The Hindustan Forest Company vs Lal Chand and Others

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No. 161 of 1955

Decision Date: 19 August 1959

Coram: A.K. Sarkar, S.K. Das, K.N. Wanchoo, M. Hidayatullah

The case was titled The Hindustan Forest Company versus Lal Chand and Others and was decided on 19 August 1959 by the Supreme Court of India. The bench comprised Justice A.K. Sarkar, Justice S.K. Das, Justice K.N. Wanchoo and Justice M. Hidayatullah. The petitioner was the Hindustan Forest Company and the respondents were Lal Chand and others. The judgment was reported in 1959 AIR 1349 and 1960 SCR (1) 563. The statutes relevant to the dispute were the Jammu and Kashmir Limitation Act, 1995 (Jammu and Kashmir Act IX of 1995), article 115, and the Indian Limitation Act, 1908, article 85. The headnote summarised the factual matrix: under a contract for the sale of goods the buyer had paid an advance towards the purchase price and, after each delivery, had made further payments. The last delivery of goods occurred on 23 June 1947 and the sellers instituted suit on 10 October 1950 to recover the balance of the price. The sellers contended the suit was timely, relying on article 115 of the Jammu and Kashmir Limitation Act, which provides a six-year limitation period for a suit for the balance due on a mutual, open and current account where reciprocal demands have been made. The Court held that article 115 was inapplicable because there was no mutual account based on reciprocal demands. Payments made by the buyer after deliveries discharged the buyer’s obligations for those deliveries; the advance payment was made under the contract to discharge a future obligation. Neither class of payment gave rise to an independent obligation on the part of the sellers towards the buyer. The Court approved the authority in Tea Financing Syndicate Ltd. v. Chandrakamal Bazbaruah, (1930) I.L.R. 58 Cal. 649.

The appeal, numbered Civil Appeal No. 161 of 1955, challenged a judgment and decree dated 4 Jeth 2011 of the Jammu and Kashmir High Court in Appeal No. 1 of 2009, which itself arose from a judgment and decree dated 2 Magh 2008 in original suit No. 40 of 2007. Counsel for the appellant were two lawyers, and counsel for the respondents were two other lawyers, their names being omitted and described only by their roles. The judgment was delivered on 19 August 1959 by Justice Sarkar. The Court explained that the appeal originated from a suit filed in the High Court of Jammu and Kashmir for the recovery of the price of goods that had been sold and delivered. The sole issue for determination was whether the suit fell under article 115 of the Jammu and Kashmir Limitation Act. The lower courts had held, and this point was not contested in the appeal, that if article 115 did not apply, the suit would be barred by limitation.

In November 1946 the appellant, as buyer, and the respondents, as sellers, executed a written agreement for the supply of 5,000 maunds of maize, 500 maunds of wheat and 100 maunds of Dal at the rates and delivery times specified in the contract. The agreement recorded that on the signing date the buyer had already paid Rs 3,000 to the sellers and had undertaken to pay an additional advance of Rs 10,000 within ten to twelve days. The remaining balance was to be payable after the expiry of each month for the goods delivered. It is admitted that the Rs 10,000 advance was later paid by the buyer. After that payment the sellers delivered various quantities of the agreed commodities; although the deliveries were not always made at the exact times stipulated, the buyer accepted each delivery. The buyer made several payments towards the price of the goods received, but these payments were not made on a month-by-month basis and the total price was never fully paid. The final delivery of goods occurred on 23 June 1947, and the buyer instituted suit on 10 October 1950 seeking the balance of the purchase price. The trial judge of the High Court held that Article 115 of the Jammu and Kashmir Limitation Act did not apply and consequently dismissed the suit as barred by limitation. The sellers appealed, and a two-judge bench of the High Court reversed the trial judge’s decision, holding that Article 115 did apply and that the suit was therefore within time; the appellate court thereafter entered a decree in favour of the sellers. The buyer has now placed the matter before this Court on appeal.

Article 115 of the Jammu and Kashmir Limitation Act reproduces the language of Article 85 of the Indian Limitation Act, except for the period of limitation, and is set out as follows: for a suit for the balance due, the limitation period is six years, beginning from the date when the mutual account between the parties is closed. The period is measured from the moment the last item is entered in the account, reflecting reciprocal demands. If Article 115 were to apply, the present suit would fall well within the six-year period because the last entry in the mutual account was made on 23 June 1947. Consequently, the only issue that was argued before the courts concerned whether the relationship between the buyer and the sellers created a mutual account. The concept of a mutual account has been examined repeatedly by the courts, and the test for determining its existence is well settled. The leading authority on the matter is the decision of the Tea Financing Syndicate Ltd. v. Chandrakamal Bezbaruah. In that case the Court explained the requirements for reciprocal demands and the presence of independent obligations on each side. That explanation establishes when an account may be deemed mutual.

In the case of v. Chandrakamal Bezbaruah, a precedent reported in 1930 at I.L.R. 58 Cal. 649, the plaintiff company had advanced sums of money as loans to the proprietor of a tea estate, and the proprietor had, in return, supplied tea to the company for sale and for the realisation of its price. The company instituted a suit against the proprietor to recover the balance of the advances, taking into account the credit that arose from the price realised on the sale of the tea. The central issue in that suit was whether the relationship between the parties constituted an account of reciprocal demands, thereby rendering the dispute subject to article 85 of the Indian Limitation Act.

