Leave to Defend Granted: Supreme Court overturns High Court in B.L. Kashyap vs. JMS Steels (2022)

Date of the Judgment: 18 January 2022
Citation: 2022 INSC 41
Judges: Justice Vineet Saran and Justice Dinesh Maheshwari
Can a contractor be held liable in a summary suit for payments when the purchase orders were issued on behalf of the principal, and the principal made payments directly to the supplier? The Supreme Court of India recently addressed this question in a case involving a dispute over unpaid dues for steel supplies. The Court examined whether the contractor, who issued the purchase orders, could be denied the right to defend the suit. The judgment was authored by Justice Dinesh Maheshwari, with Justice Vineet Saran concurring.

Case Background

M/s JMS Steels and Power Corporation (plaintiff), a steel manufacturer, filed a summary suit under Order XXXVII of the Code of Civil Procedure, 1908 (CPC), against B.L. Kashyap and Sons Ltd. (defendant No. 2/appellant), a contractor, and another firm (defendant No. 1), a real estate developer. The plaintiff claimed that it had supplied 200 tons of steel to the construction site of defendant No. 1, based on purchase orders issued by the appellant. The plaintiff asserted that while the purchase orders were raised by the appellant, the payment was to be made by defendant No. 1. The plaintiff contended that an amount of Rs. 89,50,244/- remained unpaid.

The plaintiff stated that defendant No. 1 had issued two cheques for part payment, but these were not presented for encashment as per the request of defendant No. 1. The plaintiff argued that both defendants were jointly and severally liable for the outstanding amount, as the purchase orders were issued by the appellant on behalf of defendant No. 1.

Timeline:

Course of Proceedings

The Trial Court rejected the applications of both defendants for leave to defend, holding that they were attempting to shift the burden of liability onto each other. The Trial Court noted that the purchase orders were placed by the appellant on the instructions of defendant No. 1, and the goods were supplied to the site of defendant No. 1, who was the ultimate beneficiary. The Trial Court also observed that defendant No. 1 had been making payments to the plaintiff.

The High Court dismissed the appeal of the appellant (defendant No. 2), stating that the invoices were raised in the name of the appellant, making it liable. The High Court also held that the suit was maintainable under Order XXXVII CPC, as the invoices constituted written contracts. The High Court further noted that the cheques issued by defendant No. 1 did not absolve the appellant of its liability. The High Court distinguished the case from Mechelec Engineers and Manufacturers v. Basic Equipment Corporation (AIR 1977 SC 577) and applied the principles laid down in IDBI Trusteeship Services Ltd. v. Hubtown Ltd. : (2017) 1 SCC 568, concluding that the appellant’s defense did not raise genuine triable issues.

The High Court also dismissed the appeal of defendant No. 1, holding that its defense was frivolous, as it had been making payments to the plaintiff.

Legal Framework

The case primarily revolves around Order XXXVII of the Code of Civil Procedure, 1908, which deals with summary suits. These suits are designed for the expeditious disposal of cases based on written contracts or negotiable instruments. According to Order XXXVII, a plaintiff can file a summary suit if the claim is based on a written contract, and the defendant is required to seek leave to defend the suit by demonstrating a substantial defense.

The High Court also referred to Section 2(d) of the Indian Contract Act, 1872, which states that consideration under a contract need not flow only between the parties to a contract.

The appellant argued that Section 230 of the Indian Contract Act, 1872, which states that an agent cannot be held liable for contracts executed on behalf of the principal, should apply.

Arguments

Appellant (Defendant No. 2) Arguments:

• The appellant argued that it was merely a contractor working for defendant No. 1, and the liability for payment was solely that of defendant No. 1. The appellant contended that the plaintiff itself had stated that the liability to pay was that of defendant No. 1.
• The appellant asserted that it acted as an agent of defendant No. 1 when issuing the purchase orders and thus, it cannot be held liable for payment, citing Section 230 of the Indian Contract Act, 1872.
• The appellant argued that since defendant No. 1 had issued cheques for part payment, the liability was solely of defendant No. 1.
• The appellant argued that the summary suit was not maintainable against it in the absence of a legally enforceable debt, relying on V.K. Enterprises v. Shiva Steels : (2010) 9 SCC 256.

Plaintiff (Respondent No. 1) Arguments:

• The plaintiff argued that both defendants were trying to evade liability by shifting the burden onto each other.
• The plaintiff contended that the appellant had raised purchase orders, goods were supplied based on those orders, and invoices were raised in the appellant’s name, making the appellant liable.
• The plaintiff argued that the invoices constituted written contracts, making the suit maintainable under Order XXXVII CPC.

