Dadri Cement Company and Another Vs Bird and Co. (P) Ltd.

S.N. Shankar, J.

(1) Questions for decision in this appeal from an order of the learned single Judge rejecting the application filed by the appellants u/s 34 of the Arbitration Act are: (1) whether the original contract of sale between the parties containing an arbitration clause stood superseded by the subsequent arrangement agreed to between them and (2) whether the appellants have taken part in the proceedings of the suit to disentitle them to the relief u/s 34 of the Arbitration Act, 1940.

(2) The respondent. Bird & Co. (Private) Limited, hereinafter called "the plaintiff", filed a suit for recovery of Rs. 32,14,850.12 p. with the allegation that during the period between June Ii, 1968 and December, 24, 1968 the defendants, M/s. Dadri Cement Company and its sole proprietor Shri Ram Krishna Dalmia alias Ram Krishna Harjimull (defendants 1 and 2 respectively) contracted to purchase from them heavy cement bags and between February, 1969 to August, 1969 they dispatched to the defendants these bags by rail or truck under railway receipts or truck consignment notes, and along with the railway receipts or the truck consignment notes they sent through the Central Bank of India, Darya Ganj, Delhi, relevant invoices and twenty-two bills of exchange, payable 1.20 days after sight, representing the price of the bags supplied and interest for 120 days. The railway receipts and/or truck consignment notes were delivered by the Bank to the defendants, on the latter''s acceptance of the said 22 bills of exchange and the defendants on the basis of these receipts and consignment notes took deliveries of the bags. On maturity of the bills they failed to honour them and to make the payments. According to the plaint, the defendants represented that they were in financial difficulties and the amount due from them aggregating to Rs. 31,42,064.30 may be accepted in Installments. They also offered to get the payment of Installments guaranteed by defendant No. 2 and further to secure the amount by pledge of debentures and shares held by defendant No. 2 in Edward Keventer (S) Private Limited and Durga Enterprises Private Limited. The plaintiff agreed to these proposals. In pursuance of this arrangement, on September 13, 1969 the defendants executed an agreement acknowledging the above stated amount to be due from them and agreed to pay the same in Installments in terms of the agreement with interest at the rate of 10 per cent per annum. Defendant No. 2 guaranteed payment of this amount by a deed of guarantee and also pledged with the plaintiff the debentures/shares of the face value of rupees sixty-four lakhs by separate documents executed in favor of the plaintiff. To effectuate this arrangement, defendant No. 2 also executed an irrevocable power of attorney in favor of the plaintiff in regard to the transfer of shares if the Installments were not paid. Defendant No. 1, in terms of the arrangement, did make payment of one Installment due under the agreement dated September 13, 1969 but defaulted thereafter and made no other payment. Hence the suit. The relief prayed in the suit was in the following terms:-

" THE plaintiff prays for: - (a) a decree for a sum of Rs. 32,14,850.12p. against the defendants and in favor of the plaintiff. (b) Interest at the agreed rate of 10 per cent per annum from the date of suit till payment. (c) A decree for sale of the shares and debentures pledged with the plaintiff shown in Schedule attached to Annexure ''E''. (d) Cost of the suit. (e) Such other or further relief or reliefs as this Hon''ble Court may deem fit."