Chief Justice Rankin, delivering the judgment, articulated the test for determining the presence of reciprocal demands. He observed that “There can, I think, be no doubt that the requirement of reciprocal demands involves, as all the Indian cases have decided following Halloway, A.C.J., transactions on each side creating independent obligations on the other and not merely transactions which create obligations on one side, those on the other being merely complete or partial discharges of such obligations. It is further clear that goods as well as money may be sent by way of payment. We have therefore to see whether under the deed the tea, sent by the defendant to the plaintiff for sale, was sent merely by way of discharge of the defendant’s debt or whether it was sent in the course of dealings designed to create a credit to the defendant as the owner of the tea sold, which credit when brought into the account would operate by way of set-off to reduce the defendant’s liability.” This formulation has never been dissent-ed from by Indian courts and is regarded as the correct statement of law.

The appellate bench of the High Court indicated that it had applied the same test set out by Chief Justice Rankin. However, the judges on that bench concluded that the parties shared a mutual account for the reasons they stated: “The point then reduces itself to the fact that the defendant company had advanced a certain amount of money to the plaintiffs for the supply of grains. This excludes the question of monthly payments being made to the plaintiffs. The plaintiffs having received a certain amount of money, they became debtors to the defendant company to this extent, and when the supplies exceeded Rs. 13,000 the defendant company became debtors to the plaintiff and later on when again the plaintiff’s supplies exceeded the amount paid to them, the defendants again became the debtors. This would show that there were reciprocity of dealings and transactions on each side creating independent obligations on the other.”

The Court found that reasoning to be plainly erroneous. In the factual situation described by the High Court judges, there was no reciprocity of dealings and no creation of independent obligations on either side. The actual sequence of events was, in fact, that

The sellers had undertaken to deliver the goods, and the buyer had agreed to pay for those goods, having already made a partial payment in advance. It was clear that any payment made after the goods were actually delivered was intended to satisfy the price that was due for those deliveries. Those later payments discharged the buyer’s obligation that arose from the seller’s delivery of the goods, and they did not, in themselves, create any new obligation on the part of the sellers toward the buyer. The learned Judges did not appear to contradict this factual result. Nevertheless, the learned Judges held that the advance payment of Rs 13,000 made by the buyer before any delivery began had turned the sellers into debtors of the buyer and had thereby created an obligation on the sellers in favour of the buyer. This conclusion was apparently the basis on which they found that reciprocal demands existed and that the transactions had generated independent obligations for each party. The Court found this view to be unsupported. The amount of Rs 13,000 had been paid solely as an advance on the price of goods that were to be delivered under the contract. The advance was made in anticipation of obligations that were to arise under the contract, which required the buyer to purchase goods and to pay for them. The advance did not itself give rise to a separate obligation on the sellers toward the buyer; it was not intended to be, nor did it amount to, an independent transaction detached from the main contract.

The sellers’ duty to deliver the goods derived from the contract itself and not from the mere fact that an advance had been paid. Had the sellers failed to deliver the goods, they would have been required to refund the advance and could also have been liable for damages, but such liability would have originated from the contractual relationship, not from the existence of the advance payment. In the absence of any failure by the sellers to deliver, the buyer could not recover the advance money. No allegation was made that the sellers defaulted in delivering the goods, and therefore the case involved no reciprocity of demands. Consequently, Article 115 of the Jammu and Kashmir Limitation Act could not be applied to the suit. The learned Judges also expressed the view that because the goods were not delivered at the times fixed in the contract and the prices were not paid at the ends of the months, the parties had shown an intention not to abide by the contract. The Court disagreed with that assessment, holding that such conduct merely indicated that the parties had mutually extended the contractually fixed time for delivery and payment, leaving the contract otherwise intact. The learned Judges

In this case the Court also noted that the contract did not specify the method by which the amount advanced by the buyer was to be adjusted. However, the Court found that the contract clearly stated that the advance was intended to be applied towards the price that would become due, and, as the learned Judges of the High Court had themselves observed, this intention necessarily implied that the advance must be set off against the price at the time the price became payable. Accordingly, the Court concluded that the contract indeed contained an implicit provision for adjusting the advance against the price. The Court further observed that it was rather surprising that any issue concerning the applicability of article 115 of the Jammu and Kashmir Limitation Act had been permitted to be raised. The Court explained that the operation of that article depends on the existence of special factual circumstances, and that no such circumstances were pleaded in the plaint. Moreover, the plaint did not contain any indication that the accounts between the parties were mutual. The Court expressed confidence that, had the High Court judges been made aware of this lack of factual basis, they would not have allowed a question of article 115 to be raised, and that the parties would have avoided considerable expenditure of costs. On this basis, the Court held that the appeal was to be allowed. Consequently, the judgment and the order of the appellate bench of the High Court were set aside, and the judgment and order of the Single Judge of the High Court were restored. The Court ordered that the appellant be awarded costs of these proceedings as well as the costs of the hearing of the appeal before the High Court. The appeal was therefore allowed.