Leave to Defend Granted: Supreme Court overturns High Court in B.L. Kashyap & Sons Ltd. vs. JMS Steels and Power Corporation (2022)

Date of the Judgment: 18 January 2022

Citation: (2022) INSC 50

Judges: Vineet Saran, J., Dinesh Maheshwari, J. (Authoring Judge)

Can a contractor, who claims to have acted as an agent, be denied the opportunity to defend a money recovery suit? The Supreme Court of India recently addressed this question in a case involving a dispute over payment for steel supplies. The core issue revolved around whether the appellant, a contractor, should be granted leave to defend in a summary suit where it claimed to have acted only as an agent for the principal, who was the beneficiary of the supplies. The Supreme Court, in this judgment, overturned the High Court’s decision and allowed the leave to defend.

Case Background

The plaintiff, M/S JMS Steels and Power Corporation, a partnership firm supplying iron and steel products, filed a suit against two defendants: M/S JMS Steels and Power Corporation (defendant No. 1), a real estate firm, and B.L. Kashyap and Sons Ltd. (defendant No. 2), a contractor. The plaintiff claimed that defendant No. 2, acting as a contractor for defendant No. 1’s project, placed orders for steel supplies. The plaintiff asserted that although the purchase orders were placed by the defendant No. 2, the payment was to be made by defendant No. 1.

The plaintiff stated that it supplied 200 tons of steel based on two purchase orders dated 06.02.2015 and 20.03.2015, issued by defendant No. 2, to defendant No. 1’s site. The plaintiff further stated that defendant No. 1 issued two cheques dated 04.05.2015 and 09.05.2015, for part payment but requested that the cheques not be presented until further intimation, which never came. The plaintiff then issued a legal notice on 28.01.2016 seeking payment of Rs. 89,50,244/-. Upon non-payment, the plaintiff filed a summary suit under Order XXXVII of the Code of Civil Procedure, 1908 (CPC), asserting joint and several liability of both defendants.

Timeline

Course of Proceedings

The Trial Court rejected both defendants’ applications for leave to defend, finding they were attempting to shift responsibility onto each other. The Trial Court noted that defendant No. 2 was a contractor for defendant No. 1, and as per their agreement, defendant No. 1 was liable for the costs of materials procured by the contractor. The Trial Court also observed that the purchase orders were placed by defendant No. 2 on behalf of defendant No. 1 and that the goods were supplied to defendant No. 1’s site. The Trial Court rejected defendant No. 1’s argument of no privity of contract, noting that defendant No. 1 had been making payments to the plaintiff. Consequently, the Trial Court decreed the suit in favor of the plaintiff.

Defendant No. 2 appealed to the High Court, which upheld the Trial Court’s decision. The High Court reasoned that the purchase orders and invoices were in the name of defendant No. 2, making it liable. The High Court also stated that the suit was maintainable under Order XXXVII CPC because the invoices were written contracts and that the cheques issued by defendant No. 1 did not negate the liability of defendant No. 2. The High Court distinguished the case from Mechelec Engineers and Manufacturers v. Basic Equipment Corporation : AIR 1977 SC 577, and relied on IDBI Trusteeship Services Ltd. v. Hubtown Ltd. : (2017) 1 SCC 568 for the principles governing leave to defend.

Defendant No. 1 also filed a separate appeal, which was dismissed by the High Court. The High Court held that the defense of defendant No. 1 was frivolous because it had been making payments to the plaintiff.

Legal Framework

The case primarily involves the interpretation and application of Order XXXVII of the Code of Civil Procedure, 1908 (CPC), which deals with summary suits. A summary suit is a legal procedure designed for quick disposal of cases based on written contracts or negotiable instruments where the defendant does not have a substantial defense. The court also considered Section 2(d) of the Indian Contract Act, 1872, which defines consideration in a contract. According to this provision, consideration can flow from a person who is not a party to the contract.

Order XXXVII, Rule 1(2) of the CPC specifies the types of suits that can be filed as summary suits, including those based on bills of exchange, hundis, and promissory notes, as well as those based on written contracts. The High Court observed that the invoices were written contracts containing a specified amount of liability of the appellant-defendant No. 2 for payment to the plaintiff-respondent No. 1.

Section 230 of the Indian Contract Act, 1872, was also referred to by the appellant, which states that an agent cannot be held liable for the contract executed on behalf of the principal.

Arguments

Defendant No. 2 (Appellant) Arguments:

• Defendant No. 2 argued that it was merely acting as a contractor for defendant No. 1 and that the liability for payment rested with defendant No. 1.
• It asserted that the purchase orders were issued on behalf of defendant No. 1, and as an agent, it cannot be held liable under Section 230 of the Indian Contract Act, 1872.
• Defendant No. 2 contended that the cheques issued by defendant No. 1 towards part payment should be considered as the liability of defendant No. 1 and not defendant No. 2.
• It argued that the summary suit was not maintainable against it because there was no legally enforceable debt against it.

Plaintiff (Respondent No. 1) Arguments:

• The plaintiff argued that both defendants were trying to evade liability by shifting the burden onto each other.
• It contended that defendant No. 2 had raised the purchase orders, received the goods, and the invoices were raised in its name, making it liable.
• The plaintiff argued that the invoices constituted written contracts and that the suit was rightly filed under Order XXXVII CPC.
• It asserted that the defendants were jointly and severally liable for the amount due.

Defendant No. 1 (Respondent No. 2) Arguments:

• Defendant No. 1 argued that under the construction agreement with defendant No. 2, payments for material supplies were to be made by defendant No. 2.
• Defendant No. 1 contended that there was no privity of contract between the plaintiff and defendant No. 1, as the purchase orders were placed by defendant No. 2, and the invoices were raised in its name.
• It argued that the payments made by defendant No. 1 were due to cash flow issues of defendant No. 2.

