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PETITIONER:

ANDERSON WRIGHT LTD.

Vs.

RESPONDENT:

MORAN AND COMPANY.

DATE OF JUDGMENT:

01/11/1951

BENCH:

MUKHERJEA, B.K.

BENCH:

MUKHERJEA, B.K.

BOSE, VIVIAN

JAGANNADHADAS, B.

CITATION:

1955 AIR 53 1955 SCR (1) 862

CITATOR INFO :

E 1973 SC2071 (5)

R 1975 SC 469 (6)

D 1985 SC1156 (59)

R 1989 SC 839 (18,25)

ACT:

Arbitration Act, 1940 (X of 1940), s. 34 -Application under

the section for stay of legal proceedings-Necessary

conditions-Fulfilment of-First essential pre-requisite for

an order of stay-Binding arbitration agreement between the

parties-Incumbent upon the Court to decide this-point.

HEADNOTE:

Held, that in order that a stay may be granted under s. 34

of the Indian Arbitration Act, 1940, it is necessary that

the following conditions should be fulfilled:-

(1) The proceeding must have been commenced by a party to

an arbitration agreement against any other party to the

agreement;

(2) the legal proceeding which is sought to be stayed must

be in respect of a matter agreed to be referred ;

(3) the applicant for stay must be a party to the legal

proceeding and he must have taken no step in the proceeding

after appearance. It is also necessary that he should

satisfy the court not only that he is, but also was at the

commencement of the proceedings, ready and willing to do

everything necessary for the proper conduct of the

arbitration ; and

(4) the Court must be satisfied that there is no sufficient

reason why the matter should not be referred to an

arbitration in accordance with the arbitration agreement.

The first and essential pre-requisite to making an order of

stay under a. 34 of the Arbitration Act is that there is a

binding arbitration agreement between the parties to the

suit which is sought to be stayed. The question whether the

dispute in the suit falls within the arbitration clause

really pre-supposes that there is such agreement and

involves consideration of two matters, viz., (1) what is the

dispute in the suit and (2) what disputes the arbitration

clause covers.

It is incumbent upon the Court, when invited to stay a suit

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under s. 34 of the Indian Arbitration Act, to decide first

of all whether there is a binding agreement for arbitration

between the parties.

If, in the present case, it is held that the arbitration

agreement and the contract containing it were between the

parties to the suit, the dispute in the present suit would

be one relating to the rights and liabilities of the parties

on the basis of the contract itself and would come within

the purview of the arbitration clause

863

worded as it is in the widest of terms. If, on the other

hand, it is held that the plaintiff was not a party to the

agreement, the application for stay must necessarily be

dismissed.

Case sent back for the decision of the question whether the

respondent was or was not a party to the arbitration

agreement.

Heyman v. Darwins ([1942] A.C. 356), Khusiram v. Hanutmal

((1948) 53 C. W.N. 505), A. M. Mair and Companay v.

Gordhandas ([1960] S.C.R. 792) and Patiram Y. Kankarah

Company ((1915) I.L.R. 42 Cal. 1050) referred to.

JUDGMENT:

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 205 of 1953.

Appeal from the Judgment and Order dated the 24th February,

1953, of the High Court of Judicature at Calcutta in Appeal

from Original Order No. 19 of 1952, arising out of the Order

dated the 23rd day of August, 1951, of the High Court of

Calcutta in its Ordinary Original Civil Jurisdiction Matter

No. 157 of 1951.

K. P. Khaitan, (S. N. Mukherjea and Rajinder Narain, with

him) for the appellant.

M. C. Setalvad, Attorney- General for India, (A. N. Sen,

V. S. Sawhney and S. P. Varma, with him) for the

respondents.

1954. November 1. The Judgment of the Court was delivered

by

MUKHERJEA J.-This appeal is directed against a judgment of

an appellate bench of the Calcutta High Court, dated the

24th February, 1953, reversing, on appeal, the judgment and

order of a single Judge sitting on the Original Side of that

Court, passed on an application under section 34 of the

Arbitration Act. The material facts are not in controversy

and may be shortly stated as follows:

On the 7th of July, 1950, the respondent, Moran and Company

Limited, passed two Bought Notes to the appellant company,

couched in identical terms, under which the appellant

purchased 12,00,000 yards of hessian cloth, 6,00,000 yards

under each contract, on certain terms and conditions stated

therein. The delivery was to be made every month from

January, 1951, at the rate of 1,00,000 yards per month under

864

each of these notes and payments were to be made in cash 'on

delivery, each delivery being treated as a separate and

distinct contract. The Bought Notes commenced thus:

Dear Sirs,

We have this day Bought by your order and on your account

from our Principals."

