1. The defendants are the appellants. They were sued by the plaintiffs to recover a sum of Rs. 12,000 paid to them in respect of three hundis aggregating in value Rs. 14,948. The plaintiffs based their claim on three grounds--misrepresentation, failure of consideration, and breach of contract. We think they were entitled to succeed on the first of these grounds.
2. The hundis in question were drawn by a man named Venkatasubba Rao on one Ohara of Kobe in Japan against a shipment of fibre. Subba Rao negotiated the bills with the plaintiffs and the plaintiffs negotiated the bills with defendants for Rs. 11,800 odd. Defendants in their turn transferred the bills to Itoh and Co., a firm in Japan, together with the bills of lading relative to the shipment. The drawee dishonoured the bills and they were duly protested. Notice of dishonour was given by defendants to plaintiffs by letter, dated 9th September, 1920, galling upon them to pay to the defendants the full amount of the hundis with interest. The defendants sent a reminder to the plaintiffs on 23rd October, 1920. A further reminder was sent on 3rd November, 1920, which produced a cheque for Rs. 12,000 from the plaintiffs, in their letter acknowledging the receipt of this sum defendants wrote:
We have pleasure to acknowledge your cheque for Rs. 12,000 as part payment of the above hundis being dishonoured. Kindly favour us with your cheque for the balance sum with interest due thereon at your earliest convenience. We will return the dishonoured hundis to you on receipt of same in due course
3. The plaintiffs, therefore, sent a further cheque for Rs. 137-8-0 representing the balance after deducting Rs. 12,000 already paid by them to defendants from Rs. 11,801 received on negotiation plus Rs. 336-5-3 overdue interest on that sum, and wrote:
This settles the affair and we request you to return us the dishonoured hundis by return; otherwise we will make you liable for all damages sustained by us.
4. The defendants' retort was that plaintiffs had promised to pay the full amount of Rs. 14,948 and that this sum was payable by them to the defendants.
5. We think there can be no doubt upon the correspondence between the parties that the defendants were representing to the plaintiffs that they were entitled either in their capacity of holders or of indorsers who had been made liable to a succeeding holder, to demand payment of the amount due on the dishonoured bills from the plaintiffs, and that on receipt of payment defendants would return the dishonoured instruments to plaintiffs. It is equally clear that the plaintiffs were induced by those representations to make the payment of Rs. 12,000 to the defendants, and that they would not have made that payment had they known the true position, that the defendants were not entitled to make them liable on the bills and that defendants had no prospect of being able to return the bills to them.
6. The facts were that after the plaintiffs negotiated the bills with defendants, the defendants had transferred the bills by delivery to Itoh, with authority to collect and to appropriate the amount due thereon in payment of a claim by Itoh against the defendants upon some other dealings. When, therefore, the bills were dishonoured by the drawee, Ohara, the defendants were not the holders. Itoh was the holder. He was the person entitled in his own name to the possession of the bills and to receive or recover the amount due thereon from the parties to the bills, within the definition in Section 8 of the Negotiable Instruments Act. Itoh retained the bills and was retaining the goods in the exercise of a lien which he claimed to have in respect of money alleged to be due to him from defendants for breach of contract. And it appeared in the course of the hearing of this appeal that the bills are even now in Itoh's power and possession.
7. Further, the defendants were not indorsers of the bills. They were transferors by delivery; and a transferor by delivery is not liable on the instrument: vide Section 58(2), Bills of Exchange Act. It is true that there is no provision in the Negotiable Instruments Act: corresponding to Section 58(2). But this section simply embodies the law-merchant which was explained by Abbott, C.J., in Van Wart v. Woolley (1824) 107 E.R. 797 : 3 B. & C. 439 as follows:
If a person deliver a bill to another without indorsing his own name upon it, he does not subject himself to the obligations of the law-merchant; he cannot be sued on the bill either by the person to whom he delivers it or by any other. And as he does not subject himself to the obligations, we think he is not entitled to the advantages.
8. Not being indorsers the defendants would not be liable on the bills, as provided by Section 35, Negotiable Instruments Act, to a succeeding holder; and consequently the defendants would have no right to enforce against the plaintiffs a liability on the bills to which they themselves were not subject.
9. The alternative argument that the plaintiffs were liable to the defendants under the agreement (Ex. C) is answered by the terms of the agreement. The plaintiffs undertook to refund to the defendants the sum representing interest and stamp if Ohara objected to the inclusion of that sum, and they also undertook to refund 'any reduction' made by Ohara from the invoice amount 'for whatever reason.' The meaning is quite clear, and to take the words 'reduction for whatever reason' to include the dishonour of the bills by Ohara would be, in our view, to put an unwarrantable construction upon them.
10. There was, accordingly, no obligation on the plaintiffs to pay when they made the payment of Rs. 12,000 to the defendants, and as the money was paid as a result of the defendants' misrepresentations,. the plaintiffs were entitled to recover it. The decree in their favour for Rs. 12,000 with interest at 9 per cent, from the date of demand, vis., 10th March, 1922, will therefore stand. But the learned Judge also gave the defendants on their counter-claim a decree for Rs. 2,948 with interest being the difference between the amount paid by plaintiffs to defendants, i.e., Rs. 12,000 and Rs. 14,948, the amount of the bills. For the reason already given the plaintiffs were not liable to the defendants upon the bills, and this part of the decree will be set aside. The result is that the appeal is dismissed with costs and the plaintiffs' memorandum of objections will be allowed with costs. The respondents will have the costs of the counterclaim in the Court below.