(3) The suit was filed on May 12, 1970. On the same date the plaintiff made an application (I.A. 630 of 1970) under Order 38 rule 5 and Order 39 rules 1 and 2 read with section 151 of the CPC praying for attachment before judgment of immovable property and the shares and debentures of defendant No. 2 mentioned in the schedule annexed to the application and for injunction restraining him from alienating or disposing of the said properties in any manner. When the suit came up before the learned single Judge, he directed summons of the suit to be issued for July 29, 1970. Notice of I.A. 630 of 1970 was issued for May 22, 1970 and interim injunction restraining defendant No. 2 from selling or transferring or creating any encumbrance with respect to the shares mentioned at items 2 and 3 of the schedule to the application was granted. The summons and the notice of injunction were duly served on the defendants. On May 22, 1970 the defendants filed a reply to the injunction application (I.A. 630 of 1970) and made a request to the Court that since the written statement had to be filed on July 29, 1970 this application may be taken up after the written statement had been filed. On May 23, 1970 the defendants applied under Order 39 rule 4 read with section 151 for setting aside the ex-parte order of injunction. The plaintiff took notice of this application and the application was adjourned for arguments at first to May 29, 1970 and then to July 29, 1970. On July 28, 1970 defendants filed an application u/s 34 stating that the original contract of sale out of which the claim for the amount in suit arose contained an arbitration clause and the suit may, therefore ,be stayed and the matter be referred to the arbitration of Bengal Chambers of Commerce & Industry, Calcutta in terms of this arbitration clause. The learned single Judge dismissed this application by the order under appeal.

(4) The learned Judge held that the subsequent agreement dated the September 13, 1969 was an independent agreement which did not contain any arbitration clause and was not in modification of the original contract and that even though the original contract did contain an arbitration clause it did not survive to govern the subsequent agreement dated September 13, 1969 whereby the parties entered into a fresh arrangement. It was also held that after the institution of the suit the defendants had taken steps in the proceedings and had submitted to the jurisdiction of the Court and for this reason also the suit could not be stayed u/s 34 of the Act.

(5) The relevant portion of the arbitration clause in the original contract (clause 19 of the contract) was in the following terms:-

" ALL matters ,questions, disputes, differences and/or claims whatsoever arising out of and/or concerning and/or in connection with and/or in consequence of or relating to this contract whether or not the obligations of either party or both parties under this contract be subsisting at the time of such dispute and whether or not this contract has been terminated or frustrated or purported to be terminated or completed shall be submitted to the Tribunal of Arbitration of the Bengal Chamber of Commerce & Industry at Calcutta, to be arbitrated upon in accordance with the Rules of such Tribunal in force for the time being and the Award of the Arbitrators appointed thereby shall be final and binding upon the parties to this contract. .......".

The argument on behalf of the appellant is that all questions and disputes arising out of the original contract, whether the contract was subsisting or was terminated or even frustrated, had to be submitted to the tribunal of arbitration in the manner provided in this clause and for this reason, the subsequent agreement dated September 13, 1969. should be construed to be subject to this clause.

(6) To appreciate this argument, the correct legal position that emerges, after the subsequent agreement, in this case has to be ascertained. The original contract was clearly governed by the provisions of the Sale of Goods Act, 1930. According to section 31 of this Act, it is the duty of the seller to deliver goods and of the buyer to accept and pay for them in accordance with the terms of the contract of sale. Section 32 provides that unless otherwise agreed, delivery of the goods and payment of the price are concurrent conditions, that is to say, the seller should be ready and willing to give possession of the goods to the buyer in exchange for the price and the buyer should be ready and willing to pay the price in exchange for possession of the goods. In the instant case the parties agreed that the price of the bags would be payable by the defendants on maturity of the twenty-two bills of exchange accepted by them. Delivery and payment of the price had, Therefore, not to be concurrent but by agreement between the parties was postponed to the date of maturity of the bills of exchange. The defendants failed to make payments on these dates. They, Therefore, committed breach of the original contract. Then they came out with fresh proposals to secure plaintiff''s forbearance from securing performance of the original contract and recover the price of the bags sold and entered into a fresh arrangement which is incorporated in the agreement dated September 13, 1969. To it was annexed a Schedule headed as "Schedule of Payments to be made by Dadri Cement Co. to Bird & Co. (Private) Ltd." In implementation of this agreement and on the same date, defendant No. 2 executed a deed of guarantee Exhibit P/7 in favor of the plaintiff holding himself responsible for the due repayment of the amount mentioned in the agreement together with interest. At the same time he pledged with the plaintiff, by way of security in terms of Exhibit P/6, shares and debentures mentioned therein for payment of the amount due under the agreement. Simultaneously, he also executed an irrevocable power of attorney Exhibit P/8 appointing the plaintiff to be his attorney and authorising it to execute in his name for him and on his behalf, transfer deeds and to issue receipts to effectuate the transfer of the aforesaid shares and debentures and to receive their sale proceeds etc. towards the payment of any amount payable to the plaintiff under the agreement Exhibit P/9.

