon the Tribunal to treat it as an independent action. It reads as follows:-

“19(11). Where a defendant sets up a counter-claim and the applicant contends that the claim thereby raised ought not to be disposed of by way of counter-claim but in an independent action, the applicant may, at any time before issues are settled in relation to the counter-claim, apply to the Tribunal for an order that such counter-claim may be excluded, and the Tribunal may, on the hearing of such application, make such order as it thinks fit.”

35. Thus Section 19(11) entitles a Bank to contend before the DRT that the claim made by the defendant should not be disposed of by way of counter claim, but should be tried only as an independent action. If such a contention is raised by the Bank in an application taken out before issues are settled in relation to the counter claim, then the Tribunal is entitled to pass an order. Unfortunately, after having conferred a right upon the Bank to oppose the claim of a defendant from being treated as a counter claim and after having conferred a discretion upon the Tribunal to treat such a claim as an independent action, Section 19 is silent as to what would happen next. If the claim made by a defendant in an application before the DRT is chosen not to be treated as a counter claim but to be treated only as an independent action, the very maintainability of such an independent action, may be in jeopardy, on account of the fact that Section 19(1) enables only a Bank or Financial Institution to file an application before the Tribunal. But if the counter claim is treated as an independent action, the borrower would become the applicant. To this extent, there is no clarity in the Act.

36. In the above circumstances, the present suit cannot be held to be not maintainable. Therefore the issue of maintainability of the suit is, prima facie answered in favour of the plaintiff.

SECTION 41(b) OF THE SPECIFIC RELIEF ACT:-

37. It is next contended by Mr.V.Ramachandran, learned Senior Counsel for the respondent-Bank that the prayer of the plaintiff in O.A.No.251 of 2008, for an interim order of injunction restraining the Bank from acting in furtherance of the impugned contract, by initiating any proceedings for recovery of any amount from the plaintiff or seeking recovery of any amount from the plaintiff and/or initiating any measures or proceedings to recover any amount, is not sustainable in view of Section 41(b) of the Specific Relief Act.

38. Section 41(b) of the Specific Relief Act, 1963 reads as follows:-

“41. An injunction cannot be granted:

(a) * * * * *

(b) to restrain any person from instituting or prosecuting any proceeding in a Court not subordinate to that from which the injunction is sought;”

39. In Cotton Corporation of India Ltd Vs. United Industrial Bank Ltd {1983 (4) SCC 625}, a leading case on the scope of section 41(b), the Bank filed a suit for declaring certain transactions as null and void and not binding upon the Bank. Pending suit, the Bank moved an application for an interim injunction to restrain the Cotton Corporation from using the Bills of Exchange or Hundies involved in the dispute, for the purpose of any suit or other proceedings, including winding up proceedings. Though a limited injunctive relief was granted by the single Judge of the Bombay High Court, the Division Bench granted an injunction, forcing the Cotton Corporation to file an appeal before the Supreme Court. While over turning the decision of the Division Bench, the Supreme Court considered the scope of Section 41(b) of the Specific Relief Act, 1963 and held in paragraphs-5, 7 and 23 as follows:-

“5. A very narrow question which we propose to examine in this appeal is: Whether in view of the provision contained in Section 41 (b) of the Specific Relief Act, 1963 (‘Act’ for short), the Court will have jurisdiction to grant an injunction restraining any person from instituting any proceeding in a Court not subordinate to that from which the injunction is sought? The contention may be elaborated thus : Can a person be restrained by an injunction of the Court from instituting any proceeding which such person is otherwise entitled to institute in a Court not subordinate to that from which the injunction is sought? In the facts of the present case, the narrow question is whether the Corporation can be restrained by an injunction of the Court from presenting a winding-up petition against the Bank? The High Court seems to hold that the Court has such powers in view of the provisions contained in Order 39 of the Code of Civil Procedure read with Section 37 of the Specific Relief Act, 1963 or in exercise of the inherent powers of the Court under Section 151 of the Code of Civil Procedure.

“41. An injunction cannot be granted:

(a) * * * * (b) to restrain any person from instituting or prosecuting any proceeding in a Court not subordinate to that from which the injunction is sought;”

The predecessor of Section 41 (b), Section 56 (b) of the Specific Relief Act of 1887 repealed by 1963 Act read as under:

“56. Injunction cannot be granted:

(a) * * * * (b) to stay proceeding in a Court not subordinate to that from which the injunction is sought”.

A glance at the two provisions, the existing and the repealed would reveal the legislative response to judicial interpretation. Under Section 56 (b) of the repealed Act, the Court was precluded by its injunction to grant stay of proceeding in a Court not subordinate to that from which the injunction was sought. In other words, the Court could stay by its injunction a proceeding in a Court subordinate to the Court granting injunction. The injunction granting stay of proceeding was directed to the Court and the Court has to be the Court subordinate to the one granting the injunction. This is postulated on the well recognised principle that the superior Court can regulate proceedings in a Court subordinate to it. It is implicit in this assumption and the language used in Section 56 (b) that the Court could not grant injunction under Section 56(b) of the repealed Act to stay proceeding in a Court superior in hierarchy to the Court from which injunction is sought. But by judicial interpretation, a consensus was reached that as injunction acts in personam while the Court by its injunction cannot stay proceedings in a Court of superior jurisdiction, it could certainly by an injunction restrain a party before it from further prosecuting the proceeding in other Courts may be superior or inferior in the hierarchy of Courts. To some extent this approach not only effectively circumvented the provision contained in Section 56 of the repealed Act but denuded it of its content. The Legislature took notice of this judicial interpretation and materially altered the language of the succeeding provision enacted in Section 41(b) replacing Section 56(b) of the repealed Act while enacting Specific Relief Act of 1963. The Legislature manifestly expressed its mind by enacting Section 41(b) in such clear and unambiguous language that an injunction cannot be granted to restrain any person, the language takes care of injunction acting in personam, from instituting or prosecuting any proceeding in a Court not subordinate to that from which injunction is sought. Section 41(b) denies to the Court the jurisdiction to grant an injunction restraining any person from instituting or prosecuting any proceeding in a Court which is not subordinate to the Court from which the injunction is sought. In other words, the Court can still grant an injunction restraining a person from instituting or prosecuting any proceeding in a Court which is subordinate to the Court from which the injunction is sought. As a necessary corollary, it would follow that the Court is precluded from granting an injunction restraining any person from instituting or prosecuting any proceeding in a Court of co-ordinate or superior jurisdiction. This change in language deliberately adopted by the Legislature after taking note of judicial vacillation has to be given full effect.

23. Turning to the facts of this case, let it be recalled that the learned single Judge had declined to grant any temporary injunction against the present appellant, the Corporation, and in our opinion rightly. The Appellate Bench interfered with the order for the reasons which are far from convincing and it overlooked the provision contained in Section 41(b) and effect thereof. Taking the most favourable view of the decision of the Appellate Bench and assuming that the Bench had in its mind the inherent power of the Court to grant injunction despite inhibition and consistent with the view taken by the Courts in England, it had then in order to do justice between the parties (sic to) first reach an affirmative finding that the winding-up petition as and when presented by the Corporation  the creditor would be frivolous and would constitute an abuse of the process of the Court or a device to pressurise the Bank to submit to an unjust and dishonest claim. It must also reach an affirmative conclusion that the debtor-Bank is sufficiently solvent to satisfy the claim as and when established. It has also to record an affirmative finding that the Corporation  the creditor is not seeking bona fide to present a petition for winding-up but is actuated by an ulterior motive in presenting the petition. Decisions in New Travellers’ Chambers Ltd {(1894) 70 LT 271}, Charles Forte Investments Ltd {(1963) 2 AII ER 940 : 1964 Ch 240 : (1963) 3 WLR 662 (CA)} and Bryanston Finance Ltd {(1976) 1 AII ER 25 : 1976 Ch 63 : (1976) 2 WLR 41 (CA)} would require these findings to be recorded before an interim injunction can be granted. The decision of the Appellate Bench is conspicuously silent on these relevant points and for this additional reason also the appeal must succeed.”

40. In paragraph 8 of the same judgment, the Supreme court referred to the Constitutional goal that access to justice is a valuable right and that it cannot generally be curtailed. The Supreme Court also recorded that what was prescribed in Section 41(b) was an exception. This view of the Supreme Court is found in the following portion of paragraph-8 of the judgment:-

” 8. .. .. .. .. .. ..

Now access to Court in search of justice according to law is the right of a person who complains of infringement of his legally protected interest and a fortiori therefore, no other Court can by its action impede access to justice. This principle is deducible from the Constitution which seeks to set up a society governed by rule of law. As a corollary, it must yield to another principle that the superior Court can injunct a person by restraining him from instituting or prosecuting a proceeding before a subordinate Court. Save this specific carving out of the area where access to justice may be impeded by an injunction of the Court, the Legislature desired that the Courts ordinarily should not impede access to justice through Court. This appears to us to be the equitable principle underlying Section 41(b).”

41. It was contended before the Supreme Court that Section 41(b) deals only with perpetual injunction and that temporary injunctions are regulated only by CPC and Section 37 of the Specific Relief Act, 1963. But the said contention was repelled on the ground that such a dichotomy would create an unnecessary grey area and that where no final relief could be granted, interim relief could also not be granted. The Supreme Court also noted in paragraph-14, the distinction between the law in England and the law in India. This decision in Cotton Corporation case still holds the field.

42. Once it is accepted that an injunction cannot be granted to restrain a person from instituting or prosecuting any proceeding in a Court not subordinate to the Court from which an injunction is sought, then the next question would be as to whether the Debts Recovery Tribunal could be construed as a Court not subordinate to this Court.

43. The question whether the DRT is a Court subordinate to the High Court, especially when the High Court is exercising jurisdiction on its ordinary original side, was considered by a learned Judge of the Calcutta High Court in State Bank of India Vs. Madhumita Construction Pvt Ltd {AIR 2003 Cal. 7}. The learned Judge held in paragraph-13.3 that de hors the supervisory jurisdiction and power of the High Court under Article 226/227 of the Constitution, the Debts Recovery Tribunal cannot be construed as a Court subordinate to the High Court and that while exercising ordinary original civil jurisdiction, under Clause 12 of the Letters Patent, this Court is only exercising coordinate jurisdiction. Therefore the learned Judge took the view that no injunction can be granted by the High Court while exercising ordinary original jurisdiction (entertaining a civil suit), restraining a person from instituting proceedings before the Debts Recovery Tribunal.

