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Ram Baboo Lal v. Harish Chandra Burman And Others

Allahabad High Court
Aug 22, 1973
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Structured Summary of the Court Opinion (Asthana, J.)

Factual and Procedural Background

The defendant-appellant was the lessee of a Cotton Spinning Mill under a registered lease for a fixed term of five years, which undisputedly expired on 28-4-1966. On expiry the defendant did not hand over possession in the same shape and form as when let and continued in possession. The plaintiff-lessor served a notice invoking the arbitration clause in the lease and asked the defendant to appoint an arbitrator; the defendant replied intimating his choice of an arbitrator, but ultimately nothing was referred to arbitration.

The plaintiff instituted a suit seeking eviction of the defendant, delivery of possession in the same shape and form as let out, and recovery of mesne profits (pleaded to exceed a lakh of rupees). After service of summons the defendant filed an application under Section 34 of the Arbitration Act, 1940, seeking a stay of the suit proceedings. The trial court rejected that application principally on the ground that the subject-matter of the suit was not one agreed to be referred to arbitration under the lease. The defendant appealed against that order refusing a stay.

Legal Issues Presented

  1. Whether the dispute raised in the landlord's suit (eviction and recovery of mesne profits after expiry of the lease) is a dispute "arising out of" or "in connection with" the contract of lease such that it falls within the arbitration clause of the lease.
  2. Whether the trial court correctly rejected the defendant's application under Section 34 of the Arbitration Act on account of the absence of a written statement and absence of material showing that the dispute was arbitrable, given that Section 34 requires an application to be made before filing a written statement.
  3. Whether the plaintiff's having given a prior notice to appoint an arbitrator (and the defendant having intimated his choice) prevents the court from refusing a stay of the suit or otherwise estops the plaintiff from opposing the stay.

Arguments of the Parties

Defendant-appellant's Arguments

  • The trial court erred in holding that the dispute did not arise out of the contract of lease and hence in refusing to invoke the arbitration clause.
  • The plaintiff's conduct in serving a notice under the arbitration clause and seeking appointment of an arbitrator showed that the matter should be referred to arbitration.
  • The trial court wrongly relied on the defendant's non-filing of a written statement as a reason to reject the Section 34 application, since Section 34 itself contemplates filing the application before filing the written statement.

Plaintiff's Position (as reflected in the opinion)

  • The plaintiff opposed the defendant's application under Section 34; the trial court concluded the subject-matter of the suit (eviction after expiry of lease and recovery of mesne profits) was not a matter agreed to be referred to arbitration.
  • The plaintiff sued for rights (delivery of possession and mesne profits) which the court treated as arising independently of the lease contract once the lease had expired.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Union of India v. Salween Timber and Construction Co., A.I.R. 1969 S.C. 488 The test for whether a dispute "arises out of the contract" or is "in connection with the contract" is whether recourse to the contract by which both parties are bound is necessary to determine whether a claim or party is justified. If recourse to the contract is necessary, the dispute falls within the arbitration clause. The court applied this test and concluded that the plaintiff's rights to possession on expiry of the lease and to recover mesne profits are rights which arise independently of the lease contract (when expiry is not disputed); consequently, recourse to the lease terms is not necessary to determine those rights and the dispute does not fall within the arbitration clause. The court held the trial court's decision to reject the Section 34 application was consistent with this precedent.