(7) By the first clause of the agreement the defendants acknowledged an ascertained sum of money to be due from them unconditionally. By the second and the third clauses, they agreed and undertook to pay this sum by Installments in terms of the agreement. By the fourth clause they agreed to arrange to have the payment of the stipulated Installments together with interest guaranteed. Then in implementation of this agreement they obtained an effective guarantee of defendant No. 2 and the pledge of his shares and debentures. The plaintiff accepted all this. A fresh arrangement was thus made between the parties in substitution of the liability under the original contract. While securing this arrangement the defendants agreed to pay the amount due not as the sale price under the original contract but as an unconditional debt due from them to the plaintiff and the plaintiff agreed to relinquish its right to recover the amount as the sale price of the bags in view of the additional rights secured by it, amongst others, to proceed against the shares and debentures of defendant No. 2 which was a new right wholly foreign to the original contract. There was thus accord and satisfaction of the original contract. The substituted agreement was only executory in the sense that payment of the amount due to the plaintiff under it had yet to be made but it was still a valid contract by itself enforceable at law. The law envisages accord and satisfaction by means of executory contracts also. In British Russian Gazette and Trade Outlook, Limited v. Associated Newspapers, Limited 1933 (2) KBD 616 (1) on this aspect, it was said:-

" ACCORD and satisfaction is the purchase of a release from an obligation arising under contract or tort by means of any valuable consideration, not being the actual performance of the obligation itself. The accord is the agreement by which the obligation is discharged, and the satisfaction is the consideration which makes the agreement operative. It is not necessary that the consideration should be executed; the consideration on each side may be an executory promise, the two mutual promises making an agreement enforceable at law."

(8) This exposition of law found approval of the Supreme Court in the The Union of India Vs. Kishorilal Gupta and Bros., . (2).

(9) After assenting to the fresh arrangement the position of the plaintiff changed. He could not have filed a suit for recovery of the sale price on the basis of the dishonoured bills of exchange. In fact, the sale price ceased to be the money due under the contract of sale. After execution of Exhibit P/9 it became a debt recoverable by Installments only in terms of this agreement and not independently of it. Right to proceed against the shares and the debentures of defendant No. 2 accrued to the plaintiff by reason of this arrangement and it is in this context that relief in clause (c) of the prayer clause has been claimed in the plaint.

(10) It is further to be noticed that the parties not only entered into the fresh arrangement including the agreement Exhibit P/9 but also acted on it. According to para 15 of the plaint, on December 27, 1969 the defendants paid rupees two lakhs to the plaintiff as the Installment due under the new arrangement. We are, Therefore, clear in our mind that the partics, by entering into the new arrangement, intended to substitute the original contract of sale by this substituted arrangement consisting of the agreement Exhibit P/9, the deed of guarantee Exhibit P/7, the deed of pledge Exhibit P/6 and the irrevocable power of attorney Exhibit P/8.

(11) This substitution operated to bring about a novation of the original contract. According to section 62 of the Contract Act if the parties to a contract agree to substitute a new contract for it, or to rescind it or alter it, the original contract need not be performed. The original contract of sale, Therefore, necessarily became inoperative and unenforceable and ceased to exist. The arbitration clause in the original contract perished with it. The submission, Therefore, that the arbitration clause in the original contract should be held to survive to govern the substituted arrangement cannot be sustained.

(12) In Ramdas Dwarkadas Vs. The Orient Pictures, it was held that where the original agreement between the parties contained an arbitration clause and the subsequent new agreement without any arbitration clause materially affected and altered the rights and liabilities under the original agreement and imposed liabilities and conferred rights upon the parties which were not to be found in the original agreement at all, the arbitration clause could not have any applicability to the new rights and liabilities.

