Kishan Swaroop Ashokkumar & others &Hazarimal Chhogalal & another & Rajendra Enterprises & v. Podar Mills Limited & Piramal Mills Limited — 1986 DIGILAW 225 (BOM)

JUDGMENT - M.S. JAMDAR, J.:---Appeals Nos. 652 to 657 of 1981 are filed by M/s. Kishan Swaroop Ashokkumar and others, defendants in the six suits filed by the Podar Mills Limited, the respondents in these six appeals and Appeal Nos. 735 to 738 of 1981 are filed by M/s. Hazarimal Chhogalal and others, defendants in four suits filed by the respondents in these four appeals viz. The Piramal Spg. Wvg. Mills Ltd. These appeals arise out of the orders passed by the trial Judge on the notices of motion taken out in their respective suits by the appellants for staying the suits and for referring the matters to arbitration of Mill Owners Association, Bombay. The notices of motion in the six suits filed by the Podar Mills were dismissed by a common order passed on April 24/28, 1981 while the notices of motion in other four suits filed by The Piramal Spg. Wvg. Mills Ltd., were dismissed on September 15, 1981 for the reasons given in the order dated 24/28, 1981. As all these appeals involve common questions of fact and identical questions of law they were heard together and are being disposed of by this common judgment. 2. Both the respondent-mills sold cloth to the two appellant-firms under different invoices and drew hundies on the appellants-firms for the price of the said goods. The hundies were drawn in favour of the State Bank of India and were duly accepted by the appellant-firms but they were dishonoured by non-payment. The respondent, therefore, filed summary suits under Order 37, Rule 2 of the Code of Civil Procedure for recovering the amounts of the dishonoured hundies. The appellants were duly served with summons of the suits and they put in their appearance whereupon the respondents took out summonses for judgment and after the appellants were served with these summonses they took out the notices of motion for the aforesaid reliefs viz. staying of the suits and reference of the disputes to the arbitration of the Mill Owners Association, Bombay. The learned trial Judge rejected the notices of motion holding that the hundies were not covered by the scope of the arbitration clause and that there was no dispute in respect of the goods which were the subject matter of the suits. It is this order which is the subject matter of challenge in these appeals. 3. The learned trial Judge rejected the notices of motion holding that the hundies were not covered by the scope of the arbitration clause and that there was no dispute in respect of the goods which were the subject matter of the suits. It is this order which is the subject matter of challenge in these appeals. 3. It is admitted position that the hundies in question were drawn by the respondents in favour of the State Bank of India and on the appellants who accepted them but dishonoured them by non-payment. It is also an admitted position that the hundies were drawn by the respondents and accepted by the appellants in discharge of their liability in respect of the goods supplied to them by the respondents under various invoices. It is also an admitted position that the respondents are members of the Mill Owners Association at Bombay, which institution has prescribed a standard form of contract for sale of goods by the member mills. The standard contract form contains the terms and conditions governing such contracts. 4. Clauses 21 and 22 of the standard contract, which are invoked by the appellants in support of their notices of motion, read as follows :--- "Clause 21 : All disputes and questions whatsoever which shall arise between the parties hereto out of or in connection with this agreement or as to the construction or application or the respective rights and obligations of the parties hereunder or as to any clause or thing herein contained or any account or valuation to be made hereunder or as to any other matter in any way relating to these presents shall be referred to arbitration in accordance with the rules of the Mill Owners Association, Bombay for the time being in force regulating arbitrations with respect to piece goods. Clause 22 : (a) As and when any such dispute is referred to arbitration in respect of the goods which have been already delivered and for which payment has been made, unless the arbitration award is to the effect that the goods under dispute are `no tender' the buyer shall be bound to accept the said goods on payment by the sellers of allowance (if any) awarded to the Buyers. If, however, the arbitration award is to the effect that the goods are 'no tender', the buyer shall be entitled to invoice back the said goods with any penalty the arbitrators may award. (b) No reference, however, as aforesaid shall be made by the buyer in respect of goods, delivery whereof has not been taken by him unless he deposits with the Mill Owners Association, Bombay as security, an amount equivalent to 10% of the total value of the goods forming the subject matter of the reference, if demanded by the seller. If the reference to arbitration is made by the seller then the arbitration shall before proceeding with the reference call upon the Buyers to make a deposit as aforesaid, if the sellers request the arbitrators to do so. In case the Buyers refuse to make the deposit, it will be open to the arbitrators to award such penalty to the sellers against the buyers as they may think fit. In the event of any such dispute referred to arbitration, unless the arbitration award is to the effect that the goods under dispute are : 'No tender', the buyer shall be bound to accept the said goods with the allowances (if any) awarded to the buyer and take delivery thereof after making full payment. If, however, the arbitration award is to the effect that the goods are no tender, the buyer shall not be bound to take the delivery of the goods and shall be entitled to receive penalty (if any) that the arbitrators may award." 