Supreme Court Allows Leave to Defend in Summary Suit: B.L. Kashyap and Sons Ltd. vs. JMS Steels and Power Corporation (2022)

Introduction

Date of the Judgment: 18 January 2022

Citation: 2022 INSC 602

Judges: Vineet Saran, J., Dinesh Maheshwari, J. (authored the judgment)

Can a defendant be denied the opportunity to defend a suit if they raise valid questions about their liability? The Supreme Court of India recently addressed this crucial question in a case concerning a summary suit for recovery of money. The court examined whether the defendant had raised sufficient triable issues to warrant being granted leave to defend.

The core issue was whether the appellant, a contractor, should be held liable for payments to a supplier, or if the liability rested solely with the main client. The Supreme Court analyzed the principles for granting leave to defend in summary suits, focusing on whether the defendant had raised genuine triable issues.

Case Background

M/S JMS Steels and Power Corporation (plaintiff), a supplier of iron and steel products, filed a summary suit 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 the contractor had placed purchase orders for steel to be used in a project being developed by the real estate firm. The plaintiff asserted that the real estate firm was ultimately liable for the payments, but both firms were jointly and severally liable.

The plaintiff stated that it had supplied 200 tons of steel based on two purchase orders dated 06 February 2015 and 20 March 2015, raised by the contractor (appellant). The payment for these supplies was to be made by the real estate firm. The plaintiff raised invoices for a total of Rs. 89,50,244/-. The real estate firm issued two cheques dated 04 May 2015 and 09 May 2015, for part payment, but requested the plaintiff not to present them until further intimation, which was never received. A legal notice was sent on 28 January 2016, and subsequently, a summary suit was filed.

The contractor argued that it was merely acting as an agent for the real estate firm, and therefore had no liability. The real estate firm contended that it had no direct contract with the plaintiff, and the purchase orders were issued by the contractor. The trial court rejected both applications for leave to defend, finding that both defendants were attempting to shift the burden onto each other.

Timeline

Course of Proceedings

The Trial Court rejected the applications for leave to defend by both defendants, observing that they were merely attempting to shift the burden of liability onto each other. The court noted that the purchase orders were placed by the contractor (defendant No. 2) at the instance of the real estate firm (defendant No. 1), and the goods were supplied to the real estate firm’s site. The Trial Court also pointed out that the real estate firm had been making payments to the plaintiff. The Trial Court held that the defense of lack of privity of contract raised by the real estate firm was without substance and did not raise any triable issue. The Trial Court also held that the suit was maintainable under Order XXXVII of the Code of Civil Procedure, 1908, despite the plaintiff not presenting the cheques issued by the real estate firm.

The High Court dismissed the appeal filed by the contractor (defendant No. 2), stating that the invoices were raised in the name of the contractor and that the contractor was liable for payment. The High Court held that the suit was maintainable under Order XXXVII of the Code of Civil Procedure, 1908, as the invoices constituted written contracts. The High Court also noted that the cheques issued by the real estate firm did not preclude the suit against the contractor. The High Court referred to the decision of the Supreme Court in IDBI Trusteeship Services Ltd. v. Hubtown Ltd., stating that the defenses raised by the contractor did not give rise to genuine triable issues.

The High Court also dismissed a separate appeal filed by the real estate firm (defendant No. 1), finding that its defense was frivolous or vexatious. The High Court specifically noted that if there was no liability on the real estate firm, there was no reason for it to make regular payments to the plaintiff.

Legal Framework

The case primarily revolves around Order XXXVII of the Code of Civil Procedure, 1908 (CPC), which deals with summary suits for recovery of debts based on written contracts. The court also considers Section 2(d) of the Indian Contract Act, 1872, which defines consideration, and Section 230 of the Indian Contract Act, 1872, which deals with the liability of an agent.

Order XXXVII of the Code of Civil Procedure, 1908 allows a plaintiff to file a summary suit for recovery of debt based on a written contract. The defendant in such a suit is required to seek leave to defend, and such leave is granted only if the defendant raises a triable issue. The relevant provisions are:

• Order XXXVII Rule 1(2) of the CPC states that a suit can be filed under this order based on bills of exchange, hundis, promissory notes, and written contracts.

Section 2(d) of the Indian Contract Act, 1872, states:
“When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise.”

Section 230 of the Indian Contract Act, 1872, states:
“In the absence of any contract to that effect, an agent cannot personally enforce contracts entered into by him on behalf of his principal, nor is he personally bound by them.”

The Supreme Court examined how these provisions apply to the facts of the case to determine whether the contractor should be granted leave to defend.

Arguments

Appellant (Contractor/Defendant No. 2) Arguments:

• The appellant argued that the liability for payment was not theirs, but that of the real estate firm (defendant No. 1). The plaintiff itself had pleaded that the liability to pay for the supplies was that of the real estate firm.
• The appellant contended that they were acting as an agent of the real estate firm and, therefore, could not be held liable for payment under Section 230 of the Indian Contract Act, 1872.
• The appellant argued that the cheques issued by the real estate firm for part payment constituted a liability of the real estate firm alone and not the contractor.
• The appellant submitted that the summary suit was not maintainable against them in the absence of a legally enforceable debt.

Plaintiff (Respondent No. 1) Arguments:

• The plaintiff argued that both the contractor and the real estate firm were trying to evade liability by shifting the burden onto each other.
• The plaintiff contended that the contractor had raised the purchase orders, goods were supplied based on those orders, and invoices were raised in the name of the contractor.
• The plaintiff argued that the invoices constituted written contracts, making the suit maintainable under Order XXXVII of the CPC.
• The plaintiff asserted that the defendants were jointly and severally liable to pay the amount due.