44. The words “Court subordinate” or “Court not subordinate” are not defined in the Specific Relief Act, 1963. Therefore these words have to be assigned only their natural meaning, in the absence of an indication in the statute about the sense in which the words are used therein. The Civil Procedure Code speaks of subordination of Courts in Section 3, in the following manner:-

“3. Subordination of Courts:- For the purposes of this Code, the District Court is subordinate to the High Court and every Civil Court of a grade inferior to that of a District Court and every Court of Small Causes is subordinate to High Court and District Court”.

45. Sections 23 and 24 of the Code of Civil Procedure, speak of “Court subordinate”, while dealing with the general power of transfer and withdrawal. A reading of these provisions, gives a clue that unless two Courts fall in a line of hierarchy, one cannot be taken to be subordinate or superior to the other.

46. But de hors the principle of subordination of Courts or hierarchy of Courts, having any relevance to Section 41(b) of the Specific Relief Act, 1963, the Supreme Court appears to have taken a consistent view that anti suit injunctions are possible in respect of proceedings in foreign Countries. In one of the earliest decisions on this aspect, M/s. V/O Tractoroexport, Moscow Vs. M/s.Tarapore & Co. {AIR 1971 SC 1}, the Supreme Court granted an injunction restraining a party from proceeding with an arbitration in Moscow. Following the same, the Supreme Court granted an injunction in Oil and Natural Gas Commission Vs. Western Company of North America {AIR 1987 SC 674}, restraining the defendant from proceeding with the action in a foreign Court. This decision was rendered after analysing Section 41(b) and also distinguishing Cotton Corporation case. The relevant portion of the decision of the Supreme Court in Oil and Natural Gas Commission case, reads as follows:-

“There is nothing in Cotton Corporation’s case which supports the proposition that the High Court has no jurisdiction to grant an injunction or a restraint order in exercise of its inherent powers in a situation like the one in the present case. In fact this Court had granted such a restraint order in Tractoroexport, Moscow Vs. Tarapore & Company, (1970) 3 SCR 53 : {AIR 1971 SC 1}, and had restrained a party from proceeding with an arbitration proceedings in a foreign country (in Moscow). As we have pointed out earlier, it would be unfair to refuse the restraint order in a case like the present one for the action in the foreign Court would be oppressive in the facts and circumstances of the case. And in such a situation the Courts have undoubted jurisdiction to grant such a restraint order whenever the circumstances of the case make it necessary or expedient to do so or the ends of justice so require. The following passage extracted from paragraph 1039 of Halsbury’s Laws of England Vol. 24 at page 579 supports this point of view:-

“With regard to foreign proceedings the Court will restrain a person within its jurisdiction from instituting or prosecuting proceedings in a foreign Court whenever the circumstances of the case make such an interposition necessary or expedient. In a proper case the Court in this country may restrain person who has actually recovered judgment in a foreign Court from proceeding to enforce that judgment. The jurisdiction is discretionary and the Court will give credit to foreign Courts for doing justice in their own jurisdiction.”

47. Thus, Cotton Corporation case was distinguished in Oil and Natual Gas Commission case, to the limited extent of recognising the power of the Courts to grant anti suit injunctions despite the principle of subordination of courts, found in section 41(b) of the Specific Relief Act, 1963.

48. Again the Supreme Court had an occasion to consider the power of the Court to grant anti suit injunctions to restrain the proceedings in a foreign Court, in Modi Entertainment Network vs. W.S.G. Cricket Pte. Ltd., {2003 (4) SCC 341}. In paragraph-24 of the said decision, the Supreme Court laid down the following principles:-

“24. From the above discussion, the following principles emerge:

(1) In exercising discretion to grant an anti-suit injunction the Court must be satisfied of the following aspects:

(a) the defendant, against whom, injunction is sought, is amendable to the personal jurisdiction of the Court;

(b) if the injunction is declined, the ends of justice will be defeated and injustice will be perpetuated; and

(c) the principle of comity  respect for the Court in which the commencement or continuance of action/proceeding is sought to be restrained must be borne in mind.

(2) In a case where more forums than one are available, the Court in exercise of its discretion to grant anti-suit injunction will examine as to which is the appropriate forum (forum conveniens) having regard to the convenience of the parties and may grant anti-suit injunction in regard to proceedings which are oppressive or vexatious or in a forum non-conveniens.

(3) Where jurisdiction of a Court is invoked on the basis of jurisdiction clause in a contract, the recitals therein in regard to exclusive or non-exclusive jurisdiction of the Court of choice of the parties are not determinative but are relevant factors and when a question arises as to the nature of jurisdiction agreed to between the parties the Court has to decide the same on a true interpretation of the contract on the facts and in the circumstances of each case.

(4) A Court of natural jurisdiction will not normally grant anti-suit injunction against a defendant before it where parties have agreed to submit to the exclusive jurisdiction of a Court including a foreign Court, a forum of their choice in regard to the commencement or continuance of proceedings in the Court of choice, save in an exceptional case for good and sufficient reasons, with a view to prevent injustice in circumstances such as which permit a contracting party to be relieved of the burden of the contract; or since the date of the contract the circumstances or subsequent events have made it impossible for the party seeking injunction to prosecute the case in the Court of choice because the essence of the jurisdiction of the Court does not exist or because of a vis major or force majeure and the like.

(5) Where parties have agreed, under a non-exclusive jurisdiction clause, to approach a neutral foreign forum and be governed by the law applicable to it for the resolution of their disputes arising under the contract, ordinarily no anti-suit injunction will be granted in regard to proceedings in such a forum conveniens and favoured forum as it shall be presumed that the parties have thought over their convenience and all other relevant factors before submitting to the non-exclusive jurisdiction of the Court of their choice which cannot be treated just as an alternative forum.

(6) A party to the contract containing jurisdiction clause cannot normally be prevented from approaching the Court of choice of the parties as it would amount to aiding breach of the contract; yet when one of the parties to the jurisdiction clause approaches the Court of choice in which exclusive or non-exclusive jurisdiction is created, the proceedings in that Court cannot per se be treated as vexatious or oppressive nor can the Court be said to be forum non-conveniens.

(7) The burden of establishing that the forum of choice is a forum non-conveniens or the proceedings therein are oppressive or vexatious would be on the party so contending to aver and prove the same.”

49. The principles laid down in Modi’s case, make it clear that an anti suit injunction cannot be granted when the jurisdiction of a Court is invoked on the basis of a jurisdiction clause contained in a contract, except to a limited extent. The question as to whether the proceedings were vexatious or oppressive or whether they could be initiated in a Forum non-conveniens were all said to be other relevent considerations, for the grant of such an injunction.

50. Therefore when the invokation of the jurisdiction of a court on the basis of a jurisdiction clause contained in an agreement, itself cannot be curtailed by an anti suit injunction, the question of injuncting a party from invoking the jurisdiction of a special Forum statutorily created to decide certain disputes, does not arise. In the case on hand, Act 51 of 1993 creates a special Tribunal and confers jurisdiction upon the Tribunal to decide all claims made by Banks and Financial Institutions. Therefore the respondent cannot be injuncted from initiating any proceedings for recovery of any money due to them, before the Debts Recovery Tribunal.

51. The general power of superintendence of the High Courts under Article 226/227 of the Constitution, over all Tribunals and other Forums constituted under special enactments, that was reinforced by the Constitution Bench decision in L.Chandrakumar’s case, does not make the Debts Recovery Tribunal, a Court subordinate to this Court. Therefore no injunction can be granted, for restraining the respondent-Bank from initiating any proceedings against the plaintiff herein before the Debts Recovery Tribunal.

52. But the above conclusion does not help me to dispose of both the applications of the plaintiff for injunction, since the prayer of the plaintiff cannot simply be categorised as one for restraining the defendant from initiating any proceedings. The prayer is for an injunction of all encompassing nature, to restrain the respondent from enforcing the contract in question and from claiming any rights thereunder. Therefore the bar under Section 41(b) of the Specific Relief Act, 1963, would apply only in so far as it relates to the prayer of the plaintiff for an injunction to restrain the defendant from initiating any legal proceedings. Apart from initiating any proceedings before the DRT, the defendant Bank may be entitled to take other actions such as under the SARFAESI Act. The bar under section 41 (b) may not apply to such actions. Therefore the question as to whether the plaintiff is entitled to any other injunction in respect of the contract in question, is still to be gone into, especially when the suit is found to be maintainable. Therefore I shall now proceed to discuss the other issues to find out if the plaintiff is entitled to any injunction other than the one prohibited by Section 41(b) of the Specific Relief Act, 1963.

WHETHER THE CONTRACT IS A WAGER:

53. As we have seen in the first part of this order, the plaintiff challenges the contract in question as being void, violative of the law of the land, opposed to public policy and as a wagering contract. It is the stand of the plaintiff in the suit that the contract is violative of the Master circulars and Regulations issued by the Reserve Bank of India and consequently hit by Section 23 of the Contract Act. It is the further contention of the plaintiff that since there was no underlying exposure, the contract was, per se, speculative and a wagering contract, hit by Section 30 of the Contract Act. Therefore, it is necessary to analyse whether the contract in question is hit by Section 23 and/or Section 30 of the Contract Act.

54. Though the Indian Contract Act, 1872 defines a “Contingent Contract” under Section 31, it does not define what a “Wagering Contract” is. But the consequences of a Wagering Contract are indicated in Section 30, which reads as follows:-

“30. Agreements by way of wager, void. — Agreements by way of wager are void; and no suit shall be brought for recovering anything alleged to be won on any wager, or entrusted to any person to abide by the result of any game or other uncertain event on which any wager is made.