5. The second defendant-Kishanswaroop Garg, who is the partner of both the appellant-firms averred in his affidavits in support of the notices of motion in all the suits that the parties were governed by the terms and conditions mentioned in the standard contract form including the above quoted clauses. This position was not specifically denied by the respondents in their affidavits opposing the notices of motion. Hence relying on these clauses it was urged by Mrs. Shenoi the learned Counsel for the appellants, that as the appellants disputed the main claim itself the suits must be stayed and the matters must be referred to arbitration as the disputes arise out of the contracts which contain the arbitration clause as contemplated by section 34 of the Arbitration Act. Shenoi the learned Counsel for the appellants, that as the appellants disputed the main claim itself the suits must be stayed and the matters must be referred to arbitration as the disputes arise out of the contracts which contain the arbitration clause as contemplated by section 34 of the Arbitration Act. It was also contended on behalf of the appellants that the appellants were ready and willing to refer the dispute to arbitration and had taken all the necessary steps towards that end. 6. Section 34 of the Arbitration Act lays down that where any party to an arbitration agreement or any person claiming under him commences any legal proceedings against any other party to the agreement or any person claiming under him in respect of any matter agreed to be referred any party to such legal proceedings, may, at any time before filing a written statement or taking any other steps in the proceedings apply to the judicial authority before which the proceedings are pending to stay the proceedings ; and if satisfied that there is no sufficient reason why the matter should not be referred to in accordance with the arbitration agreement and that the applicant was, at the time when the proceedings were commenced and still remains, ready and willing to do all things necessary to the proper conduct of the arbitration, such authority may make an order staying the proceedings. 7. Analysing section 34 of the Arbitration Act in (Anderson Wright Ltd. v. Moran Co.)1, A.I.R. 1955 S.C. 53 the Supreme Court laid down the conditions necessary for granting stay under the said provisions as follows : "Thus in order that a stay may be granted under this section, it is necessary that the following conditions should be fulfilled : (1) The proceedings must have been commenced by a party to an arbitration agreement against any other party to the agreement; (2) The legal proceeding which is sought to be stayed must be in respect of a matter agreed to be referred; (3) The applicant for stay must be a party to the legal proceeding and he must have taken no steps in the proceeding after appearance. It is also necessary that he should satisfy the Court not only that he is but also was at the commencement of the proceedings ready and willing to do every thing necessary for the proper conduct of the arbitration; and (4) The Court must be satisfied that there is no sufficient reason why the matter should not be referred to an arbitration in accordance with the arbitration agreement." Elucidating the matter further the Supreme Court went on to observe as follows: "The first essential pre-requisite to making an order of stay under section 34 of the Arbitration Act is that there is a binding arbitration agreement between the parties to the suit which is sought to be stayed. The question whether the dispute in the suit falls within the arbitration clause really pre-supposes that there is such agreement and involves consideration of two matters, viz. (1) what is the dispute in the suit and (2) what disputes the arbitration clause covers ?". It is, therefore, essential that the dispute which is sought to be referred to arbitration must relate to or arise out of the contract which is the subject matter of the suit, sought to be stayed. 