Submissions of the Parties

Issues Framed by the Supreme Court

The Supreme Court framed the following issues:

1. Whether the plaintiff was entitled to maintain a summary suit under Order XXXVII CPC for the claim in question?
2. Whether the appellant-defendant No. 2 has rightly been declined the leave to defend?

Treatment of the Issue by the Court

Authorities

Cases:

• Mechelec Engineers and Manufacturers v. Basic Equipment Corporation : AIR 1977 SC 577 – Supreme Court of India: This case laid down the principles for considering a prayer for leave to defend in a summary suit.
• IDBI Trusteeship Services Ltd. v. Hubtown Ltd. : (2017) 1 SCC 568 – Supreme Court of India: This case modulated the principles stated in Mechelec Engineers and provided the current guidelines for granting leave to defend.
• Prem Nath Motors Limited v. Anurag Mittal : (2009) 16 SCC 274 – Supreme Court of India: Cited by the appellant to argue that an agent cannot be held liable for contracts executed on behalf of the principal.
• V.K. Enterprises v. Shiva Steels : (2010) 9 SCC 256 – Supreme Court of India: Cited by the appellant to argue that a summary suit is not maintainable in the absence of a legally enforceable debt.

Legal Provisions:

• Order XXXVII of the Code of Civil Procedure, 1908 (CPC): Pertains to summary suits.
• Section 2(d) of the Indian Contract Act, 1872: Defines consideration in a contract.
• Section 230 of the Indian Contract Act, 1872: States that an agent cannot be held liable for the contract executed on behalf of the principal.

Treatment of Authorities by the Court

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Supreme Court, while considering the principles for granting leave to defend, observed that the principles stated in paragraph 8 of Mechelec Engineers and Manufacturers v. Basic Equipment Corporation [AIR 1977 SC 577]* were superseded by the principles laid down in IDBI Trusteeship Services Ltd. v. Hubtown Ltd. [(2017) 1 SCC 568]*.
• The Court relied on the principles in IDBI Trusteeship Services Ltd. v. Hubtown Ltd. [(2017) 1 SCC 568]* to hold that the appellant should have been granted leave to defend since it had raised triable issues.

What weighed in the mind of the Court?

The Supreme Court’s decision was influenced by the need to ensure that a defendant with a potentially valid defense is not denied an opportunity to be heard. The Court emphasized that the denial of leave to defend should be an exception, not the rule. The following factors weighed in the mind of the Court:

• The appellant’s assertion of acting as an agent, which raised a triable issue regarding its liability.
• The fact that the plaintiff itself admitted that payments were made by defendant No. 1, which contradicted the claim of joint and several liability of the defendants.
• The High Court’s failure to provide specific reasons for treating the appellant’s defense as frivolous or vexatious.
• The need to balance expeditious disposal of commercial causes with ensuring that genuine triable issues are not shut out.

The Court’s decision was influenced by the factual aspects of the case, including the payments made by defendant No. 1 and the assertion of agency by defendant No. 2. The legal aspects, including the interpretation of Order XXXVII CPC and the principles for granting leave to defend, were also considered.

Logical Reasoning

Key Takeaways

• The Supreme Court emphasized that the denial of leave to defend in a summary suit should be an exception, not the rule.
• A defendant who raises triable issues, indicating a fair or reasonable defense, is ordinarily entitled to unconditional leave to defend.
• The assertion of acting as an agent in a transaction can constitute a triable issue, warranting leave to defend.
• Courts must provide clear reasons when denying leave to defend and not treat such defenses as frivolous or vexatious without proper justification.
• The principles for granting leave to defend as laid down in IDBI Trusteeship Services Ltd. v. Hubtown Ltd. [(2017) 1 SCC 568]* must be strictly followed.

Potential Future Impact: This judgment reinforces the importance of ensuring that defendants in summary suits are given a fair opportunity to present their case, especially when they raise valid defenses. It sets a precedent for lower courts to be more cautious when denying leave to defend and to provide clear and specific reasons for doing so. This decision may lead to more defendants being granted leave to defend in similar cases, thereby ensuring a more balanced approach in summary suit proceedings.

Directions

The Supreme Court directed that the amount of Rs. 40,00,000/- deposited by the appellant (defendant No. 2) should be treated as a deposit towards the condition for leave to defend. The Trial Court was directed to pass appropriate orders regarding the treatment of the said amount and then proceed with the trial of the suit only with respect to the appellant-defendant No. 2 in accordance with law.

Development of Law

Ratio Decidendi: The ratio decidendi of this case is that a defendant in a summary suit who raises triable issues, particularly the assertion of acting as an agent and not a principal, is ordinarily entitled to leave to defend. The denial of leave to defend should be an exception, and courts must provide clear reasons when denying such leave. The principles laid down in IDBI Trusteeship Services Ltd. v. Hubtown Ltd. [(2017) 1 SCC 568]* must be strictly followed.

Change in Previous Positions of Law: This judgment clarifies and reinforces the principles for granting leave to defend in summary suits, emphasizing that the denial of leave should not be routine. It reiterates that even if there remains a reasonable doubt about the probability of defense, sterner conditions may be imposed while granting leave, but denying the leave should be countenanced only when the defendant fails to show any genuine triable issue and the Court finds the defense to be frivolous or vexatious.

Conclusion

The Supreme Court allowed the appeal filed by B.L. Kashyap and Sons Ltd., setting aside the High Court’s judgment and the Trial Court’s decree against the appellant. The Court granted leave to defend to the appellant, emphasizing that the defense raised was not frivolous and that the appellant had raised triable issues concerning its liability. The Court directed the Trial Court to proceed with the trial of the suit only with respect to the appellant, treating the deposited amount as security for leave to defend.