Exception in favour of certain prizes for horse-racing. — This section shall not be deemed to render unlawful a subscription or contribution, or agreement to subscribe or contribute, made or entered into for or toward any plate, prize or sum of money, of the value or amount of five hundred rupees or upwards, to be awarded to the winner or winners of any horse-race.”

In Carlill Vs. Carbolic Smoke Ball Co. {(1892) 2 Q.B. 484, 490} Hawkins J., defined a wager as follows:-

“A wagering contract is one by which two persons professing to hold opposite views touching the issue of a future uncertain event, mutually agree that, dependent upon the determination of that event, one shall win from the other, and that other shall pay or hand over to him, a sum or money or other stake; neither of the contracting parties having any other interest in that contract than the sum or stake he will so win or lose, there being no other real consideration for the making of such contract by either of the parties.”

The above view was first affirmed in (1893) 1 Q.B. 256 and later in Weddle Beck & Co. Vs. Hackett {(1929) 1 K.B. 321 and Ellesmere Vs. Wallace {(1929) 2 Ch. 1}.

55. The essential features of a Wagering Contract as formulated by the English Courts are as follows:-

(1) There must be 2 persons or 2 sets of or 2 groups of persons holding opposite views touching a future uncertain event. It may even concern a past or present fact or event.

(2) In a Wagering Contract, one party is to win and the other to lose upon the determination of the event. Each party must stand either to win or lose under the terms of the contract. It will not be a Wagering Contract if one party may win but cannot lose or if he may lose but cannot win or if he can neither win or lose.

(3) The parties have no actual interest in the occurrence or non occurrence of the event, but have an interest only on the stake.

56. Applying the above essential features, contracts for differences in stock exchange or commodity market transactions were once treated as wagers {Grizewood Vs. Blane (1851) 11 CB 526 and Richards Vs. Starck (1911) 1 K.B. 296}. They were held to be wagers because of the understanding of the parties that the subject matter should neither be transferred nor paid for, on the settlement day, but that on that day, one party should pay to the other, the difference between the market price on that day and the price on the day of the contract. Thus where a series of contracts for the sale and purchase of shares gave the buyer an option to demand delivery on payment of an extra sum, it was held that they were wagers, since it was only if the option was exercised that they would become genuine transactions of sale and purchase. But if one party to the transaction undertakes a real liability to give or take delivery, the mere fact that the other party intends by a subsequent transaction to arrange that delivery under the first transaction shall not take place, does not turn the transaction into a wager. A genuine purchase of shares followed by a separate and genuine sale, creates enforceable obligations, even though the original purchaser never intended to take delivery of the shares and was in fact merely speculating upon their value. Sales and purchases of stocks and shares are not wagering transactions unless there is an agreement between the parties to them that they shall not be actually carried out but shall end only in the payment of differences. If there is an agreement to this effect, the transaction will be a wager notwithstanding the fact that the ostensible terms of business give a right to insist on delivery (Chitty on Contracts- Volume II – 29th Edition Page 1119).

57. Until the enactment of the Gaming Act, 1845, wagering contracts were not prohibited by law in England. But Section 18 of the Gaming Act, 1845 (UK) declared that all contracts or agreements by way of wager shall be null and void and that no suit shall be brought or maintained in any Court of law and equity for recovering any sum of money or valuable thing alleged to be won upon any wager. However, certain dealings in investments by way of business are excepted from invalidity under Section 18 even though they might amount to wagering contracts. For example, contracts for differences or bets on stock market indices {City Index Ltd Vs. Leslie (1992) 1 Q.B. 92}.

58. Though every wagering contract is speculative in nature, every speculation need not necessarily be a wager. In Bhagwandas Parasram Vs. Burjori Ruttonji Bomanji (AIR 1917 PC 101), it was held that speculation does not necessarily involve a contract by way of wager and that to constitute a Wagering Contract, a common intention to wager is essential. It was further held therein that in a wagering contract, there has to be a mutuality in the sense that the gain of one party would be the loss of the other on the happening of the uncertain event which is the subject matter of wager. The said decision was quoted with approval by the Supreme Court in Firm of Pratapchand Nopaji Vs. Firm of Kotrike Venkata Setty & Sons and Others {(1975) 2 SCC 208}.

59. The mere fact that the parties never intended to take delivery at the end would not also make a transaction a wager. In Ismail Lebbe Marikar Ebrahim Lebbe Marikar Vs. Bartleet and Company {AIR (29) 1942 Privy Council 19}, a firm of share and produce brokers entered into an arrangement with the grower of rubber in Ceylon. Under the arrangement, the broker was to buy rubber for the defendant in the London market, but there was to be no delivery. The arrangement was that the defendant should pay the differences when the market was against him and that he should be paid the differences, when the market was in his favour. Holding such a contract not to be a wager, the Privy Council held as follows:-

“The essence of a bet is that both parties agree that they will pay and receive respectively on the happening of an event in which they have no material interest. The transaction may be cloaked behind the forms of genuine commercial transactions; but to establish the bet, it is necessary to prove that the documents are but a cloak and that neither party intended them to have any effective legal operation. Where the documents show an ordinary commercial transaction, and, in conformity with them, one of the parties incurs personal obligations on a genuine transaction with third parties so that he himself is not a winner or loser by the alteration of price, but can only benefit by his commission, the inference of betting is irresistibly destroyed. In such cases the fact that no delivery is required or tendered is of practically no value.”

60. In Gherulal Parakh Vs. Mahadeodas Maiya {AIR 1959 SC 781} a question arose as to whether a partnership formed for the purpose of entering into forward contracts for the purchase and sale of wheat so as to speculate in rise and fall of price of wheat in future, was a wager and whether it was hit by Section 30 of the Contract Act. But the Supreme Court held that such a partnership was not illegal, although the business for which the partnership was formed, was held to involve wagering. It was held therein as follows:-

“(1) Under the Common Law of England a contract of wager is valid and therefore both the primary contract as well as the collateral agreement in respect thereof are enforceable;

(2) after the enactment of the Gaming Act, 1845, a wager is made void but not illegal in the sense of being forbidden by law, and thereafter a primary agreement of wager is void but a collateral agreement is enforceable;

(3) there was a conflict on the question whether the second part of Section 18 of the Gaming Act, 1845, would cover a case for the recovery of money or valuable thing alleged to be won upon any wager under a substituted contract between the same parties: the House of Lords in Hill’s case{(1921) 2 KB 351} had finally resolved the conflict by holding that such a claim was not sustainable whether it was made under the original contract of wager between the parties or under a substituted agreement between them; (4) under the Gaming Act, 1892, in view of its wide and comprehensive phraseology, even collateral contracts, including partnership agreements, are not enforceable;

(5) Section 30 of the Indian Contract Act is based upon the provisions of Section 18 of the Gaming Act, 1845, and though a wager is void and unenforceable, it is not forbidden by law and therefore the object of a collateral agreement is not unlawful under Section 23 of the Contract Act; and (6) partnership being an agreement within the meaning of Section 23 of the Indian Contract Act, it is not unlawful, though its object is to carry on wagering transactions.”

61. Even the question whether a contract of wager was opposed to public policy was answered in the negative by the Supreme Court in the above decision in Gherulal Parakh case, in paragraph-28 as follows:-

“28. The Common law of England and that of India have never struck down contracts of wager on the ground of public policy; indeed they have always been held to be not illegal notwithstanding the fact that the statute declared them void. Even after the contracts of wager were declared to be void in England, collateral contracts were enforced till the passing of the Gaming Act of 1892, and in India, except in the State of Bombay, they have been enforced even after the passing of the Act 21 of 1848, which was substituted by Section 30 of the Contract Act. The moral prohibitions in Hindu Law texts against gambling were not only not legally enforced but were allowed to fall into desuetude. In practice, though gambling is controlled in specific matters, it has not been declared illegal and there is no law declaring wagering illegal. Indeed, some of the gambling practices are a perennial source of income to the State. In the circumstances it is not possible to hold that there is any definite head or principle of public policy evolved by Courts or laid down by precedents which would directly apply to wagering contracts. Even if it is permissible for Courts to evolve a new head of public policy under extraordinary circumstances giving rise to incontestable harm to the society, we cannot say that wager is one of such instances of exceptional gravity, for it has been recognized for centuries and has been tolerated by the public and the State alike. If it is has any such tendency, it is for the legislature to make a law prohibiting such contracts and declaring them illegal and not for this Court to resort to judicial legislation.”

62. Keeping the above principles in mind, if we look at the transaction in question namely OPT 727, which is the subject matter of the present controversy, it is seen that the essence of the deal between the plaintiff and the defendant is as follows:-

(a) Under Part-A of the deal, if during the period from 22.6.2007 (taken as Trade date) to 19.6.2008 (taken as Fixing date-1), the spot never trades at 1.2385, the plaintiff would receive USD 100,000. In simple terms, if the exchange rate of 1 USD never touches 1.2385 CHF during the above period, the Bank is obliged to pay to the plaintiff, USD 100,000.

(b) Under Part-B, there are 3 contingencies each in respect of 2 different fixing dates.

With reference to fixing date 19-6-2008, under contingency No.1, if the rate of exchange of 1 USD never touches 1.1250 and 1.2385 CHF, there is no exchange of principal. Under contingency No.2, if the rate of exchange of 1 USD ever touches 1.2385 CHF, there is no exchange of principal. Under contingency No.3, if the rate of exchange of 1 USD ever touches 1.1250 CHF, but never touches 1.2385 CHF during the relevant period, the plaintiff is obliged to buy $ 20 million from the defendant Bank at the rate of CHF 1.3300 per USD.

With reference to fixing date 15-6-2009, under contingency No.1, if the rate of exchange of 1 USD never touches 1.1200 and 1.2385 CHF, during the period from 22-6-2007 to 15-6-2009, there is no exchange of principal. Under contingency No.2, if the rate of exchange of 1 USD ever touches 1.2385 CHF, there is no exchange of principal. Under contingency No.3, if the rate of exchange of 1 USD ever touches 1.1200 CHF, but never touches 1.2385 CHF during the relevant period (22-6-2007 to 15-6-2009), the plaintiff is obliged to buy $ 20 million from the defendant Bank at the rate of CHF 1.3300 per USD.