8. As rightly contended by Shri Subramanium, the dispute which was raised by the appellants in their affidavits in support of their notices of motion and which they sought to refer to arbitration does not relate to the subject matters of the suits viz. the goods supplied, towards the price of which the hundies in question were drawn by the respondents and accepted by the appellants. The averments in the affidavits in support of the notices of motion are blissfully silent about the specific grievance in respect of the goods supplied under the invoices towards the amount of which the hundies were given. The averments in the affidavits are too vague and relate to the general dealings between the parties during the period from 1975-76 to November, 1979. So far as the claim for credit of 3% and rebate of 2% mentioned in Clauses 'd' and 'e' of the affidavits of Kishanswaroop, neither the invoices in question nor the standard contract form provides for such an agreement. So far as the claim for credit of 3% and rebate of 2% mentioned in Clauses 'd' and 'e' of the affidavits of Kishanswaroop, neither the invoices in question nor the standard contract form provides for such an agreement. The particular contracts referred to in the invoices were not produced and there is nothing on record to show, prima facie, that there was an agreement between the parties to give any credit or rebate in respect of the goods, towards the price of which the hundies were drawn. Moreover as mentioned in Clause `c' of Kishanswaroop's affidavit the last of the several complaints allegedly made by the appellants in respect of the goods supplied by the respondents was made on September 5, 1979 while the goods in question were supplied after that date. 9. A reference in this context can also be made to the registered notice addressed by the appellants M/s. Kishan Swaroop Ashokkumar to the respondents. The Podar Mills Ltd., on September 30, 1980. In this notice M/s. Kishan Swaroop Ashokkumar specified the disputes which they wanted to refer to the arbitration of Mill Owners Association at Bombay. The particular of those claims are as follows :--- "1) M/s. Podar Mills filed a false criminal prosecution against our clients Shri K.S. Garg, Ashokkumar Garg and Surendrakumar Garg in the Court of Metropolitan Magistrate, Bhoiwada Court Bombay, Bearing Case No. 15/IR/79 under section 420. Rs. 1,50,000.00 2) For transaction between November 1978 to November 1979 about 60 lacs Mills agreed to give 3% rebate being turnover rebate. Rs. 1,80,000.00 3) Mills agreed to give further 2% rebate if transaction exceeded 2 lac per month. Turnover was 60 lacs between November 78 to November 1979. Rs. 1,20,000.00 4) My clients purchased Prt. handkerchiefs of 20 lacs but same were misprinted, mis-sized, seconds and lot of printing defects and short length packed in full length without rebate, total further rebate agreed by the Mills 10% on value of Rs. 20,00,000.00 Rs. 2,00,000.00 5) My Clients purchased special 1.34 cms. blouse piece multiple out of dyed polynosic cotton cambric of about 100 bales of Rs. 3 lacs being odd cut of .65 to 1.34 cms. Director Vinay Poddar Sales Manager Shri D.P. Kanodia agreed a rebate of 15% on value of 3 lacs. Rs. 45,000.00 ------------------- Rs. 6,95,000.00 ------------------- Obviously the first claim does not arise out of the contracts in question. 3 lacs being odd cut of .65 to 1.34 cms. Director Vinay Poddar Sales Manager Shri D.P. Kanodia agreed a rebate of 15% on value of 3 lacs. Rs. 45,000.00 ------------------- Rs. 6,95,000.00 ------------------- Obviously the first claim does not arise out of the contracts in question. As observed above the invoices and the standard contract form are silent in respect of the next two claims while claims Nos. 4 and 5 relate to the printed handkerchiefs and blouse pieces purchased by the appellants---M/s. Kishan Swaroop Ashokkumar From M/s. Podar Mills Ltd. under various contracts. Admittedly these are not the goods towards the price of which the hundies in question were accepted by the appellants. There is also nothing on record to show that the dispute allegedly raised by the appellants in other four appeals related to the goods towards the price of which the hundies which are the subject matter of the four suits filed by the respondents in the last four appeals viz. Piramal Spg. Wvg. Mills Ltd., were drawn. The disputes sought to be raised by the appellants do not relate to the claims made in the suits and hence not covered by the arbitration clause, even assuming that the appellants can invoke the arbitration clause in the summary suits filed by the respondents. 10. The basic question, however, is whether in a summary suit based on a hundi the defendant can invoke the arbitration clause contained in the contract, under which the goods for the price of which the hundies were drawn, were supplied. The Supreme Court accepting the test laid down in this behalf in (Heyman v. Darwins Ltd.)2, 1942 A.C. 356 laid down in (A.M. Mair Co. v. Gordhandas Sagarmull)3, A.I.R. (38)1951 S.C. 9 that where a party has to have recourse to the contract to establish his case, it is a dispute under the contract. As mentioned above the suits out of which these appeals arise are summary suits based on the negotiable instruments viz. the hundies. It is also pertinent to note in this context that the hundies were drawn in favour of the State Bank of India and were endorsed in favour of the respondents who thus became the holders in due course of the hundies. It will also be seen from the hundies that the goods were received by the appellants before the hundies were drawn. It will also be seen from the hundies that the goods were received by the