Court's Reasoning and Analysis

The court proceeded through a sequence of legal analysis closely tied to the facts:

  1. Characterisation of the suit's subject-matter: The court identified the suit as an ordinary landlord's suit for possession after the lease expired and for mesne profits. It emphasized that the plaintiff's right to delivery of possession upon expiry arises independently of the contract of lease unless the defendant pleads that the lease had not expired.
  2. Application of the Supreme Court test (Union of India v. Salween Timber): The court quoted and relied upon the stated test—whether recourse to the contract is necessary to decide the dispute. If such recourse is necessary, the arbitration clause applies; if not, the dispute is extraneous to the contract.
  3. Assessment of the arbitration clause and of the particular rights claimed: Although Clause 22 of the lease broadly provided for arbitration of matters "regarding the meaning, interpretation or effect" and "all other matters arising out of or having any bearing on this agreement," the court examined whether the specific rights claimed (possession after expiry and mesne profits) required recourse to the lease terms for their determination. The court concluded they did not: delivery of possession on expiry is not determined by the lease terms when expiry is undisputed; mesne profits are not rent and, while the lease could be referred to as collateral evidence concerning amounts, the existence of the right to mesne profits does not require recourse to lease terms.
  4. Burden on the defendant under Section 34: The court accepted that Section 34 applications must be made before filing a written statement, but held that this procedural rule does not absolve the defendant from the duty of placing material before the court to enable an objective finding that the subject-matter is arbitrable. The trial court's remarks about the absence of a written statement were to be read in context: the defendant had not placed facts or material showing the nature of the dispute his defence would disclose, so the court could not objectively determine arbitrability.
  5. Effect of the parties' conduct (notice to appoint arbitrator): The court held that the plaintiff's having served a notice to appoint an arbitrator (and the defendant's intimating a choice) did not estop the plaintiff or preclude the court from refusing a stay; the circumstance had no material bearing on the decision and could not be used as an estoppel.
  6. Practical considerations and delay: The court observed that even if arbitrators had determined the dispute in favour of the plaintiff, the matter would ultimately return to a court for decree and execution; referring the matter to arbitration at that stage would only further delay an already old matter. This practical consequence supported refusal to stay proceedings.

Holding and Implications

Holding: The appeal is dismissed and the trial court's order refusing to stay the suit under Section 34 of the Arbitration Act is affirmed. The court dismissed the appeal with costs and upheld the rejection of the defendant's application for a stay.

Implications:

  • The direct effect is that the defendant's application for a stay under Section 34 was rightly refused and the landlord's suit for eviction and mesne profits proceeds in the court, rather than being referred to arbitration.
  • The court treated the rights claimed (possession on expiry of the lease and mesne profits) as not requiring recourse to the lease for their determination in the circumstances of this case; hence those matters were deemed extraneous to the arbitration clause.
  • The opinion indicates it is consistent with existing Supreme Court law (Union of India v. Salween Timber), and the court did not purport to announce any novel legal principle or wider precedent beyond applying that test to the facts; accordingly no new precedent was asserted by this decision beyond the application to the facts at hand.

Disposition recorded in the opinion: "Appeal dismissed." (The appeal was dismissed with costs.)

Show all summary ...

Asthana, J.:— The defendant-appellant was lessee of a Cotton Spinning Mill. The lease was reduced into a registered document and its term was five years. There is no dispute that the term of the lease expired on 28-4-1966. The defendant did not hand over possession of the mills in the same shape and form as was given to him on the expiry of the lease and continued to remain in possession. The plaintiff, who was the lessor, is said to have served upon the defendant the lesses, a notice invoking the arbitration clause in the deed of lease and asking the defendant to appoint his arbitrator. It is said that the defendant replied to the notice intimating his choice of an arbitrator. It transpired that nothing was referred to the arbitrators. The plaintiff then commenced a suit for eviction of the defendant from the mills premises, for the possession thereof in the same Shape and form as it was let out, and for recovery of mesne profits amounting to over a lakh of rupees. Then the summons of the suit was served upon the defendant who filed an application under Sec. 34 of the Arbitration Act 1940 praying for the stay of proceedings of the suit. This application was opposed by the plaintiff. The learned judge trying the suit rejected the application of the defendant for stay of proceedings mainly on the ground that the subject-matter of the suit was not such as was agreed upon to be referred to arbitration under the arbitration clause of the lease deed. The defendant has now come up in appeal from this order of rejection of his application for stay of proceedings in the suit under Sec. 34 of the Arbitration Act.