The particulars of the goods, the price, the time of

delivery and other terms of the contract are then set out

and amongst the terms is an arbitration clause worded as

follows:

" All matters, questions, disputes, differences and/ or

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claims 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 or both parties

under this contract be subsisting at the time of such

dispute and, whether or not this contract has been

terminated or purported to be terminated or completed, shall

be referred to the arbitration of the Bengal Chamber of

Commerce -under the rules of its Tribunal of Arbitration for

the time being in force and according to such rules the

arbitration shall be conducted."

The notes were signed by the respondent, Moran and Company,

describing themselves as brokers.

It is admitted that the goods covered by the Bought Notes

were delivered to the appellant in all the months from

January to June, 1951, with the exception of the goods due

to be delivered for the month of March, 1951. The appellant

required from the respondent delivery of goods in respect of

the month of March but the latter informed -the appellant,

by a letter dated the 27th March, 1951, that its principals

disowned a liability in this respect as there was default on

the part of the appellant in not giving shipping

instructions for the said goods within the time mentioned in

the contracts. The appellant denied any default on its part

and did not also accept the position that the respondent had

any principal, and on the 27th of April, 1951, it sent its

bills to the respondent claiming Rs. 1,13,042-3-0 as damages

for non-delivery of the

865

goods. As the respondent did not comply with this demand,

the appellant contemplated referring the matter in dispute

to the arbitration of the Bengal Chamber of Commerce as

provided in the contracts and while it was preparing to take

steps in that direction, the respondent, on the 11th of

June, 1951, filed a suit against the appellant in the

Original Side of the Calcutta High Court (being Suit No.

2516 of 1951,) and it is in respect of this suit that the

application under section 34 of the Arbitration Act has been

made. It was alleged in the plaint that the plaintiff acted

merely as broker and in that capacity brought about the two

contracts of sale and purchase evidenced by the two Bought

Notes mentioned above, that the real seller was a firm known

as Gowarchand Danchand, and that the plaintiff not being a

party to the contract could not incur any liability under

its terms. There were prayers in the plaint for a

declaration that the plaint. off was not a party to the said

contracts and, that it had no liability under the same.

There was a further prayer for an injunction restraining the

respondent from, claiming any damages in respect of the said

contracts

The writ of summons was served on the appellant on the 23rd

of June, 1951. On the 19th July, 1951, it filed an

application under section 34 of the Arbitration Act praying

that the proceedings in the suit may be stayed in order that

the matter in dispute between the parties may be dealt with

under the arbitration clause contained in the contracts.

The application was heard by Das Gupta J. who allowed the

prayer of the applicant and stayed further proceedings in

the suit. In the opinion of the learned Judge the dispute

in this case was not whether there was any contract entered

into by and between the appellant and the respondent: but

whether the respondent, who admittedly passed the two Bought

Notes to the appellant, could be made liable under the

contract by reason of the fact that it described itself as

broker. The answer to this question depended according to

the learned Judge upon the interpretation of the contract

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itself and the dispute arising as. it did out of or

concerning or relating to the

866

contracts would come within the purview of the arbitration

clause.

Against this judgment the respondent took an appeal to the

Appellate Division of the High Court and the appeal was

heard by a bench consisting of Chakravartti C.J. and Sarkar

J. By two separate judgments which concurred in the result,

the Chief Justice and the other learned Judge allowed the

appeal and vacated the order for stay. It is against this

judgment that the appellant has come to this Court on the

strength of a certificate under article 133(1)(a) of the

Constitution. The short point for our consideration is,

whether on the facts of this case, the appellant is entitled

to an order under section 34 of the Arbitration Act, staying

the proceedings of the suit commenced by the respondent.

Section 34 of the Arbitration Act is in these terms:

" Where any party to an arbitration agreement or any person

claiming under him commences any legal proceedings against

any other party to the agreement or any person claiming

under him in respect of any matter agreed to be referred,

any party to such legal proceedings may, at any time before

filing a written statement or taking any other steps in the

proceedings, apply to the judicial authority before which

the proceedings are pending to stay the proceedings; and if

satisfied that there is no sufficient reason why the matter

should not be referred in accordance with the arbitration

agreement and that the applicant was, at the time when the

proceedings were commenced, and still remains, ready and

willing to do all things necessary to the proper conduct of

the arbitration, such authority may make an order staying

the proceedings."