appellants before the hundies were drawn. There is also nothing to show that by a subsequent agreement the liability of the appellants to pay the amounts of the hundies was conditional upon the appellants satisfying themselves of the quality and quantity of the goods supplied. The liability accepted by the appellants under the hundies was absolute and the discharge of the liability to pay for the goods was unconditional. Hence not only it was not open for the respondents to fall back on the original contracts for the recovery of the price nor it was open for the appellants to raise any dispute in respect of the quality and quantity of the goods, or in respect of any counter claim arising out of the terms of the contracts under which goods in question were supplied. This position flows from section 32 of the Negotiable Instruments Act which lays down that in the absence of a contract to the contrary, the maker of a promissory note and the acceptor before maturity of a bill of exchange are bound to pay the amount thereof at maturity according to the apparent tenor of the note or acceptance respectively, and the acceptor of a bill of exchange at or after maturity is bound to pay the amount thereof to the holder on demand. 11. Somewhat identical question fell for consideration of the Division Bench of Lahore High Court in (Bihari Diwan Singh v. Jaffe Sons)4, A.I.R. 1922 Lahore 353 in an appeal from an order refusing to stay the proceedings in a suit under Rule 18 of the second schedule of the Code of Civil Procedure (which is analogous to section 34 of the Arbitration Act). In that case the appellant-firm placed indent for purchase of 10 bales of white shirting of certain specified qualities with the respondent-firm. After the shipment of goods the appellants, draw two bills of exchanges against the buyers at 60 days' sight. These bills were presented by the National Bank of India, Limited, Delhi to the appellants who accepted them but subsequently refused to pay them upon maturity. The respondent-firm accordingly sued them and their claim was based in the first instance, upon the accepted but unpaid bills, and in the alternative they sued for the price of the goods and for certain expenses. The respondent-firm accordingly sued them and their claim was based in the first instance, upon the accepted but unpaid bills, and in the alternative they sued for the price of the goods and for certain expenses. Clause 15 of the indent form provided that if any claim or dispute arose in connection with the contract, unless amicable settlement could be arrived at, it must be referred to arbitration in Delhi, in accordance with the Survey and Arbitration Rules of Delhi Hindustani Mercantile Association. Relying upon this clause the appellants sought reference of the dispute to arbitration and stay of the suit. The trial Court rejected the prayer and in appeal the Division Bench confirmed that order holding as follows : "It is not denied that the bills of exchange were accepted by the defendant firm. Section 32 of the Negotiable Instruments Act lays down that in the absence of a contract to the contrary the acceptor before maturity of a bill of exchange is bound to pay the amount thereof at maturity, according to the apparent tenor of the acceptance. The suit as brought upon the accepted, but unpaid, bills of exchange is, therefore, a suit governed by this section and is not a suit for damages or for the price of the goods at all". In that case the appellants invoked section 43 of the Negotiable Instruments Act to urge that either the bills of exchange were accepted without consideration or for a consideration which subsequently failed, and, that, therefore, the appellants were not liable. The learned Judges accepted the position that it was open for the appellants to show that the bills of exchange were accepted without consideration or to raise any other defence which they may be advised to do, but prima facie the respondent-firm had a good case under section 32 of the Negotiable Instruments Act, and, hence there was no justification for interfering with the order refusing to stay the suit. No doubt in that case in the indent itself the appellants had bound themselves to accept the bills on presentation and pay at maturity notwithstanding any objections they may have regarding or on account of any variation whatever from the terms of the indent, such objection to be settled by arbitration as provided for. No doubt in that case in the indent itself the appellants had bound themselves to accept the bills on presentation and pay at maturity notwithstanding any objections they may have regarding or on account of any variation whatever from the terms of the indent, such objection to be settled by arbitration as provided for. The learned Judges held that even if such objection was taken it must be settled by arbitration in the way subsequently provided but the accepted drafts must be paid at maturity whether there be any objection or not. 12. The decision of the Allahabad High Court in, (Diraj Lal v. Sir Jacob Behrens Sons)5, A.I.R. 1933 Allahabad 74 is more to the point. In that case the parties had entered into an agreement known as C.I.F. contract in terms of which the defendant-appellants purchased