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Vasanji Mavji and Company, a Registered Partnership Firm Dealing in Cotton (with Firm Registration No. D. 110853), Represented by Its Partner Chandulal Momayya Vs. K.P.C. Spinners, a Partnership Firm, Represented by Its Partner Mr. K.P. Ganapathia Chettiar and ors. - Court Judgment

LegalCrystal Citation
SubjectArbitration
CourtChennai High Court
Decided On
Reported in(1982)2MLJ216
AppellantVasanji Mavji and Company, a Registered Partnership Firm Dealing in Cotton (with Firm Registration N
RespondentK.P.C. Spinners, a Partnership Firm, Represented by Its Partner Mr. K.P. Ganapathia Chettiar and ors
Cases ReferredPerumal Chettiar v. Kamakshi Ammal
Excerpt:
- - that letter, dated 19th january, 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. ogale glass works limited [1954]25itr259(sc) ,clearly supports the appellant's case. 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 takes effect from the delivery of the cheque, though that may be defeated by the happening of a condition, i. 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......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 contemporaneous 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.....
Judgment:

G. Ramanujam, J.

1. These two appeals arise out of the orders passed by the Court below allowing I.A. No. 1802 of 1977 filed by the defendants 1 and 3 and I.A. No. 89 of 1977, filed by defendants 2, 4 and 5 in O.S. No. 850 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:

2. The plaintiff had 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 23rd March, 1976 for Rs. 750, on 29th January, 1977 for Rs. 13,000 on 2nd February, 1977 for Rs. 13,000; on 10th February, 1977 for Rs. 14,000; and on 17th February, 1977 for Rs. 14,736.77. Out of the said five cheques, the plaintiff was able to realise only two cheques for Rs. 26,000. The other three 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 6th January, 1977. As soon as the summons 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 Limited, Bombay, which contains among other things a provision for a settlement of quality and other disputes by arbitration.

3. The application for stay filed by the defendants was 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, that the cause of action for the suit was based on the dishonouring of the cheques issued by the defendants, and therefore, the claim cannot be taken to arise out of the original contract to supply cotton.

4. After considering the relevant contentions of the parties in the applications for stay of the suit filed by the defendants, the Court be low has held that the suit has to be stayed under Section 34 of the Arbitration Act for three reasons : (1) that since the sale contract was made subject to the bye-laws of the East India Cotton Association Limited, Bombay which contained an arbitration clause, the par ties 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.

5. 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.

6. 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 claimed by a party as of right and 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 form of five cheques. As a matter of fact, the five cheques were sent along with a letter which1 has been marked as Exhibit B-7 in this case. That letter, dated 19th January, 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 6th January; 1977, for Rs. 54,736.77. The said letter indicates that the defendants have agreed and paid the full invoice price of Rs. 54,736.77 in the form 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.

7. 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 obligation to pay the price for the goods applied 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 Kandasamy Gounder v. Sivambramania Iyer : (1962)2MLJ518 , in support of his contention that a payment by cheque can only be taken to be a conditional payment, conditional on the 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 the promissory note results in the discharge of liability for payment of rent absolutely. The Court held that & promise to pay is not a payment and seldom dees a creditor accept a mere promise to make a future payment as 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 wherever 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 contention. Jambu Chetty v. Palaniappa Chettiar : (1903)13MLJ252 ; Perumal Chettiar v. Kamakshi Ammal : AIR1938Mad785 ; Keshav Mills Co. v. Income-tax Commissioner : [1950]18ITR407(Bom) .

In Jambu Chetty v. Palaniappa Chettiar : (1903)13MLJ252 , 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 to sue on the hundies. It was found on evidence that the acceptance of the hundies was unconditional and, therefore, the plaintiff cannot fall back 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 received 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 : AIR1938Mad785 , a claim had been made to recover the original debt in respect of which a promissory note had been given by a 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 if 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 contemporaneous 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 remedy and that 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 for 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.

8. We do not think how the above decisions will help the respondents in this case. In those cases, the payment made either by the execution of a promissory note or by a cheque was treated as conditional so as to enable the creditor to have recourse to the original cause of action. The principle laid down in those cases is that where the amount of the promissory note or the cheque issued by the debtor 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 had1 been issued, the suit simpliciter is one to 'recover amounts covered by the three cheques which had 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 promissory note or the cheque. The question whether the creditor can file a suit to recover the amount covered by the dishonoured cheques without falling back on the original debt did not come up for consideration in these cases. In those cases, the question was when 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 cheque 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.

9. As a matter of fact, the decision in Commissioner of Income-tax v. Ogale Glass Works Limited : [1954]25ITR259(SC) , 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 Clause 15 of that contract, payments for delivery of goods were to be made on submission of the bills in the prescribed forms by 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 resident 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 Indian Income-tax Act. It was contended on behalf of the Commissioner of Income-tax that a payment by negotiable instrument is only a conditional payment subject to the condition that if the 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 takes 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 India, there was a complete discharge of the claim for the price of the goods outside British India 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., nonpayment at maturity' is recognised by Benjamin on Sale, 8th Edition page 789 and also by the following passage in Byles on Bills, 20th Edition, page 23:

A cheque, unless dishonoured, is payment.

10. 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 the 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, Arbitration Act, cannot 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 as to costs.

11. 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 mainly 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.


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