(c) Under Part-C, 2 situations are provided. In both situations the plaintiff receives USD 100,000. But in situation 1, the entire structure is knocked out and in situation 2, the structure is not knocked out. These situations would arise when the rate of exchange of 1 USD either touches 1.2385 CHF or if spot touches 1.2325 during the period 22-6-2007 to 15-6-2009.

63. The entire structure of OPT 727 detailed above, shows that there are some contingencies in which USD 100,000 becomes payable by the Bank to the plaintiff and there are other contingencies when the plaintiff becomes obliged to buy USD 20 million at the rate of 1.3300 Swiss Franc per 1 USD from the Bank. Thus the plaintiff stands to gain at times, while the Bank stands to gain at other times. The gain for the plaintiff is intended to off-set the loss that they may incur in their foreign currency receivables or payables. As stated above (in the paragraph narrating the facts of the case), the plaintiff is an exporter having foreign currency receivables. The plaintiff also has foreign currency payables due to External Commercial Borrowings. Therefore, when the value of USD appreciates against Indian currency, the value of their receivables go up in terms of Indian rupee. But at the same time, the value of foreign currency payables would also go up on account of ECB. A converse situation would arise if the value of USD depreciates. Therefore the payment of USD 100,000 prescribed under the deal is to hedge the plaintiff against the risk. It can be compared to the payment of the sum assured under a contract of insurance, though it may not exactly be the same.

64. The purchase of USD 20 million at the rate of 1.3300 CHF per Dollor, under OPT 727, would certainly make the plaintiff lose a huge amount, especially since the market rate on the crucial date would be lower than 1.3300 CHF. But that by itself would not make the contract a wager. The contract confers a right to seek actual delivery. In other words, the performance of the contract can always be compelled, by the plaintiff insisting on actual delivery. If actual delivery can be compelled, it cannot be termed as a wager. Thus, the contract does not have the necessary ingredients of a wager.

65. At any rate, the records do not show any common intention between the plaintiff and the Bank to enter into a wagering transaction, which is a sine quo non for the transaction to be dumped as a wager. What preceded this OPT 727 deal confirmation, would throw light both upon the question as to whether Mr.P.K. Viswanathan had the authority to enter into the transaction and as to whether the transaction was intended and is in fact, a wager or not. The events that preceded this deal confirmation are listed as follows:-

(a) On 24.3.2004, the Board of Directors of the plaintiff-Company passed a resolution according consent for interest rate and foreign currency derivatives including interest rate and currency option contracts with Banks and Financial Institutions. It was also resolved by the Board to authorise Mr.P.K.Viswanathan, Chief Financial Officer and Company Secretary to deal with all matters concerning derivative transactions. The Board Resolution dated 24.3.2004 is filed as plaint document No.3.

(b) In pursuance of the aforesaid Board Resolution, a ISDA Master Agreement dated 14.5.2004, filed as plaint document No.4 was entered into on behalf of the plaintiff by Mr.P.K.Viswanathan, with the defendant-Bank. Neither the Master Agreement dated 14-5-2004 nor any of the 9 deals entered into in pursuance of the same, is assailed by the plaintiff, as null and void. Only one particular deal namely OPT727 alone is assailed in the suit. The suit itself is filed beyond a period of 3 years from the date of the ISDA Master Agreement dated 14.5.2004.

(c) In so far as the disputed transaction OPT 727 is concerned, there was exchange of e-mails between the plaintiff and the defendant. By a e-mail sent on 20.6.2007 by Mr. Gaurav Chandak, D.M. Treasury of the defendant-Bank to Mr.P.K.Viswanathan, the “brief structure details” were sent. This e-mail filed as plaint document No.5 also contained the “Risk Analysis” putting the plaintiff on notice that the plaintiff is subjected to the risk of US Dollar weakening against Swiss Franc, without touching the knock out level. It is useful to extract the last paragraph of this e-mail, which reads as follows:-

“Risk Analysis The Client is subjected to risk of USD weakening and CHF appreciating without touching KO Level. In worst case if USD/CHF weakens and touches levels of 1.1250 and 1.12 then the client is under obligation to deliver CHF and receive USD at 1.33 on the two fixing dates. This could be worse than market levels”

(d) Again another e-mail was sent on the same day after a gap of nearly 45 minutes (filed as part of plaint document No.5) containing details of brief structure and also putting the plaintiff on notice of the risk. Thus the plaintiff was fore-warned, but they were not fore-armed.

(e) Thereafter, a e-mail was sent on 22.6.2007 along with the “Deal Confirmation for USD-CHF Option Structure” by the defendant to the plaintiff, containing a draft of OPT727. This e-mail with the enclosure is filed as plaint document No.6. It is only in confirmation of the terms and conditions contained in plaint document No.6 that Mr.P.K.Viswanathan sent the letter of consent under plaint document No.7. It is this plaint document No.7 which is the subject matter of this litigation. Thus, the entire correspondence by e-mail between the parties discloses at least three fundamental facts viz.,

(i) that Mr.P.K.Viswanathan was duly authorised by the Board of Directors of the plaintiff to enter into such transactions with authorised dealers like the defendant herein;

(ii) that the defendant did not enter into the transaction with any unauthorised person but acted entirely on the basis of the Board Resolution;

(iii) that the defendant apprised the plaintiff’s representative of the risk involved, by making a full disclosure.

(f) In OPT 727, filed as plaint document No.7, the parties covenanted as follows:-

“(a) If the Counter Party is an entity other than a Bank or Primary Dealer, then the Counter Party represents and warrants as follows:

(i) The Counter Party is entering into this transaction solely for the purpose of hedging its foreign currency Balance Sheet exposure.

(ii) The size and tenor of this Transaction is not in excess of the Counter Party’s underlying foreign currency exposure, and

(iii) All necessary corporate authorisations and approvals have been obtained for entering into and performance of this transaction.

(b) Assessment and Understanding : Each party is capable of assessing by itself (on its own behalf or through independent professional advice) the merits and understands and accepts the terms, conditions and risks of this Swap Transaction.

(c) Status of Parties : The Counter Party is not acting as a fiduciary for or an adviser to it in respect of this transaction.

(d) Risk Management : It has entered into this transaction for the purpose of hedging its assets or liabilities or in connection with a line of business or market making, and not for the purpose of speculation.”

66. Even after the deal in OPT 727 was confirmed on 22.6.2007, the parties exchanged correspondence. The plaintiff has filed a e-mail sent by P.K.Viswanathan to one Mr.R.Kannan, on 19.7.2007. By the said e-mail, he had forwarded a message received from the defendant-Bank to him on the same day just about half an hour before. In the mail sent by the defendant to P.K.Viswanathan, which was actually forwarded by him to R.Kannan, the defendant had indicated that the markets of late, had become very volatile and that USD was getting battered across the currencies except Asian currencies. At the end of the message, there was a warning that the option could be knocked out due to excessive appreciation of CHF in future. This e-mail forwarded by P.K.Viswanathan is filed as plaint document No.8.

67. Similarly, by yet another e-mail dated 31.10.2007, the Assistant Vice President of the defendant-Bank warned the plaintiff that the USD might weaken further and that if the plaintiff was interested in cutting their losses at the current level or taking any corrective structures, it should be intimated to the defendant. This e-mail message is filed as plaint document No.9.

68. There was also a spate of correspondence subsequently about restructuring the product. Such correspondence, copies of which are filed as plaint documents, went on till mid December 2007. Ultimately by a letter dated 12.12.2007 addressed by the plaintiff to the defendant-Bank, the plaintiff took a stand that the entire structure including Part-A and Part-B in OPT 727 stood knocked out with no subsequent liability to either party. A copy of this letter is filed as plaint document No.18. In this letter, the plaintiff acknowledged the fact that in the last couple of weeks, the defendant advised them about various options to mitigate the risks under OPT 727. Incidentally, this letter was signed by Mr.P.K.Viswanathan.

69. After the aforesaid letter dated 12.12.2007, one Mrs.Rajshree appears to have met the officials of the defendant-Bank in Delhi and held negotiations for risk mitigation. This was confirmed in a e-mail dated 14.12.2007 sent by the Assistant Vice President of the defendant-Bank to Mr.P.K.Viswanathan, filed as plaint document No.19. Mrs.Rajshree, as seen from plaint document Nos. 1 and 2, is one of the promoters of the plaintiff and a signatory to the Memorandum and Articles of Association.

70. In the meantime, the Bank also wrote a letter dated 7.1.2008 to the Chairman and Managing Director of the plaintiff-Company, filed as plaint document No.21. By this letter, the Bank expressed their protest against the claim of the plaintiff in the letter dated 12.12.2007 that the transaction got knocked out. It is only thereafter that a Director and Chief Operating Officer of the plaintiff-Company sent a communication dated 22.1.2008, requesting the Bank to furnish copies of all the documents, triggering off a chain reaction, ultimately leading to the dispute on hand.

71. The above sequence of events would show that the transaction in question, from its very nature, cannot be termed as a wager. We have seen in paragraph-55 above that three tests are to be satisfied if a contract is to be termed as a wager. The first test is that there must be two persons holding opposite views touching a future uncertain event. The second test is that one of those parties is to win and the other is to lose upon the determination of the event. The third test is that both the parties have no actual interest in the occurrence or non-occurrence of the event, but have an interest only on the stake. The first test is satisfied in this case as there are 2 parties. But, the second test may not be satisfied in this case since the plaintiff may not always stand to lose. If the plaintiff loses in the underlying contract on account of currency fluctuation, it may get compensated by the hedging and vice versa. Therefore both parties cannot be taken to be winners or losers in absolute terms. Even if we take for the sake of argument that the first two tests are satisfied in this case, the third test is certainly not satisfied in the case on hand. Both the parties definitely have an actual interest in the rate of exchange hitting a high or low. This is because of the fact that the very intention of the transaction is to hedge an underlying exposure. It is like a contract of insurance, where, on the happening of an uncertain event, the sum assured becomes payable.