cloth from the plaintiffs. Several orders were placed by the defendant-appellants with the respondents and the respondents despatched goods after the bills of exchange drawn by the respondents directing the appellants to pay to the Chartered Bank of Cawnpore a sum representing the cost of goods, freight and insurance etc. were accepted by the appellants but when the time came for honouring the accepted bills and taking delivery of the goods the appellants refused to do so and hence the respondents, instituted a suit for recovery of the amount due on bills of exchange accepted by the appellants. The appellants, relying on a clause in the agreement applied under section 19 of the Arbitration Act for stay of the suit. The trial Judge rejected the application on various grounds, one of which was that the suit was based on accepted bills of exchange and was not a suit for price of goods delivered, under the contract which contained the arbitration clause. Upholding the order of the trial Court the learned Judges of the Allahabad High Court held as follows : "The defendants accepted the bills, before maturity. The effect of such a transaction ordinarily is that the defendants' liability to the plaintiffs for the invoice value of the goods is discharged, and a liability to the Bank under the bills is substituted therefore. The effect of such a transaction ordinarily is that the defendants' liability to the plaintiffs for the invoice value of the goods is discharged, and a liability to the Bank under the bills is substituted therefore. The defendants could not be liable to both, that is to the plaintiffs for the price of goods and to the bank for acceptance of the bills under section 32, Negotiable Instruments Act, which clearly provides that the acceptor before maturity of a bill of exchange is bound to pay the amount thereof at maturity according to the apparent tenor of acceptance." In that case by virtue of Clause 3 of the agreement the respondents were empowered to claim the invoice value inspite of the acceptance of the bills. Discussing the effect of this clause the learned Judges observed further as follows : "It is, of course, implied that if the sellers elect to sued for the invoice value on the basis of the original contract they would secure for the buyers immunity against any claim on the basis of bill and, conversely, if the buyers' acceptance of the bill is enforced, they are absolved of their liability under the original contract. But for Clause (c) the legal position would have been only this matter acceptance followed by maturity of the bill the buyers would have been liable to the bank which alone would be liable to the sellers according to the terms of the agreement between them, under which the sellers drew the bill of exchange in favour of the bank. The sellers have however reserved to themselves an alternative remedy of falling back on the original consideration. It is only if they avail themselves of this remedy and their claim is contested that a dispute will arise out of a contract entered into in connection with this agreement', within the meaning of the arbitration clause quoted above marked (d). The sellers have however reserved to themselves an alternative remedy of falling back on the original consideration. It is only if they avail themselves of this remedy and their claim is contested that a dispute will arise out of a contract entered into in connection with this agreement', within the meaning of the arbitration clause quoted above marked (d). If on the other hand, the suit is based on the bill and a dispute arises in such suit, it cannot be said to arise out any contract between the parties "in connection with the agreement" but it arises between one of the parties to it and a third person in connection with the acceptance of the bill a transaction collateral to but not arising out of the agreement." In the ultimate analysis the learned Judge spelt out their view of the case as follows : "The draft was drawn in favour of the Chartered Bank, and it was the Chartered Bank who had in the first instance a right to recover the sum due on the draft from the acceptor. Had the Bank sued on the acceptance, clearly the acceptors could not have pleaded that under an agreement between themselves and a third party, namely, the sellers of the goods, they had a right to refer the matter to arbitration. No question as to the nature of the goods arise between the present appellants and the Chartered Bank, and there was no agreement between them containing any clause authorising a reference to arbitration. The chartered Bank endorsed the bills of exchange to the plaintiffs and the plaintiffs in bringing this suit on the basis of the bills of exchange are in the position of the Chartered Bank, and therefore, entitled to frame their suit accordingly. Their position in this respect is the same as that of a total stranger to whom the Bank might endorse the bills. A suit brought by them for the price of the goods will bring into operation the arbitration clause of the agreement between themselves as sellers and the defendants as buyers. Their position in this respect is the same as that of a total stranger to whom the Bank might endorse the bills. A suit brought by