Thus in order that a stay may be granted under this section,

it is necessary that the following conditions should be

fulfilled:-

(1)The proceeding must have been commenced by a party to an

arbitration agreement against any other party to the

agreement;

(2)the legal proceeding which is sought to be. stayed must

be in respect of a matter agreed to be referred

867

(3)the applicant for stay must be a party to the legal

proceeding and he must have taken no step in the proceeding

after appearance. It is also necessary that he should

satisfy the Court not only that he is but also was at the

commencement of the proceedings ready and willing to do

everything necessary for the proper conduct of the

arbitration; and

(4)the Court must be satisfied that there is no sufficient

reason why the matter should not be referred to an

arbitration in accordance with the arbitration agreement.

The third condition can be taken to have been fulfilled on

the facts of the present case, and the fourth is one which

is exclusively for the determination of the Court. The

controversy between the parties centres round the other two

conditions, namely, conditions (1) and (2) ; and unless the

applicant for stay succeeds in establishing that the

respondent is a party to an arbitration agreement and that

the subject-matter of dispute in the suit is a matter coming

within the scope of such agreement, it cannot possibly ask

the Court to order a stay of the proceedings, under section

34 of the Arbitration Act. The learned Judges of the

appellate bench of the High Court have taken the view that

the only matter in dispute between the parties to the suit

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is whether the plaintiff was a party to the contract. It

was definitely alleged by the plaintiff that the contract

was not between it and the appellant but was one between the

appellant and a third party and since the arbitration

agreement is contained in the contract, it is an agreement

between those parties only, which could not bind or affect

the plaintiff in any way. The dispute, it is said, which is

the subject-matter of the suit does not arise under the

contract and does not relate to it; it is outside the

contract altogether and does not come within the scope of

the arbitration agreement. The decision in the appeal

therefore rests entirely on the finding of the learned

Judges that the matter in dispute between the parties to the

suit does not come within the ambit of the arbitration

clause. In view of this decision the learned Judges did not

consider it necessary to go into the first point as to

whether in fact

868

there was a binding arbitration agreement between the

parties to the suit. The learned Chief Justice no doubt did

in a manner consider that point also, but he refrained from

pronouncing any decision upon it, being of opinion that a

decision on this question which was the only issue in the

suit itself might prejudice the parties and create a bar of

res judicata against one or the other.

We think that on the facts of this case it was necessary for

the learned Judges of the appellate bench to decide the

question as to whether or not the plaintiff in the suit

which the applicant wants to stay was a party to the

arbitration agreement. This would have a material bearing

on the decision of the other question upon which the learned

Judges rested their judgments.

The first and essential pre-requisite to making an order of

stay under section 34 of the Arbitration Act is that there

is a binding arbitration agreement between the parties to

the suit which is sought to be stayed. The question whether

the dispute in the suit falls within the arbitration clause

really pre-supposes that there is such agreement and

involves consideration of two matters, viz., (1) what is the

dispute in the suit and (2) what disputes the arbitration

clause covers?(1). The contention raised by the plaintiff

in the present suit is, that the contract was really between

the appellant and another party and not between it and the

appellant and consequently it was not bound by the contract

and could not be made liable for any damages in terms

thereof. In substance therefore the controversy between the

parties in the suit is whether the plaintiff did incur any

liability in terms of the contracts evidenced by the two

Bought Notes to which it was a signatory no matter in

whatever capacity. The question whether the plaintiff was a

party to the agreement at all is undoubtedly one which

cannot go before the arbitrators and with that question they

cannot possibly deal. But as Lord Porter pointed out in

Heyman v. Darwins (2), "this does not mean that in every

instance

(1) Vide per Viscount Simon in Heyman v. Darwins, [1942] A

C. 356 at 360.

(2) [1942] A.C. 356, 393.

869

in which it is claimed that the arbitrator has no juris-

diction the Court will refuse to stay an action. If this

were the case such a claim would always defeat an agreement

to submit disputes to arbitration, at any rate until the

question of jurisdiction had been decided. The Court to

which an application for stay is made is put in possession

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of the facts and arguments and must in such a case make up

its mind whether the arbitrator has jurisdiction or not as

best it can on the evidence before it. Indeed, the

application for stay gives an opportunity for putting these

and other considerations before the court that it may

determine whether the action shall be stayed or not."

Section 34 of the Arbitration Act as is well known is a

virtual reproduction of section 4 of the English Arbitration

Act of 1889. The observations quoted above were approved of

by Mr. Justice S. R. Das in the case of Khusiram V. Hanutmal

(1) and it was held by the learned Judge that where on an

application made under section 34 of the Arbitration Act for

stay of a suit, an issue is raised as to the formation,

existence or validity of the con. tract containing the

arbitration clause, the Court is not bound to refuse a stay

but may in its discretion, on the application for stay,

decide the issue as to the existence or validity of the

arbitration agreement even though it may involve

incidentally a decision as to the validity or existence of

the parent contract.