72. As per the decision of the Privy Council in Bhagwandas Parasram Vs. Burjori Ruttonji Bomanji {AIR 1917 PC 101} and followed by the Supreme Court in Firm of Pratapchand Nopaji Vs. Firm of Kotrike Venkata Setty & Sons and Others {(1975) 2 SCC 208} (stated in paragraph-64 above), every speculation will not fall under the category of wager. There must be a common intention to wager. In this case, there was certainly no intention much less a common intention to wager. The plaintiff attempts to project the transaction as a wager by contending that OPT 727 was not in respect of a specific underlying contract of import or export and that therefore it was only speculative in nature. But the plaintiff cannot be heard to raise such a contention in view of the covenant (or declaration) made by the plaintiff to the defendant in OPT 727 that there was an underlying exposure and that the transaction was not for the purpose of speculation. Even assuming for the sake of argument that there was an intention on the part of the plaintiff to speculate, no such intention on the part of the Bank to speculate, is made out by the plaintiff in the plaint. Thus, there was certainly no common intention to wager, even if it is accepted for the sake of argument that there was an intention on the part of the Officer of the plaintiff to speculate. In such circumstances, the transaction in question cannot certainly be termed as a wagering contract. Therefore the plaintiff cannot avoid the contract on the ground that it was a wager.

73. To substantiate their contention that OPT 727 is speculative in nature and thus amounted to a wager, the plaintiff contends that there was no underlying to the deal. It is the contention of the plaintiff that OPT 727 did not correspond to any underlying exposure and hence could not be raised to the level of a valid contract enforceable in law. According to the plaintiff, unless there was any matching import/export obligation, the deal ceased to be one for hedging a risk. If the deal was not for hedging a risk, then it becomes a wager, according to the plaintiff.

74. But the above contention can hardly be allowed to be advanced by the plaintiff, in view of the covenant/undertaking given by the authorised signatory of the plaintiff in the OPT deal confirmation sheet. In OPT 727 filed as plaint document No.7, the plaintiff has covenanted as follows:-

“(i) The Counter Party is entering into this transaction solely for the purpose of hedging its foreign currency Balance Sheet exposure.

(ii) The size and tenor of this Transaction is not in excess of the Counter Party’s underlying foreign currency exposure”

After having so covenanted, it is not open to the plaintiff to contend that there was no underlying to the deal. If there was actually no underlying and yet the plaintiff misled the defendant Bank to offer a structured product, then the plaintiff is guilty of perpetrating a fraud upon the Bank. Therefore the plaintiff cannot come to court to avoid the contract, after enticing the Bank to enter into the deal with a false representation. As pointed out by Wilmot, C.J., in Collins vs. Blantern (2 Wils. 341 : 1 Smith L.C.), “no polluted hand shall touch the pure fountains of justice”.

75. Realising that the covenant contained in OPT 727 may be held against them, the plaintiff has also taken a stand that Mr.P.K.Viswanathan exceeded his authority in entering into this particular deal, without the knowledge and consent of the Board. The plaintiff has further taken a stand that Mr.P.K.Viswanathan was not well versed in such transactions and that the defendant Bank made misrepresentations and lured him into this deal.

76. But the above stand of the plaintiff is wholly unjustified and far from convincing. Such a stand has been invented by the plaintiff only at the time of filing this suit and not before. Admittedly, (i) there was a Board resolution dated 24-3-2004 authorising Mr.P.K.Viswanathan to enter into derivatives transactions with the defendant Bank; (ii) a ISDA Master Agreement was entered into by Mr.P.K.Viswanathan on 14-5-2004 and the same is not challenged by the plaintiff as null and void; (iii) a series of about 10 transactions sprung out of the ISDA Master Agreement, all of which were signed and confirmed only by Mr.P.K.Viswanathan; (iv) 9 out of those 10 deals sailed smoothly to the shores, perhaps profitting the plaintiff and hence they are not questioned by the plaintiff; (v) the amount of USD 100,000 paid by the defendant Bank under OPT 727 (the deal in question), way back on 27-6-2007, was accepted and utilised by the plaintiff and never challenged as tainted; (vi) some of the e-mails sent by the Bank were actually forwarded by Mr.P.K.Viswanathan to others as seen from plaint document No.8; (vii) the letter dated 12-12-2007 filed as plaint document No.18 sent on behalf of the plaintiff claiming that the entire structure got knocked out in terms of Part-C of the deal, was also signed only by Mr.P.K.Viswanathan on behalf of the plaintiff; (viii) the e-mail dated 14-12-2007 sent by the bank and filed as plaint document No.19 discloses that the Bank had discussions with Mrs. Rajshree at Delhi for risk mitigation against new exposures (this Mrs.Rajshree is one of the promoters of the plaintiff and a signatory to the Memorandum and Articles of Association of the plaintiff as seen from plaint document Nos.1 and 2). At no point of time, from the date of the OPT deal namely 22-6-2007 till the date of filing the suit in February 2008, did the plaintiff dissociate or distance themselves from Mr.P.K.Viswanathan with regard to the deal. Even in their letter dated 25-2-2008 (plaint document No26), which preceded the suit, the plaintiff did not question the authority of Mr.P.K.Viswanathan to enter into the transaction. Therefore, the attempt now made by the plaintiff to drop Mr.P.K.Viswanathan like a hot potato, as though he had no authority, is unbelievable and unacceptable.

77. It must be remembered that OPT 727 was entered into on 22.6.2007 and the plaintiff received USD 100,000 on 27.6.2007. At the time of deriving a benefit or income, the plaintiff had no qualms about the deal. Therefore, as the Tamil proverb goes, the plaintiff is not entitled to behave like a horse which would open its mouth for food but close it for bridle. The defendant-Bank is entitled to invoke the “Doctrine of Indoor Management” against the plaintiff in so far as the authority of Mr.P.K. Viswanathan is concerned.

78. The alternative contention that the deal was a product of misrepresentations on the part of the Bank, is also an argument in futility. The only misrepresentation attributed by the plaintiff to the Bank, in the entire plaint, is that the USD would never reach the stipulated level of exchange rate against CHF. Such a representation, even if had been made, would not amount to a misrepresentation. Whether the exchange rate of USD as against CHF, would reach a stipulated level or not, on a future date, is something over which both parties had no control. The fact that both parties had no control over the same, is also known to both parties. Therefore, even if the Bank had made any representation that the exchange rate would or would not reach a particular level, it cannot be termed as a misrepresentation, since no one had any control or even knowledge as to how the currency would behave. The prediction of the behavioural pattern of a foreign currency is much worse than a weather forecast and hence any representation with regard to the same cannot be termed as misrepresentation.

79. To paint the deal as nothing more than a wager, the plaintiff also contends that the payment of USD 100,000 by the Bank to the plaintiff, in pursuance of the contract, was actually a premium paid by the Bank. In an insurance cover, the insured pays premium to the insurer and not vice versa. Therefore, according to the plaintiff, the payment of the amount by the bank made it an unlawful deal.

80. The above argument of the plaintiff is to be stated only to be rejected. The claim made by the plaintiff in their letter dated 12-12-2007, filed as plaint document No.18, exposes the hollowness and untenability of this argument. The plaintiff claimed in that letter that the USD/CHF touched the level of 1.2385 on 22nd and 23rd June 2007 and that therefore, in terms of Part-C of OPT 727, the entire structure was knocked out and a payment of USD 100,000 was received by the plaintiff on 27-6-2007. In the light of such a stand taken by the plaintiff themselves, the payment of USD 100,000 cannot be treated as a premium for the contract. After claiming that the said payment was in fulfilment of the obligations arising under the contract, it is not open to the plaintiff to paint it as a premium.

81. Therefore the argument that the contract was a wager, that it was brought forth by misrepresentation, that Mr.P.K.Viswanathan had no authority and that there was a payment of premium by the Bank, are all rejected. As a matter of fact, the prices of derivatives are now scientifically determined on the basis of a mathematical model (or formulae) developed by 2 men by name Fischer Black and Myron Scholes in 1973. The formulae itself was named after them, as Black-Scholes Model. The application of the model, led to the award of the Nobel in Economics. The derivatives prices are determined by feeding certain inputs into this model. These inputs are (i) stock price of the underlying asset (ii) amount of time until expiration (iii) strike price of the option (iv) volatality of the underlying asset (how much it moves up or down during a given period) (v) risk free rate of return (usually the interest rate paid by Govt ot banks on guaranteed investments). After Black-Scholes model, several models were developed, the noted among them being the Garman-Kohlhagen model designed to arrive at the price of FX options. Therefore derivatives transactions ceased to be purely speculative deals, long time ago. The pricing of the deals, follows a scientific pattern on the basis of Financial Mathematics. Just as Actuaries scientifically determine the value of insurance risks and the premium payable, Financial Mathematicians (or Portfolio Managers) evaluate the price of these derivatives. Hence they cannot be termed as wagers..

WHETHER THE DEAL WAS UNLAWFUL AND OPPOSED TO PUBLIC POLICY

82. The next contention of the plaintiff is that the contract is illegal, violative of FEMA, 1999 and the Regulations and Master Circulars issued by RBI and opposed to public policy and hence hit by sections 23 and 24 of the Contract Act. In order to test the veracity of this argument, it is essential to look into the historical background of the transactions in derivatives.

HISTORY OF EVOLUTION OF DERIVATIVES

83. As we have seen in our prelude, derivatives are financial instruments used to transfer or hedge the risk. There are 4 types of derivatives contracts, namely (1) forwards (2) futures (3) options and (4) swaps. They had their origin, perhaps in “speculative trading in commodities” several centuries ago and later underwent a metamorphosis to become “futures trading” and “forward trading” a couple of centuries back. Some trace their history to 600 B.C., when a Greek purchsed an option to work on olive presses. Others trace it to the period of Wiliam and Mary in the 17th century. Their history has to be traced from 3 different perspectives namely (1) Forwards/Futures Trading in commodities (2) forwards/futures trading in stocks and securities and (3) forwards/futures trading in currencies. While the history of futures trading in commodities is fairly long, the history of futures trading in stocks and securities is shorter and the history of futures trading in foreign currencies is only a few decades old, in our country.

