1. These two appeals arise out of the orders passed by the Court below allowing I. A. 1802 of 1977 filed by the defendants 1 and 3 and I. A. 89 of 1977 filed by defendants 2, 4 and 5 in O. S. 858 of 1977, and staying the said suit under Section 34 of the Arbitration Act. The plaintiff who is aggrieved against the orders passed by the Court below staying his suit has come forward with these appeals. The circumstances under which the suit was stayed by the Court below may briefly be stated:- The plaintiff has entered into a contract with the defendants for supply of cotton. In pursuance of the said contract, the plaintiff supplied cotton to the defendants and for the supplies made, the defendants have issued five cheques on different dates, on 23-3-1976 for Rs.790; on 29-1-1977 for Rs13,000; on 2-2-1977 for Rs.13,000; on 10-2-1977 for Rs.14,000; and on 17-2-1977 for Rupees 14, 736-77. Out of the said five cheques, the plaintiff was able to realise only two cheques had been dishonoured with the endorsement `exceeds arrangement'. Consequently, the plaintiff filed the suit for realising the proceeds of the three cheques which had been dishonoured amounting to Rs. 28, 736-77 from the defendants with interest thereon from 6-1-1977. As soon as the summonses were served on the defendants in the said suit, they filed applications under Section 34 of the Arbitration Act contending that the contract to supply cotton entered into by the plaintiff with the defendants is subject to the bye-laws of the East India Cotton Association Ltd., Bombay, which contains among other things a provisions for a settlement of quality and other disputes by arbitration.
2. The applications for stay filed by the defendants were opposed by the plaintiff in the suit, the appellant herein, on the ground that the claim in the suit, is not a dispute arising out of the contract for supply of cotton, that the contract to supply cotton stands fully performed by the supply of cotton and the full payment made by the defendants towards the sale price of cotton by various cheques issued by the defendants, and, therefore, the claim cannot be taken to arise out of the original contract to supply cotton.
3. After considering the relevant contentions of the parties in the applications for stay of the suit filed by the defendants, the Court below has held that the suit has to be stayed under Section 34 of the Arbitration Act, for the reasons (1) that since the sole contract was made subject to the bye-laws of the East India Cotton Association Ltd., Bombay which contained, an arbitration clause the parties should resort to the remedy by way of arbitration under the said arbitration clause (2) that the Court must exercise a discretion in a judicial manner having regard to the relevant facts and circumstances of the case and that the discretion is to be exercised in favour of the grant of stay of the suit; and (3) that the suit is based on a commercial transaction and the disputes relate only to the question of fact which can easily be decided by the arbitrators.
4. The question is whether the said order of the Court below staying the suit under Section 34 of the Arbitration Act can be legally sustained.
On a due consideration of the matter, we are of the view that the Court below has not considered the matter in a proper perspective. Merely because the grant of stay of a suit is discretionary, it cannot be granted for the mere asking. In this case, from the facts already stated, it will be clear that the contract to supply cotton has been fully performed as between the parties to the contract by the actual supply of cotton by the plaintiff as per the terms of the contract and by the defendants making due payments for the supplies made in the from of five cheques. As a matter of fact, the five cheques were sent along with a letter which has been marked as Ex. B-7 in this case. That letter dated 19-1-1977, would clearly indicate that the contract has been fully performed and nothing remained to be done in relation to the contract as between the parties. That letter is to the effect that the five cheques have been issued in full settlement of the plaintiff's claim as per his final invoice dated 6-1-1977 for Rs. 54, 736-77.
5. The said letter indicates that the defendants have agreed and paid the full invoice price of Rs. 54, 736-77 in the from of the five cheques towards their liability. Therefore, after the defendants had agreed and paid the full price of Rs. 54, 736-77 by way of cheques for the supplies of cotton the contract entered into between the parties for supply of cotton has been fully performed and nothing remains to be done under the contract. The fact that three of the cheques issued by the defendants have been dishonoured cannot be taken to revive the contract including the arbitration clause contained therein.