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

• Defendant No. 1 argued that under the construction agreement, the payments for the supply of materials were to be made by the appellant.
• Defendant No. 1 contended that there was no privity of contract between the plaintiff and defendant No. 1, as the purchase orders and invoices were in the name of the appellant.
• Defendant No. 1 stated that the payments made to the plaintiff were made at the request of the appellant, due to cash flow issues.

Issues Framed by the Supreme Court

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

The Supreme Court considered the following authorities:

Judgment

How each authority was viewed by the Court?

• The principles in Mechelec Engineers and Manufacturers v. Basic Equipment Corporation [AIR 1977 SC 577] were noted as being superseded by IDBI Trusteeship Services Ltd. v. Hubtown Ltd. [(2017) 1 SCC 568], but the Court clarified that the core principles for granting leave to defend remained the same.
• The Court relied on IDBI Trusteeship Services Ltd. v. Hubtown Ltd. [(2017) 1 SCC 568] to reiterate that leave to defend should be granted unless the defense is frivolous or vexatious.
• The Court acknowledged the appellant’s reliance on Prem Nath Motors Limited v. Anurag Mittal [(2009) 16 SCC 274] and V.K. Enterprises v. Shiva Steels [(2010) 9 SCC 256] but did not make a specific finding on these cases, leaving the issues open for the Trial Court.

What weighed in the mind of the Court?

The Supreme Court emphasized that denying leave to defend is an exception, not the rule. The Court noted that the appellant had raised a triable issue regarding its liability, particularly given that the plaintiff had acknowledged payments made by defendant No. 1. The Court found that the High Court had not adequately considered the appellant’s defense and had treated it as frivolous without proper reasoning. The fact that the High Court had dismissed the appeal of defendant No. 1 based on its payments to the plaintiff, while not applying the same logic to the appellant, also weighed in the mind of the Court.

The Court’s reasoning can be summarized as follows:

The Court stated that,
“…grant of leave to defend (with or without conditions) is the ordinary rule; and denial of leave to defend is an exception.”

The Court also observed that,
“…even in the case of raising of triable issues, with the defendant indicating his having a fair or reasonable defence, he is ordinarily entitled to unconditional leave to defend unless there be any strong reason to deny the leave.”

The Court further noted,
“The same considerations, which weighed with the Courts to deny the leave to defend to the defendant No. 1, could not have been applied ipso facto to the case of the appellant; rather those considerations, in our view, make out a case of triable issues qua the appellant.”

The Supreme Court found that the High Court had erred in treating the appellant’s defense as frivolous and vexatious, without providing adequate reasoning.

Key Takeaways

• In summary suits under Order XXXVII CPC, leave to defend should be granted unless the defense is clearly frivolous or vexatious.
• A defendant who raises a triable issue, indicating a fair or reasonable defense, is ordinarily entitled to unconditional leave to defend.
• Courts must provide adequate reasoning when denying leave to defend, particularly when the defendant has raised a plausible defense.
• The principles for granting leave to defend remain consistent, even with the amendment of Order XXXVII Rule 3.

Directions

The Supreme Court set aside the High Court’s judgment and the Trial Court’s decree against the appellant. The Court granted leave to defend to the appellant and directed the Trial Court to proceed with the trial of the suit only against the appellant. The Court also directed the Trial Court to pass appropriate orders regarding the treatment of the Rs. 40,00,000/- deposited by the appellant.

Development of Law

The judgment clarifies that while the principles in Mechelec Engineers and Manufacturers v. Basic Equipment Corporation were superseded by IDBI Trusteeship Services Ltd. v. Hubtown Ltd., the fundamental approach to granting leave to defend remains consistent. The Court reiterated that the denial of leave to defend should be an exception, not the rule, and that a defendant raising a triable issue is ordinarily entitled to leave to defend. This reaffirms the importance of ensuring that defendants have an opportunity to present their case, especially when a plausible defense is raised.

Conclusion

The Supreme Court’s decision in this case underscores the importance of allowing defendants in summary suits to present their case, especially when they raise triable issues. The Court held that the appellant had raised a legitimate defense concerning its liability, and the High Court had erred in denying the appellant leave to defend. The judgment reinforces the principle that denying leave to defend should be an exception, and not the rule, in summary suits.