FUTURES TRADING IN COMMODITIES

84. Futures trading in commodities, through recognised Exchanges, got entrenched firmly in India more than a century ago. Organized futures market evolved in India with the setting up of “Bombay Cotton Trade Association Ltd.” in 1875. But, following widespread discontent amongst leading cotton mill owners and merchants over the functioning of the Association, a separate association by the name “Bombay Cotton Exchange Ltd.” was constituted in 1893. Futures trading in oilseeds was organized in India for the first time with the setting up of Gujarati Vyapari Mandali in 1900. Futures trading in Raw Jute and Jute Goods began in Calcutta with the establishment of the Calcutta Hessian Exchange Ltd., in 1919. Later East Indian Jute Association Ltd., was set up in 1927 for organizing futures trading in Raw Jute. These two associations amalgamated in 1945 to form the East India Jute & Hessian Ltd., to conduct organized trading in both Raw Jute and Jute goods. In case of wheat, futures markets were in existence at several centres at Punjab and U.P. The most notable amongst them was the Chamber of Commerce at Hapur, which was established in 1913. Futures market in Bullion began in Mumbai in 1920 and later similar markets came up in other places. In due course several other exchanges were also created in the country to trade in such diverse commodities as pepper, turmeric, potato, sugar and gur (jaggory).

85. Pre-independence, Bombay alone had a Special enactment known as Bombay Forward Contracts Control Act, to control forward trading in cotton, bullion and oil seeds. But forward trading in commodities such as foodgrains, oilseeds, raw cotton, spices, sugar etc., was prohibited under the Defence of India Rules, at the time of war. However, after independence, the Constitution of India brought the subject of “Stock Exchanges and futures markets” in the Union list. As a result, the responsibility for regulation of commodity futures markets devolved on Govt. of India and the Forward Contracts (Regulation) Act, 1952, was enacted. The Act provided a 3-tier regulatory system, namely (a) An association recognized by the Government of India on the recommendation of Forward Markets Commission (b) The Forward Markets Commission (it was set up in September 1953) and (c) The Central Government. The Act excluded transactions on stock exchanges, so as to deal with them separately. As seen from the Statement of Objects and Reasons, options were prohibited altogether on the ground that they were an undesirable form of speculation. The Act divided the commodities into 3 categories with reference to the extent of regulation, viz (a) commodities in which futures trading can be organized under the auspices of recognized association (b) Commodities in which futures trading is prohibited and (c) commodities which were neither regulated nor prohibited, which were referred as Free Commodities.

86. In the seventies, most of the registered associations became inactive, as futures as well as forward trading in the commodities for which they were registered came to be either suspended or prohibited altogether. The Khusro Committee (June 1980) recommended reintroduction of futures trading in most of the major commodities. After the introduction of economic reforms since June 1991 and the consequent liberalization in both the domestic and external sectors, the Govt. of India appointed a committee on Forward Markets under the Chairmanship of Prof. K.N. Kabra. The Committee recommended that futures trading be introduced in various commodities such as Basmati Rice etc. The committee also recommended the upgradation of some of the existing commodity exchanges particularly the ones in pepper and castor seed, to the level of international futures markets. In pursuance of the National Agricultural Policy announced in July 2000, the Government issued notifications on 1.4.2003 permitting futures trading in many commodities. Thus, historically, futures trading in commodities is more than a century old in India.

FUTURES TRADING IN STOCKS/SECURITIES AND CURRENCIES

87. While Forward contracts in commodities other than securities and currencies were regulated under the Forward Contracts (Regulation) Act, 1952, the futures market in stocks and securities were regulated by the Securities Contracts (Regulation) Act, 1956. Similarly, the finance market was regulated by (i) the Reserve Bank of India Act, 1934, (ii) the Banking Regulation Act, 1949 and (iii) the Foreign Exchange Regulation Act, 1973. While Securities Exchange Bureau of India (SEBI) became the regulator of the market in stocks and securities, RBI became the regulator of the finance market, just as the Forward Markets Commission was made the regulator of futures trading in commodities. Graphically presented, the regulations and the regulators are as follows:-

FUTURES IN COMMODITIES STOCKS/SECURITIES CURRENCIES

1.The law governing 1. The law regulating it, is the 1. The law is in it, is in Forward Contracts Securities Contracts (Regulation) RBI Act, 1934 (Regulation) Act, 1952. Act, 1956. Banking Reg. Act,

2.The regulator is the 2. The regulator is SEBI. 1949 and Forward Markets FERA, 1973 Commission (now FEMA,1999)

2. The regulator is RBI.

88. After sweeping reforms and glasnost (opening up) in the financial sector, the Foreign Exchange (Regulation) Act, 1973, was replaced by the Foreign Exchange Management Act, 1999. As a consequence of the reforms, transactions in “derivatives” stormed the market. To begin with, “derivatives in securities/shares”, were statutorily recognised under Amendment Act 31 of 1999 to the Securities Contracts (Regulation) Act, 1956. By the said Amendment Act, which came into force with effect from 22.2.2000, Section 18-A was inserted in the Securities Contracts (Regulation) Act, 1956. Section 18A reads as follows:-

“18A.Contracts in derivative: Notwithstanding anything contained in any other law for the time being in force, contracts in derivatives shall be legal and valid if such contracts are –

(a) traded on a recognised stock exchange;

(b) settled on the clearing house of the recognised stock exchange, in accordance with the rules and bye laws of such stock exchange.”

The definition of the word “derivative” was also incorporated in Section 2 (ac) of the Securities Contracts (Regulation) Act, 1956, by the aforesaid amendment. The definition in Section 2(ac) is as follows:-

“2(ac) “derivatives” includes –

(A) a security derived from a debt instrument, share, loan whether secured or unsecured, risk instrument or contract for differences or any other form of security;

(B) a contract which derives its value from the prices, or index of prices, of underlying securities;”

As is obvious, the above definition is only inclusive and hence the natural meaning of the word “DERIVATIVE” was not lost.

89. Following the above amendment to the Securities Contracts (Regulation) Act, with effect from 22.2.2000, the Reserve Bank of India notified certain regulations known as “Foreign Exchange Management (Foreign Exchange Derivative Contracts) Regulations, 2000”, in exercise of the powers conferred under Section 47 (2)(h) of the Foreign Exchange Management Act, 1999. These regulations were issued, with the professed object of “promoting orderly development and maintenance of foreign exchange market in India”, as seen from the preamble to these regulations.

90. Regulation 4 of the aforesaid regulations permitted a person resident in India to enter into a foreign exchange derivative contract. Regulation 2 (v) of the Regulations defined “Foreign Exchange Derivative Contract” as follows:-

” ‘Foreign exchange derivative contract’ means a financial transaction or an arrangement in whatever form and by whatever name called, whose value is derived from price movement in one or more underlying assets, and includes,

(a) a transaction which involves at least one foreign currency other than currency of Nepal or Bhutan, or

(b) a transaction which involves at least one interest rate applicable to a foreign currency not being a currency of Nepal or Bhutan, or

(c) a forward contract, but does not include foreign exchange transaction for Cash or Tom or Spot deliveries;”

Schedule-I of the Regulations contained provisions governing the Foreign Exchange Derivative Contracts permissible for a person resident in India; Schedule-II of the Regulations contained provisions governing the Foreign Exchange Derivative Contracts permissible for a person resident outside India; Schedule-III prescribed the procedure for approval of hedging of commodity price risk. It was prescribed by Regulation 3 that except as otherwise provided by these regulations, no person was entitled to enter into a foreign exchange derivative contract without the prior approval of the Reserve Bank of India.

91. After the issue of the aforesaid Regulations, the Reserve Bank considered the introduction of Foreign Currency-Rupee (FC/INR) options as part of their efforts in developing derivatives market in the country and in adding to the spectrum of products for hedging currency exposures. Therefore a Technical Committee was constituted, which held deliberations between July and October 2002 and submitted a report recommending a phased introduction of the product.

92. In the pre liberalisation era, a simple and much restricted foreign exchange forward contract was the only derivative product available. But post liberalisation, the Reserve Bank started allowing a variety of products. They are (i) Cross Currency Options to hedge exposures arising out of trade (ii) Foreign Currency Interest Rate Swap / Forward Rate Agreements / Interest Rate Options / Swaptions/Caps to hedge interest rate and currency mismatches and (iii) Commodity Futures/Options to cover commodity exposures from overseas exchanges.

93. Keeping in mind the above developments, the Technical Committee (referred to above) recommended that at the inception, FC/INR Options market could start with some options and then proceed to introduce exotic features/options.

94. Thereafter, the Reserve Bank of India (Amendment) Act, 2006, was passed, legitimising the transactions in derivatives, with retrospective effect, with the introduction of Chapter III-D in the Act. By the said Amendment, Sections 45U, 45V, 45W and 45X were inserted in the Act. Section 45U contained definitions. Clause (a) of Section 45U defined a “derivative” as follows:-

“(a) “derivative” means an instrument, to be settled at a future date, whose value is derived from change in interest rate, foreign exchange rate, credit rating or credit index, price of securities (also called “underlying”), or a combination of more than one of them and includes interest rate swaps, forward rate agreements, foreign currency swaps, foreign currency-rupee swaps, foreign currency options, foreign currency-rupee options or such other instruments as may be specified by the Bank from time to time.”

Section 45V(1) declared that all transactions in derivatives as may be specified by the Reserve Bank shall be valid if one of the parties to the transaction is the Reserve Bank or a Scheduled Bank or an Agency falling under the purview of the Reserve Bank, the Banking Regulation Act or the Foreign Exchange Management Act. Sub-section (2) of Section 45V gave retrospective effect to the validity of such transactions. Section 45V reads as follows:-

“45V. (1) Notwithstanding anything contained in the Securities Contracts (Regulation) Act, 1956 (42 of 1956), or any other law for the time being in force, transactions in such derivatives, as may be specified by the Bank from time to time, shall be valid, if at least one of the parties to the transaction is the Bank, a scheduled bank, or such other agency falling under the regulatory purview of the Bank under the Act, the Banking Regulation Act, 1949 (10 of 1949), the Foreign Exchange Management Act, 1999 (42 of 1999), or any other Act or instrument having the force of law, as may be specified by the Bank from time to time.