(13) In Century Spinning and Manufacturing Co. Ltd. Vs. Motilal Dhariwal, , a Division Bench of the Court held that where the subsequent contract dealt with the same subject matter as the original contract and contained terms and conditions which enabled the parties to sue upon the second arrangement alone, recission of the original contract may be properly inferred. Recission of a contract whether written or by parole need not. be express.

(14) A similar situation arose before the Supreme Court in the The Union of India Vs. Kishorilal Gupta and Bros., (4). The respondents in this case entered into three several contracts with the appellant for the fabrication and supply of diverse military stores. Each contract contained an arbitration clause. Before the contracts were fully executed, disputes arose between the parties. The parties entered into three fresh settlement contracts purporting to settle the disputes on the terms contained in these contracts. The respondents failed to carry out the terms of the settlement contracts. In pursuance of the arbitration clauses contained in the original contracts, the appellant referred its claim for breach of the three original contracts to arbitration. The arbitrator made award in respect of the first and the third original contracts, the claim under the second contract having been abandoned. The respondents applied for a declaration that the arbitration clause in the original contracts had ceased to have any effect and the contracts stood finally determined as a result of the settlement contracts and for an order for setting aside the award as void and nullity. One point, amongst others, urged was that in the facts of the case there had been a recission of the original contracts and the substitution of legally enforceable unconditional contracts. The majority judgment cited with approval the Privy Council decision in Payana Reena Saminathan v. Pana Lana Palaniappa (1914) A.C. 618 it was held that where the parties agreed to a settlement of all their existing disputes by an arrangement it was a case of accord and satisfaction by a substituted agreement, the consequence of which was that the prior rights of the parties were extinguished. The Court found that the relevant settlement contract in this case was a self-contained document which did not depend on the earlier document for its existence or enforcement and that it embodied an ascertained liability and provided the mode of recovery.

(15) The settlement, in these circumstances, was held to have superseded the original contracts and the arbitration clause in the original contract was held not to survive after the execution of the settlement between the parties. One of the clauses of the settlement contract in this case in terms stated that the original contract stood finally concluded in terms of the settlement and no party will have any further or other claim against the other. There is no such term, in this case, in the substituted agreement Exhibit P/9 but, to our mind, that makes no difference because the language of the agreement, the tenor of the whole arrangement and the conduct of the parties in agreeing to the new arrangement, for reasons already stated, in our view, shows an unmistakable intention of the parties to substitute this arrangement in place of the original contract. Reference was made on behalf of the defendants to Rungta Sons Private Ltd. Vs. Jugometal Trg. Republike and Another, , where it was held that where the terms of the subsequent arrangement were merely modifications of the original contract and the two together formed one agreement comprising the original terms including the arbitration clause with its subsequent modifications, in such a case the arbitration clause applied to the disputes arising out of the contract and its subsequent modification) even though the modification may have conferred some new rights and imposed new liability which did not find place in the parent contract. The ratio of this decision is not attracted to the facts of this case firstly because, for reasons already stated, the subsequent arrangement in this case was not a modification of the original contract of sale but an altogether new contract introducing a new subject matter of the contract, namely, shares and debentures and created new rights and obligations between the parties and secondly because in the facts of this case, we find nothing in the new arrangement to indicate that the parties intended to introduce any arbitration clause. Further, the substituted contract in the cited case was sought to be proved by means of affidavits. The Court observed on page 426, Col. I of the report that the halting and cautious allegation made in the affidavit did not amount to a plea of express agreement of abrogation and supersession of the arbitration agreement. Having regard to the nature of the original contract and the change in the terms, the Court also noticed that the terms of the new arrangement were in no way inconsistent with the continuance of the arbitration agreement. All these considerations are absent in the present case. The cited case, Therefore, does not help the defendants.

(16) For all these reasons, we are in agreement with the finding of he learned single Judge that the original contract of sale in this case had been superseded by the new arrangement and the arbitration clause in the original contract did not survive to govern the latter.