them for the price of the goods will bring into operation the arbitration clause of the agreement between themselves as sellers and the defendants as buyers. But there is no arbitration clause which can come into force as between the plaintiffs as holders and the defendants as acceptors of the bills of exchange." As mentioned above all the hundies in question in these suits were drawn in favour of the State Bank of India and were endorsed to the respondents by the bank. Moreover the respondents have based their claims on the hundies and have not alternatively claimed the prices of the goods, which obviously they could not have done as in the present cases, the option to fall back on the original contracts was not reserved. The ratio of the decision in Dhiraj Lal v. Sir Jacob Behrens Sons, is therefore, clearly applicable to the facts of the present case. 13. The Full Bench of the Madras High Court in (Kevalchand Daga v. Girdhardass)6, (1961)II Madras L.J. 528 took the view that section 34 of the Arbitration Act of 1940 has no application to a suit based on a promissory note executed on settlement of disputes under contract with an arbitration clause. In that case it was contended on behalf of the defendants-respondents that there would be valid defence to the claim because the contract was in the nature of a wagering contracts which could not be enforced. The Full Bench observed that they were not concerned with the defence so far as the question of applicability of section 34 of the Arbitration Act was concerned, and that in their opinion section 34 had no application to the case. 14. Mrs. Shenoi the learned Counsel for the appellants placed strong reliance on the decision of a Single Judge of the Calcutta High Court in the case of (Pench Valley Coal v. Indian Cable Co.)7, A.I.R. 1975 Cal. 284. In that case a suit was filed against the applicant-defendant for certain amount under Order 37 of the Civil Procedure Code basing the claim on certain hundies drawn and accepted by the applicant in respect of certain goods delivered against challans by the plaintiff-respondent. The goods were delivered under certain contracts containing arbitration clauses. 284. In that case a suit was filed against the applicant-defendant for certain amount under Order 37 of the Civil Procedure Code basing the claim on certain hundies drawn and accepted by the applicant in respect of certain goods delivered against challans by the plaintiff-respondent. The goods were delivered under certain contracts containing arbitration clauses. The applicant filed an application under section 34 of the Arbitration Act for stay of the suit. The contention of the applicant was that the goods delivered were defective and were not delivered in time and as such the discharge of obligation for payment was made wrongfully and was liable to be refunded. It was held that the arbitration clauses were wide enough to include a dispute arising in respect of a discharge of the obligation for payment and the application was maintainable. In arriving at this decision the learned Judge distinguished on facts the decision of the Supreme Court in (Commr. of Income Tax, Bombay South, Bombay v. Ogale Glass Works Ltd.)8, A.I.R. 1954 S.C. 429 and in (Ramlal Onkarmal Firm v. Mohanlal Jogani Rice Atta Mills)9, A.I.R. 1965 S.C. 1679 and expressed his opinion without giving any reasoning worth the name in support of his opinion. The impact of the provision contained in section 32 of the Negotiable Instruments Act was not considered at all. As a matter of fact in the whole judgment there is no reference to the said provision which materially altered the position of the parties in the suit viz. that the suit was not a suit between the seller and a buyer but a suit between the holder of bill of exchange and the drawer-acceptor thereof. I am, therefore, unable to accept the ratio of this decision which is quite contrary to the weight of the decisions quoted above. It is, therefore, crystal clear that section 34 of the Arbitration Act cannot have any application to the suits in questions as they are framed. 15. It is also difficult to accept the claim that the appellants were ready and willing, at the commencement of the proceedings, to refer the disputes to arbitration. It will be seen from the correspondence produced on record that the appellants took steps for referring the matter to arbitration only after they were served with the summonses of suit. 15. It is also difficult to accept the claim that the appellants were ready and willing, at the commencement of the proceedings, to refer the disputes to arbitration. It will be seen from the correspondence produced on record that the appellants took steps for referring the matter to arbitration only after they were served with the summonses of suit. They also did not take out the notices of motion after they were served with the summonses but they did so only after they were served with the summonses for judgment. 16. In the result, therefore, the appeals must fail and are dismissed. The appellants shall pay costs in Appeals Nos. 652, 653, 654, 655, 656 and 657 of 1981 to the respondents and bear their own. In rest of the appeals there shall be no order as to costs. Appeals dismissed. -----