(2) Transactions in such derivatives, as had been specified by the Bank from time to time, shall be deemed always to have been valid, as if the provisions of sub-section (1) were in force at all material times.”

95. Both before and after the enactment of the Reserve Bank of India (Amendment) Act, 2006, the Reserve Bank was issuing Master Circulars on “Risk Management and Inter Bank Dealings”, in exercise of the power conferred under the Foreign Exchange Regulation Act,1973 and later under the Foreign Exchange Management Act, 1999 and the regulations issued thereunder. These circulars had a period of validity of one year with a sunset clause. The purport of these circulars is to provide guidelines for regulating the derivatives contracts.

96. Two of the earliest circulars so issued by the Reserve Bank of India, were A.D (M.A. Series) Circular Nos. 21 and 26 dated 23.12.1994. They were issued in exercise of the power conferred under Section 73(3) of the Foreign Exchange (Regulation) Act, 1973, permitting authorised dealers (of foreign exchange) to offer forward cover to resident customers in any currency of their choice. Normally customers used to require forward cover facilities in respect of the foreign currency, in which their receivables or payables are denominated, against the Indian Rupee. But these circulars acknowledged the fact that the customers may at times, wish to hedge against a third currency instead of the rupee. Therefore these circulars permitted the authorised dealers to provide forward sale or purchase facilities, in the currency of receivables or payables against a third currency, provided the latter currency is also a permitted currency and is actively traded in the market, if the customer wished to hedge against a third currency instead of the rupee.

97. The contents of the above circular are as follows:-

“A reference is invited to A.D. (M.A. Series) Circular No.26 dated 23rd December 1994 whereby authorised dealers have been permitted to offer forward cover to resident customers to any currency of their choice.

2. Customers will ordinarily require forward cover facilities for the foreign currency in which their receivables or payables are denominated, against the Indian rupee. If for any reason, customers wish to hedge them against a third currency instead of the rupee, authorised dealers may provide forward sale or purchase facilities as appropriate, in the currency of the receivables or payables against the third currency provided the latter currency is also a permitted currency and is actively traded in the markets. Partial hedging may also be permitted whereby the customer hedges the currency of receivables or payables against the third currency first and completes the hedge against the rupee subsequently. Partial hedging may also be permitted in reverse order wherein the third currency is hedged against the rupee first.

3. Authorised dealers are advised that they should bring to the notice of their customers the possibilities of exchange losses arising due to adverse exchange rate fluctuations occurring before hedges are completed, besides protecting themselves against default risk by taking suitable margin deposits or earmarking against credit limits. All bookings, cancellations etc., must be noted on the documents seen/retained by authorised dealers in terms of paragraph 3C3 of Exchange Control Manual (1993 Edition) in the chronological order in which the transactions have been undertaken.

4. The directions contained in this circular have been issued under Section 73(3) of the Foreign Exchange Regulation Act, 1973 (46 of 1973) and any contravention or non-observance thereof is subject to the penalties prescribed under the Act.”

98. The contents of the above circular show that it is not necessary for the Customers to seek forward cover facilities for the foreign currency in which their receivables or payables are denominated, against the Indian rupee. If for any reason, customers wished to hedge them against a third currency instead of the rupee, authorised dealers were permitted by this circular to provide forward sale or purchase facilities as appropriate, in the currency of the receivables or payables against the third currency provided the latter currency is also a permitted currency and is actively traded in the markets. This facility was allowed in view of the fact that at times, a third currency other than the rupee may be more stable, while the rupee may be volatile and in turbulent weather.

99. The above Master circulars 21 and 26 dated 23-12-1994 were followed by several circulars, 2 of which are relevant for our purpose. They are the Master Circular No.06/2006-07 dated 1.7.2006 and Master Circular No.6/2007-08 dated 2.7.2007. These Circulars had a validity period of one year with a sunset clause. Therefore, they are always replaced by new circulars every year.

100. Thus the transactions in derivatives are age old, in so far as commodities and stocks and securities are concerned. These transactions are atleast about a couple of decades old in so far as foreign currencies (and forex options) are concerned. Therefore it is futile on the part of the plaintiff to contend that the transactions are either prohibited by law or opposed to public policy. What is expressly permitted by law, cannot be held to be opposed to public policy. The Master Circulars issued by RBI from time to time and the Regulations framed by RBI under the FEMA, 1999 permit such transactions. Such transactions have the sanction of law the world over, despite the mishaps such as Orange County, Barings Bank, Long Term Capital Management, Lehman Brothers, AIG etc . Admittedly, the Nationalised Banks in our country also offer such products, though their marketing strategy is not so aggressive, on account of conservative outlook. Therefore, the contention of the plaintiff that the deal is opposed to public policy is archaic.

101. Realising the futility of seeking an outright rejection of the deal as illegal, in the light of the above express stipulations contained in the Master Circulars and the Regulations, the plaintiff assails the OPT 727 deal as illegal, on the grounds inter alia–

(a) that their receivables and payables are not denominated in Swiss Franc and hence a forex option in USD/CHF was wholly unauthorised and not permitted;

(b) that the deal was not with reference to any particular underlying exposure and hence it was violative of the Master Circulars;

(c) that the defendant Bank had an obligation under the Master Circulars to see that there is a risk management policy in place in the plaintiff company and that they failed to ensure this; and

(d) that the payment of USD 100,000 by the bank to the plaintiff amounted to the payment of a premium, which is prohibited by the Regulations and the Master Circulars.

102. Ground No. 1: It is true that the plaintiff’s foreign currency payables and receivables are denominated only in US Dollors and not in Swiss Franc. But it is seen from the Master circulars and the Regulations that there is no compulsion for a person to have dealings only with reference to the Indian rupee. The Master circulars A.D.(M.A.Series) 21 and 26 dated 23-12-1994, extracted in paragraph-97 above, expressly permit customers to hedge their receivables and payables against a third currency instead of Indian rupee, subject only to 2 conditions namely (1) that such third currency should be a permitted currency and (2) that it should be actively traded in the market. Swiss Franc satisfies both conditions. Therefore the first ground of attack is unsustainable.

103. Moreover, Schedule-I to the “Foreign Exchange Management (Foreign Exchange Derivative Contracts) Regulations, 2000 imposes certain conditions, three of which are important for our purpose and they are as follows:-

(a) the authorised dealer through verification of documentary evidence is satisfied about the genuineness of the underlying exposure.

(b) the maturity of the hedge does not exceed the maturity of the underlying transaction.

(c) the currency of hedge and tenor are left to the choice of the customer.

104. Paragraph-A.1.c of Schedule-I of the aforesaid Regulations, makes it clear that even the currency of hedge and tenor are left to the choice of the customer. Therefore it is clear that hedging need not necessarily be in terms of US Dollars versus Indian currency. If a customer feels that the Indian currency is highly volatile and unstable as against US Dollars, he is entitled to opt for a more stable currency, so that his risks are minimised. But when a contra situation arises, he would stand to lose, but the same would be part of the game. Therefore, it is futile to contend that the transaction is prohibited by law, on account of a third currency (swiss franc) being used for hedging.

105. Ground No.2:: The contention of the plaintiff is that there was no underlying exposure in relation to OPT 727 and that by virtue of the Regulations, there was a prohibition from entering into such contracts without underlying exposure. According to the plaintiff the Bank (authorised dealer) also had a duty cast upon it, to satisfy itself, through verification of documentary evidence about the genuineness of the underlying exposure.

106. It is true that paragraph-A.1.(a) and (b) of Schedule-I to the Regulations, extracted in paragraph-103 above, imposes an obligation upon the authorised dealer to satisfy itself about the genuineness of the underlying exposure through documentary evidence. But the purpose of the same is to prevent Bankers from indulging in “kite flying operations” throwing public money into heavy risks. Moreover, the Master Circular No.06/2006-07 dated 1.7.2006 issued by the Reserve Bank of India on “Risk Management and Inter Bank Dealings” gives a leverage to the authorised dealers. Part-A, Section 1, paragraph A.1(a) of the Master Circular contains a clause which reads as follows:-

“(a) the AD bank through verification of documentary evidence is satisfied about the genuineness of the underlying exposure, irrespective of the transaction being a current or a capital account transaction. Full particulars of contract should be marked on such documents under proper authentication and copies thereof retained for verification. However, AD bank may allow importers and exporters to book forward contracts on the basis of a declaration of exposure subject to the conditions mentioned in paragraph-A.2 of this Circular.”

107. In so far as the extent to which hedging can be permitted, paragraph-A.2 of Part-A of Section 1 of the same circular provides as follows:-

“A.2. AD banks may also allow importers and exporters to book forward contracts on the basis of a declaration of an exposure and based on past performance upto the average of the previous three financial years’ (April to March) actual import/export turnover or the previous year’s actual import/export turnover, whichever is higher, subject to the following conditions.”

108. In the subsequent paragraphs, similar leverage is provided in respect of contracts other than forward contracts. As a matter of fact, paragraph A.6 of Part-A, Section 1 of the same circular makes it clear in clause (d)(i) that a person resident in India may enter into a cross currency option contract, not involving the rupee, with an authorised dealer to hedge foreign exchange exposure arising out of his trade subject to similar conditions. Therefore the conditions extracted above are applicable to cross currency opion contracts also and hence the second ground of attack that there was no underlying exposure, cannot be heard to be raised by the plaintiff who made a declaration in OPT 727 that it was entering into this transaction solely for the purpose of hedging its foreign currency Balance sheet exposure. This declaration is binding on the plaintiff and this declaration was sufficient for the defendant bank to enter into the deal, in view of the provisions of the Master Circulars extracted in paragraphs 106 and 107 above. Moreover, it is the admitted case of the plaintiff (para 4 of the plaint) that they had export orders to the tune of Rs.111 crores for the period upto 31-12-2007 and that they had foreign currency loans to the tune of USD 30 million. It is only by showing their foreign currency receivables and payables that the plaintiff entered into the ISDA Master Agreement. Therefore, they cannot now contend that this particular deal alone had no underlying exposure. Hence the second ground of attack is rejected as untenable.