(17) Coming now to the second contention, we again find ourselves in agreement with the view of the learned single Judge that the defendants had submitted themselves to the jurisdiction of the Court and the suit, Therefore, could not be stayed u/s 34. As stated earlier, on the application of the plaintiff (I.A. 630 of 1970) the Court granted ad interim injunction restraining defendant No. 2 from selling or transferring or creating any encumbrance in respect of the shares mentioned at item Nos. 2 and 3 of the schedule annexed to the application and adjourned the case to May 22, 1970. On this date, the defendants filed reply to the injunction application and made a request to the Court that the application may be taken up after the written-statement was filed. The Court passed the order adjourning the case in the following terms:-

MAY22, 1970: "Reply to the injunction application has been filed and a copy given to the opposite party. The learned counsel for the defendants suggests that since the written-statement has to be filed on 29th July, 1970, this application be taken up after the written-statement has been filed. The injunction to continue till then."

The concluding portion of para 15 of the reply filed by the defendants also read as under:-

"...............The Defendants will detail the circumstances under which the agreements dated 13-9-1969 came to be written which will show the bonafides of the Defendants on the one hand and the fraudulent intent of the plaintiff on the other in the written statement."

This unmistakably shows that the defendants, even for contesting the injunction, relied on their case to be set out on the merits of the controversy in the written-statement to be filed by them. In pursuance of the same intention, the next day i.e. on May 23, 1970 the defendants applied under Order 39 rule 4 for setting aside the ex-parte order of temporary injunction. The hearing of the application was adjourned to May 29, 1970. Not a suggestion was made even at this stage that the suit could not proceed. From May 29, 1970 the hearing was adjourned to July 29, 1970. It was only one day before this date, on July 28, 1970 that they made the application u/s 34 of the Arbitration Act. This section in clear terms states that the application for stay should be made before filing the written statement or taking other steps in the suit proceedings. The expression "steps in the proceedings" connotes the idea of doing something in aid of the progress of the suit or submitting to the jurisdiction of the Court for the purpose of adjudication of the merits of the controversy in the suit. When defendants in this case in reply to the injunction application undertook to "detail the circumstances under which the agreements dated 13-9-1969 came to be written", they clearly submitted to the jurisdiction of the Court for the decision of the controversy in suit. In the The State of Uttar Pradesh and Another Vs. Janki Saran Kailash Chandra and Another, , the mere taking of an adjournment by counsel for the defendants for filing the written statement was held by the Supreme Court to be taking steps in the proceedings within the meaning of section 34. In Ford''s Hotel Co., Ltd. v. Barlett 1895 All ER 1041 a prayer for extension of time for filing the defense upon which 14 days time was granted was held to be a step in the proceedings.

(18) In Messrs. Bortes S.A. by Agents. Bortes S.A. by Agents, South India Corporation (Agencies) Private Ltd. Vs. Astrouic Compania Naviors S.A. by Power of Attorney Agent Shaw Wallace Co. Ltd., , the filing of an application by the defendants praying for the setting aside of interim injunction was held to amount to taking steps in the proceedings within the meaning of section 34 to disentitle them to ask for stay of the suit.

(19) Strong reliance on behalf of the defendants was placed on Sansarchand Deshraj Vs. State of M.P. and Others, ,. The Court in this case held that the filling of a reply to the application of the plaintiff for securing temporary injunction and arguing the said application did not amount to taking steps in the proceedings within the meaning of section 34. Facts of this case, however, show that in the reply that the defendants filed they had expressly mentioned the subsistence of an arbitration agreement and had urged that reference to arbitration was the correct remedy for the plaintiff to follow. It was in this background that it was held that the mere filing of the application was not a step in the proceedings.

(20) We are, Therefore, of the view that the defendants had taken steps in the proceedings of the suit filed by the plaintiff and the learned single Judge, for this reason also, was right in holding that the suit could not be stayed u/s 34.

(21) In the result F.A.O. (O.S.) 49 of 1971 fails and is dismissed with costs. Counsel''s fee Rs. 200.