6. However, according to the learned counsel for the respondents, the issue of cheques as full consideration for the supplies of cotton made by the plaintiff can be taken to be only a conditional payment and if the cheques stand dishonoured, the defendants cannot be taken to have discharged their obligations to pay the price for the goods supplied and in that event the plaintiff's claim for recovery of the amount covered by the cheques dishonoured will amount to a claim for non-payment of the price which would in turn attract the arbitration clause. The learned counsel for the respondents referred to the decision in Kandasami Gounder v. Sivasubramania Iyer, in support of his contention that a payment by cheque being honoured. In that case there was an execution of a promissory note by the tenant for arrears of rent payable to the landlord. The question arose whether execution of a promissory note results in the discharge of liability for payment of rent absolutely. The Court held that a promise to pay is not a payment and seldom does a creditor accept a mere promise to make a future payment in satisfaction of an existing debt, that the general rule is that the taking of a bill or note by a creditor would operate only as a conditional payment and that whenever a negotiable instrument is taken in lieu of a money payment, the presumption is that the parties intend it to be a conditional discharge only. The ultimate decision rendered by the Court in that case was that the execution of the promissory note by the tenant does not result in the discharge of the tenant's liability for arrears of rent. The learned counsel also refers to the following decisions in support of his contentions - (1) Jambu Chetty v. Palaniappa Chettiar, (1903) ILR 26 Mad 526; (2) Perumal Chettiar v. Kamakshi Ammal, AIR 1938 Mad 785 (FB); (3) Keshav Mills Co. v. I.T. Commr. . In Jambu Chetty v. Palaniappa
Chettiar, (1903) ILR 26 Mad 526 a Division Bench of this Court was concerned with a case where a suit was filed for the amount due on account of goods sold and delivered and the defence was that the plaintiff has accepted hundies in discharge of the debt and was, in consequence, debarred from suing on the original consideration and his only remedy, if he had one, was sue on the hundies. It was found on evidence that the acceptance of the hundies was unconditional and, therefore, the plaintiff cannot fall on the original debt and he can sue only on the hundies. It was laid down in that case that wherever, there is no evidence of the payment being recieved as an absolute discharge, the presumption is that the effect of giving and taking a note or bill is that the debt is conditionally paid. In the case in Perumal Chettiar v. Kamakshi Ammal, AIR 1938 Mad 785 a claim had been made to recover the original debt in respect of which a promissory note had been given by the debtor which was later found to be not properly stamped. The defence taken in that case was that by execution of the promissory note by the debtor, the debt had been absolutely discharged and the only remedy for the creditor was to enforce the promissory note and not to fall back on the original debt. Leach. C.J. speaking for the Full Bench of five Judges, had expressed the view as follows after referring to the relevant decisions rendered earlier:-
"In my opinion, the law may be stated shortly in this way. If the promissory note embodies all the terms of the contract and the instrument is improperly stamped no suit on the debt will lie. Section 91 of the Evidence Act and Section 35 of the Stamp Act bar the way. But it does not embody all the terms of the contract the true nature of the transaction can be proved and where an instrument has been given as collateral security or by way of conditional security or by way of conditional payment a suit on the debt will lie. The fact that the execution of the promissory note is contemporeneous with the borrowing cannot exclude the possibility of the instrument having been given as collateral security or by way of conditional payment. Whether a suit lies on the debt apart from the instrument therefore depends on the circumstances under which the instrument was executed."
Varadachariar J. as he then was, had expressed his view thus :-
"It may be convenient to refer next to those of the Indian decisions which when dealing with claims for money lent under unstamped notes invoke the principle that the giving of a negotiable instrument only operates as a 'conditional discharge' or merely suspends the plaintiff's right to sue is revived if the instrument turns out to be worthless or is not discharged by payment in due course. I see no difficulty in applying this principle to cases where money is already due to a person - as far goods sold or for a preexisting debt - and the debtor gives his own note to the creditor or draws a bill or cheque in his favour. It is legitimate to presume in such cases that the creditor is not accepting the instrument in satisfaction of his existing claim but only as a security or as a means of obtaining satisfaction from the drawee of the bill or cheque."