109. Ground No.3: Relying upon paragraph-A.7 of the very same circular, it was contended on behalf of the plaintiff that the authorised dealers are obliged to ensure that the Board of Directors of the Corporate had drawn up a risk management policy, laid down clear guidelines for concluding the transactions and institutionalised the arrangements for a periodical review of operations and annual audit of transactions to verify compliance with the Regulations. According to the plaintiff, there was no risk management policy in place in the company and the defendant Bank simply went ahead with the transaction on the basis of the declaration made by Mr.P.K.Viswanathan and that therefore, the transaction was violative of the Master Circulars.

110. But the above contention is wholly untenable. As stated earlier, the Bank was entitled in terms of Part-A, Section 1, paragraph A.1(a) of the Master Circular, to act on the basis of a declaration signed by the customer, with regard to risk management. In the present case, the Bank had in fact obtained, such a declaration (in clause ‘d’ of OPT 727). The declaration formed part of OPT 727, which is filed as plaint document No.7. Apart from the declaration which forms part of the deal confirmation OPT 727, a separate declaration was also obtained by the Bank from the plaintiff. This separate declaration signed by Mr.P.K.Viswanathan on behalf of the plaintiff is filed as document No.4 by the defendant. The declaration dated 14-5-2004 reads as follows:-

” It is hereby declared that the Board of Directors of the company has taken note of the management policy of the company covering derivative trades. The policy has laid down clear guidelines for concluding the transactions and institutionalises the arrangements for a quarterly review of operations and annual audit of transactions to verify compliance with the regulations as laid down by the RBI or any other regulatory or statutory authority.”

Apart from the above declaration, the plaintiff’s authorised representative Mr.P.K.Viswanathan also signed a “Risk Disclosure Statement” on 7-6-2004 after signing the ISDA Master Agreement. This Risk Disclosure Statement is filed by the defendant as their document No.5. The Statement shows that the plaintiff was aware of a variety of risks associated with the deal, such as Market Risk, Basis Risk, Operational Risk and Legal, Regulatory and Tax Risks. The Risk Disclosure Statement also contains an undertaking by the plaintiff that they will get only into those derivatives transactions as are permitted by the laws of the country including RBI guidelines. The undertaking given by the plaintiff is found in defendant’s document No.5 under the caption “Regulatory Appeals” where there is a commitment by the plaintiff to the Bank that it is acting within the bounds of law and that derivatives transactions are entered into only to hedge the actual liabilities of the company.

111. Mr.P.K.Viswanathan, who signed the above Declaration and Risk Disclosure Statement, was duly authorised by the resolution of the Board of Directors of the company, filed as plaint document no.3, to enter into derivatives transactions. From the date of the deal namely 22-6-2007, till the date of institution of the suit, the plaintiff did not raise a little finger about the lack of authority on the part of Mr.P.K.Viswanathan. Even when the plaintiff made the earliest attempt to wriggle out of the deal, through a letter dated 12-12-2007 (plaint document No.18), they did not disown Mr.P.K.Viswanathan or his actions. On the contrary, the very letter dated 12-12-2007 claiming that the entire structure got knocked out, was signed only by Mr.P.K.Viswanathan. Even in the subsequent letters and the meeting that Mrs.Rajshree had with the officilas of the Bank at Delhi, the validity of the declaration signed by Mr.P.K.Viswanathan was never questioned. Having allowed its authorised signatory to make a declaration regarding the existence of a risk management policy, and having failed to question the same at the earliest, the plaintiff cannot now turn around and say that there was none. If the plaintiff says that there was no risk management policy, it would mean that the declaration made on their behalf was false. If it was a false declaration, then the plaintiff cannot take advantage of the fact that it was false. Nullus commodum capere potest de injuria sua propria-No one can take advantage of his own wrong. The plaintiff was not only aware of the transaction but also aware of the declaration signed by Mr.P.K.Viswanathan, since OPT 727 was always available in the records of the company.

112. It is not the case of the plaintiff that the Board of Directors never had an occasion to see the document OPT 727. Such a stand cannot also be taken by the plaintiff since the plaintiff received USD 100,000 on 27-6-2007 in pursuance of OPT 727. Moreover, the plaintiff claims in para-3 of the plaint that it is a listed company whose shares are traded in the Bombay Stock Exchange and National Stock Exchange. By a Master Circular bearing No.SEBI/CFD/DIL/CG/1/2004/12/10 dated 29-10-2004 the Securities Exchange Bureau of India directed all Stock Exchanges to amend the Listing Agreements by replacing the existing clause 49. The requirements of revised clause 49 of the Listing Agreement were given in Annexures 1 to 1-D of the said Master Circular. Anexure 1-A of the Master Circular contained the information to be placed before the Board of Directors of the Company. Item No.14 of Annexure 1-A related to the “Quarterly details of foreign exchange exposures and the steps taken by the management to limit the risks of adverse exchange rate movement, if material”. There is a presumption that the plaintiff complied with the above mandatory requirement relating to the revised clause 49 of the Listing Agreement. Therefore, the Board of Directors of the company cannot feign ignorance of the declaration and risk disclosure statement made by Mr.P.K.Viswanathan, while confirming the deal OPT 727. In such circumstances, the plaintiff cannot be heard to contend that the Bank failed to ensure the existence of a risk management policy, after having allowed Mr.P.K.Viswanathan to sign the declaration and risk disclosure statement.

113. Ground No.4: The next ground of attack of the plaintiff is based upon a clause in Annexure-VII under paragraph-A.6 (a) of the above Master Circular, whereby customers are permitted to purchase call or put options subject to the condition that no premium is received by the customer. Clause (d) of Annexure-VII of the Master Circular reads as follows:-

“(d) i. Customers can purchase call or put options.

ii. Customers can also enter into packaged products involving cost reduction structures provided the structure does not increase the underlying risk and does not involve customers receiving premium.

iii. Writing of options by customers is not permitted. However, zero cost option structures can be allowed.”

The argument of the plaintiff is that the defendant-Bank paid USD 100,000 under OPT 727 and that the same amounted to payment of a premium and hence violative of the above stipulation contained in the Master Circular.

114. At the outset, I do not agree that the payment of USD 100,000 under OPT 727 was by way of premium. Even as per the letter dated 12-12-2007 of the plaintiff (plaint document No. 18) it was a payment in terms of the structure. The OPT 727 was confirmed by the plaintiff on 22-6-2007. The payment was received by the plaintiff on 27-6-2007 when USD/CHF touched the level of 1.2385. Therefore the plaintiff received the payment and also understood the nature and purpose of the payment as anything but a premium.

115. The contention that the amount of USD 100,000 paid by the Bank to the plaintiff is a premium, has arisen out of a misconception. As we have seen above, a put option is the right to sell and a call option is the right to buy. A combination of the two is called a zero cost option and it is permitted by Clause d.(iii) of Annexure-VII of the Master Circular, extracted in para 111 above. The combination of put and call options is called a “zero cost option” because there will be no financial outlay for the customer in the form of premium. Such options have evolved on account of the fact that a majority of the customers have both foreign currency receivables as well as payables.

116. The plaintiff has repeatedly assailed OPT 727 as an “exotic option”. Exotic options are neither sinful nor illegal though erotic options may be. Exotic options may, at the most, be erratic options, at times. An exotic option is nothing but an “out of the routine” option. Commonly traded plain options are known as vennila options. Options which are not plain but which are imaginatively fashioned are exotic options. As a matter of fact, some of the options which were once considered exotic, later became vennila options, when they gained popularity and used frequently.

117. Thus in fine, I find no merit, prima facie, in any of the grounds on which the plaintiff assails the deal as illegal and opposed to public policy. The fact that the deal has exposed the plaintiff to the possibility of a huge financial loss, is no ground to declare the contract as null and void, illegal or opposed to public policy. In fact the OPT deal by itself did not bring any misfortune to the plaintiff. It was the fate of the US Dollar, which has brought the plaintiff to the cliff. Therefore the plaintiff which had the benefit of a push, up the ladder in 9 out of 10 deals, cannot duck when it comes to a pull, down the ladder in the remaining 1 deal. Every business venture provides a roller-coaster ride at some point of time or the other and the validity of contracts cannot be judged on the basis of the success or failure of the venture.

118. In view of the above, the plaintiff is not entitled to any injunction restraining the bank from enforcing the contract OPT 727. Therefore, the applications for injunction O.A.Nos.251 and 252 of 2008 are dismissed and the injunction earlier granted is vacated. Consequently, the counter injunctions prayed for by the defendant Bank in O.A.Nos. 526 and 527 of 2008 are also rejected since the defendant is now free to work out their remedies in an appropriate manner. On the same logic, the applications A.Nos.2446 and 2447 of 2008 taken out by the Bank for appropriate interim reliefs, are also dismissed and it is left open to the Bank to work out their remedies in a manner known to law.

119. In view of my finding that the suit is maintainable, the application to revoke the leave A.No.1926 of 2008 and the application to reject the plaint A.No.1927 of 2008 are dismissed. The jurisdiction clause contained in the ISDA Master Agreement does not confer exclusive jurisdiction upon the courts in Mumbai, by the use of the words “only” or “alone”. The averments in the plaint proceed on the basis that a part of the cause of action arose at Chennai within the jurisdiction of this court. Therefore the grant of leave to sue under clause 12 of the Letters Patent, was proper. The jurisdiction of the court to try a lis has to be tested at this stage, only in the light of the plaint averments. The plaint averments do disclose a cause of action, sufficient to entertain this suit. It is contended by the defendant bank that under OPT 727 no cause of action would arise till the contingency stipulated therein arises or till the expiration date (or fixing date) is reached. But that is only for enforcing the contractual obligations. When a contract is assailed as null and void, the cause of action cannot be said to arise only on the expiration date. Therefore, the contention that the plaintiff could not have filed the suit before the expiration date was reached or before the happening of the event stipulated therein, cannot be accepted. In view of the nature of the reliefs prayed for, it cannot be said that the plaint discloses no cause of action. Therefore A.Nos 1926 and 1927 are also dismissed.

NF