We are in entire agreement with the view enunciated above.

As we have said already, it is incumbent upon the Court when

invited to stay a suit under section 34 of the Arbitration

Act to decide first of all whether there is a binding

agreement for arbitration between the parties to the suit.

So far as the present case is concerned if it is held that

the arbitration agreement and the contract containing it

were between the parties to the suit, the dispute in the

present suit would be one relating to the rights and

liabilities of the parties on the basis of the contract

itself and would come within the purview of the arbitration

clause worded as it is in the widest of terms, in accordance

with the principle enunciated by this Court in A. M. Nair

and

(1) (1948) 53 C.W.N. 505 at 518.

870

Company v. Gordhandass (1). If on the other hand it is held

that the plaintiff was not a party to the agreement, the

application for stay must necessarily be dismissed.

The appellate Judges of the High Court in our opinion held

rightly that the decision in A. M. Mair and Company v.

Gordhandass (1) was not in any sense conclusive in the

present case on the question of the dispute in the suit

being included in the arbitration agreement. The report

shows that the dispute in that case was whether the

appellants had made the contract in their own right as

principals or on behalf of the Bengal Jute Mill Company as

agents of the latter. The decision -of this question was

held to turn upon a true construction of the contract and

consequently it was a dispute under or arising out of or

concerning the contract. The judgment proceeds on the

footing that there was in fact a contract between the

parties and the only dispute was in which character they

were parties to it, the respondents contending that the

appellants were not bound as principals while the latter

said that they were. Mr. Justice Fazl Ali in delivering the

judgment pointed out that the error into which the learned

Judges of the appellate bench of the High Court appeared to

have fallen was their regarding the dispute raised by the

respondent in respect of the position of the appellants

under the contract as having the same consequence as a

dispute as to the contract never having been entered into.

In this case it is certainly not admitted that the

respondent was a party to the contract. In fact that is the

subject-matter of controversy in the suit itself. But, as

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has been said already, the question having been raised , in

this application, under section 34 of the Arbitration Act,

the Court has undoubted jurisdiction to decide it for the

purpose of finding as to whether or not there is a binding

arbitration agreement between the, parties to the suit. It

has been said by Chakravartti C.J. and in our opinion

rightly, that if the person whose concern with the agreement

is in question is a signatory to,the contract and formally a

(1) [1950] S.C.R. 792.

871

contracting party, that will be sufficient to enable the

Court to hold for purposes of section 34 that he is a party

to the agreement. It was the contention of the respondent

in the Court below that this test was not fulfilled in the

present case. The point has been canvassed before us also

by Mr. Sen and it has been argued on the authority of

several decided cases that in cases of this description the

Bought Note is a mere intimation to the buyer, that the

orders of the latter have been carried out and purchases

have been made from other persons and not from them. The

writer does not thereby become a party to the contract of

purchase and sale even as an agent. He remains a mere

broker or intermediary and the provision of section 230(2)

of the Contract Act 'Cannot be invoked against him. Mr.

Khaitan on the other hand argues that the English law being

quite different from the Indian law regarding the liability

of an agent contracting on behalf of an undisclosed

principal, the English authorities are no guide to a

solution of the problem. It is said that the case of

Patiram Banerjee v. Kanknarrah Co., Ltd.(1), upon which the

respondent relies, was wrongly decided being based upon

English authorities which have no application to India. The

respondent here, it is pointed out, signed an elaborate

document setting out in full every particular of the

contract entered into and it is impossible to say that he

was not an agent executing a contract on behalf of another

whose identity he did not disclose but was a mere

intermediary conveying an information to the buyer. In our

opinion, the point is not free from doubt and requires

careful consideration and as it was not decided by the

learned Judges of the High Court and we have not the

advantage of having their views upon it, the proper course

for us to follow would be to send the case back for a

hearing of and decision on this point. We, therefore, allow

the appeal and set aside the judgments of both the Courts

below. The matter will go back to the appellate bench of

the Calcutta High Court which will decide as an issue in the

proceeding under section 34 of the Arbitration Act the

question whether the respondent was or was not a party

(1) (1915) I.L.R. 42 Cal. I050.

872

to the arbitration agreement. If the Court is of opinion

that the respondent was in fact a party, the suit shall be

stayed and the appellant would be allowed to, proceed by way

of arbitration in accordance with the arbitration clause.

If on the other hand the finding is adverse to the

appellant, the application will be dismissed. The appellant

will have its costs of this appeal. Further costs between

the parties will abide the result.

Appeal allowed.