7. We do not think how the above decisions will help the respondents in this case. In these cases, the payments made either by the execution of a promissory note or by a cheque treated as conditional so as to enable the creditor to have recourse to the original cause of action. The principle laid down in these cases is that where the amount of the promissory note or the cheque issued by the debtor which for some reason or other could not be realised by the creditor the latter could fall back on the original cause of action and recover the earlier debt. In this case, though a reference has been made to the circumstances under which the cheque has been issued, the suit simplicities is one to recover amounts covered by the three cheques which had been issued by the defendants and which had been dishonoured. The decisions referred to above specifically proceed on the basis that the creditor has got a remedy to recover the amounts covered by the dishonoured cheques without falling back on the original debt did not come up for consideration in those cases. In those cases, the question was whether the promissory note given in discharge of the earlier debt cannot be enforced for any reason whether the creditor can fall back on the original cause of action and recover the debt. The right of the appellant in this case to sue on the dishonoured cheques cannot be doubted. Though the plaint refers to the antecedent facts which gave rise to the issue of the cheques by the defendants in favour of the plaintiff, the suit is in substance a suit on dishonoured cheques. Such a suit cannot be taken to arise solely out of the contract entered into by the plaintiff with the defendants for supply of cotton.
8. As a matter of fact, the decision in Commr. of Income-tax v. Ogale Glass Works Ltd., , clearly supports the appellant's case. In the case before the Supreme Court, there was a contract for the supply of goods manufactured by a company to the Government of India. Under Cl. 15 of that contract, payments for delivery of goods were to be made on submission of the bills in the prescribed forms by the cheques drawn on the Reserve Bank of India or the Imperial Bank of India. The Company which supplied the goods contracted have received certain cheques which were honoured in due course by the Reserve Bank at Bombay. Since the company was a redient company in Aundh State outside British India, the question arose whether the income profits or gains in respect of the sales made to the Government of India by the company were received in British India within the meaning of Section 4(1)(a) of the Income tax Act. It was contended on behalf of the Commissioner of Income-tax that a payment be negotiable instrument is dishonoured, the creditor may consider it as a waste paper and resort to his original debt. The Supreme Court however held that though normally a payment made by a negotiable instrument is a conditional payment, a cheque once issued, unless dishonoured, is payment and the payment taken effect from the delivery of the cheque though that may be defeated by the happening of a condition i.e., non-payment at maturity. In that case, though the payments for the cheques were made at Bombay, since the cheques were accepted by the company in Aundh State outside British Indian and, therefore the profits arising out of the transaction of sale of goods to the Government of India could not be assessed as profits arising in British India. The legal principle that the payment (by a bill) takes effect from the delivery of the bill, but is defeated by the happening of the condition i.e. non-payment at maturity, is recognised by Benjamin on Sale, 8th Edn. pay 788 and also by the following passage in Lyles on Bills, 20th Edn. page 23
"A cheque, unless dishonoured, is payment."
In the present case, there is no dispute as to the price payable in respect of the supply of the goods. The plaintiff sent a final bill, as already stated, for a sum of Rs.54,736.77 and the defendants have accepted that liability and issued cheques covering the entire amount of Rs.54,736.77. By sending the cheques the defendants should be taken to have paid for the goods supplied by the plaintiff. The fact that some of the cheques had been dishonoured cannot be taken advantage of by the defendants to say that the obligation to pay by them has not been discharged and, therefore, the plaintiff has to proceed by way of arbitration to recover the amount covered by the dishonoured cheques. The dishonour of the cheques is a subsequent event after the contract has been fulfilled by complete payment for the goods purchased and the suit has been filed on the subsequent cause of action i.e., the dishonouring of the cheques and therefore the suit cannot be taken to be a suit for recovery of the price. Even assuming that the suit has been traced only to a contract, still the arbitration clause cannot come into play as there is no dispute either as regards the quality of the goods or as regards the quantum of the sale consideration. In this view of the matter, we cannot agree with the conclusion of the lower Court that the suit is liable to be stayed under Section 34 of the Arbitration Act. We are of the view that Section 34 of the Arbitration Act come into play here as the contract which provided for an arbitration agreement has completely been performed and nothing remains to be done under that contract. The defendants liability which is now sought to be enforced in this suit arises out of the dishonouring of the cheques issued by them. The appeals are, therefore, allowed and the order of the lower Court is set aside with a direction to the lower Court to proceed with the trial of the suit on merits. There will be no order to costs.
9. The learned counsel for the respondents prays for leave to appeal to the Supreme Court against the judgment just now pronounced. Since our decision is rested on the factual position, we do not think that this is a fit case for the grant of leave to appeal to the Supreme Court. The leave asked for is refused.