Defendant No. 1 (Real Estate Firm/Respondent No. 2) Arguments:

• The real estate firm argued that under the construction agreement between them and the contractor, the payments for the material supplied by the plaintiff were to be made by the contractor.
• The real estate firm contended that there was no privity of contract between them and the plaintiff, as the purchase orders were placed by the contractor and the invoices were raised in the name of the contractor.
• The real estate firm argued that the mere fact that they were the beneficiary of the project and the invoices mentioned the project name did not make them liable to pay the plaintiff.
• The real estate firm submitted that the payments made by them were only on the request of the contractor due to cash flow issues.

Innovation of Arguments: The contractor’s argument that it was acting as an agent and therefore not liable under Section 230 of the Indian Contract Act, 1872 was innovative. The real estate firm’s argument that the payments made by them were only due to the contractor’s cash flow issues was also a novel point.

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether the plaintiff was entitled to maintain a summary suit under Order XXXVII of the Code of Civil Procedure, 1908 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 Relied Upon by the Court:

Legal Provisions Considered by the Court:

• Order XXXVII of the Code of Civil Procedure, 1908: Deals with summary suits for recovery of debts based on written contracts.
• Section 2(d) of the Indian Contract Act, 1872: Defines consideration in a contract.
• Section 230 of the Indian Contract Act, 1872: Deals with the liability of an agent.

Judgment

How each authority was viewed by the Court:

• Mechelec Engineers and Manufacturers v. Basic Equipment Corporation : AIR 1977 SC 577*: The Supreme Court referred to this case for the principles for consideration of a prayer for leave to defend in a summary suit. The Court noted that the principles in this case were superseded by the later decision in IDBI Trusteeship, but the core theme remained the same.
• IDBI Trusteeship Services Ltd. v. Hubtown Ltd. : (2017) 1 SCC 568*: The Supreme Court referred to this case for the modulated principles for grant of leave to defend in a summary suit, emphasizing that the grant of leave to defend is the ordinary rule and denial of leave is an exception.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the fact that the appellant (contractor) had raised genuine triable issues regarding its liability. The Court noted that the High Court had failed to consider the appellant’s defense that it was merely acting as a contractor and that payments were being made by the real estate firm. The Court emphasized that the denial of leave to defend is an exception and should only be done when the defense is frivolous or vexatious.

Fact:Law Ratio:

Logical Reasoning:

The Court considered the appellant’s defense that it was merely a contractor and the fact that payments were made by the real estate firm. The Court emphasized that the denial of leave to defend is an exception. The Court also noted that the High Court did not provide sufficient reason to deny leave to defend.

The Court stated, “It is at once clear that even though in the case of IDBI Trusteeship, this Court has observed that the principles stated in paragraph 8 of Mechelec Engineers’ case shall stand superseded in the wake of amendment of Rule 3 of Order XXXVII but, on the core theme, the principles remain the same 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, “In the given set of circumstances, the conclusion of the High Court that the defence raised by the appellant was frivolous or vexatious could only be treated as an assumptive one and lacking in requisite foundation.”

The Court further stated, “In the totality of the circumstances of this case, we are clearly of the view that the appellant has indeed raised triable issues, particularly concerning its liability and the defence of the appellant cannot be said to be frivolous or vexatious altogether.”

Key Takeaways

• The Supreme Court has reiterated that the grant of leave to defend in summary suits is the ordinary rule, and denial of leave is an exception.
• A defendant should be granted leave to defend if they raise triable issues, even if the defense is not positively good.
• Courts should not deny leave to defend merely because the defense appears to be improbable; conditions may be imposed while granting leave.
• The Court emphasized that the defense of an agent cannot be treated as frivolous or vexatious without proper consideration.
• The judgment highlights the importance of considering all aspects of a case before denying leave to defend, especially in cases involving multiple parties and complex transactions.

Directions

The Supreme Court set aside the High Court’s judgment and the Trial Court’s decree insofar as they related to the appellant (defendant No. 2). The Court granted leave to defend to the appellant. The amount of Rs. 40,00,000/- deposited by the appellant was to be treated as a deposit towards the condition for leave to defend. The Trial Court was directed to pass appropriate orders for the treatment of the said amount and to proceed with the trial of the suit only concerning the appellant.

Specific Amendments Analysis

There were no specific amendments discussed in the judgment.

Development of Law

The ratio decidendi of this case is that in a summary suit under Order XXXVII of the Code of Civil Procedure, 1908, leave to defend should be granted if the defendant raises triable issues, and denial of leave to defend is an exception. The Supreme Court reiterated the principles laid down in IDBI Trusteeship Services Ltd. v. Hubtown Ltd., emphasizing that the grant of leave to defend is the ordinary rule and denial of leave is an exception. This case clarifies that even if the defense is not positively good, leave to defend should be granted if triable issues are raised. This case reinforces the principle that courts should not deny leave to defend merely because the defense appears to be improbable and that conditions may be imposed while granting leave. There is no change in the previous position of law, but it reinforces the existing principles.

Conclusion

The Supreme Court allowed the appeal filed by the contractor, setting aside the High Court’s judgment and the Trial Court’s decree. The Court held that the contractor had raised triable issues regarding its liability and should be granted leave to defend. The Court reiterated that the grant of leave to defend is the ordinary rule in summary suits, and denial of leave is an exception. The Court emphasized that a defendant should be given the opportunity to defend their case if they raise valid points about their liability.