2. We have heard Sri Ashok Gupta for the defendant-appellant. Learned counsel urged that the court below was in error in holding that the subject-matter of dispute involved in the suit did not arise out of the contract of lease and that it was not otherwise a case in which the defendant was entitled to invoke the arbitration clause. The learned counsel further suggested that the conduct of the plaintiff showed that the arbitration clause should be invoked as he served upon the defendant notice for nominating an arbitrator and referring the dispute to arbitration under the arbitration clause in the contract of lease. It was also emphatically urged by the learned counsel that the/court below fell into a grave error in observing that the defendant not having filed his written statement it could not be known as to what dispute actually he was raising in the suit, therefore the court was not in a position to judge the validity of the claim made by the defendant for stay of proceedings under Sec. 34 of the Arbitration Act. It was submitted that as Sec. 34 of the Arbitration Act itself provides that the defendant has to make an application under that section before filing a written statement, therefore, non-filing of the written statement could not be used as a ground for rejecting the defendant's application for stay of proceedings. We have given our due consideration to the submissions of learned counsel for defendant-appellant and we find that no case has been made out for interfering with the order by the court below. The suit which was instituted by the plaintiff is an ordinary suit filed by a landlord against the tenant after the expiry of the lease, and for recovery of mesne profits. The right of the plaintiff for delivery of possession of the demised premises arises independently of the contract of lease. So any dispute with regard to that right cannot be said to arise out of the contract of lease unless the defendant pleaded that the lease had not expired and the suit was premature. Likewise the right to recovery mesne profits will not arise out of the contract of lease as it is an independant right which accrues to the plaintiff on account of illegal or wrong retention of possession of the mills. The suit is not for recovery of rent. We think that the defendant was under a duty to place before the court all the grounds on which be wanted the invocation of Sec. 34 of the Arbitration Act, and to establish that the subject-matter of dispute arising in the suit was one which was agreed upon to be referred to arbitration. We think that it is in that context that the observations of the learned judge of the court below in regard to the non-filing of the written statement of the defendant are to be read What the court below meant was that the defendant had not placed any facts or information before the court as to the nature of the dispute which his defence would disclose against the plaintiff's claim for eviction and recovery of mesne profits. The defendant not having done so, he is to be blamed for it. Even before us the learned counsel for the defendant-appellant was not able to disclose as to what the real nature of the dispute would be on the pleadings of the defendant. Certainly the law requires that an application under Sec. 34 of the Arbitration Act has to be filed before the defendant files his written statement, but that does not absolve the defendant from his duty to bring material before the court to enable it to record an objective finding on the question whether the subject-matter of dispute before it was one which was agreed upon under the contract to be referred to arbitration. There being complete absence of any such material before the court it was certainly justified in throwing out the defendant on that score. We have already observed above that the subject-matter of dispute which arises in the suit is wholly extraneous to the contract of lease which expired on 28-4-66.

3. Sri Ashoke Gupta referred us to certain observations made by the learned Judges of the Supreme Court in the case of Union of India v. Salween Timber and Construction Co. A.I.R 1969 S.C 488..

4. The learned Judges in that case observed that—

“The test for determining whether a dispute is one ‘arising out of the contract’ or ‘in connection with the contract’ is whether recourse to the contract by which both the parties are bound is necessary for the purpose of determining whether the claim or the party is justified or otherwise. If it is necessary to take recourse to the terms of the contract for the purpose of deciding the matter in dispute, it must be held that the matter is within the scope of the arbitration clause and the arbitrators have jurisdiction to decide that dispute.”

5. Clause 22 of the contract of lease in the instant case shows that—

“all proceedings regarding the meaning, interpretation or effect of the various terms and conditions contained herein and all other matters arising out of or having any hearing on this agreement, shall be settled by means of arbitration.”

6. It was strenuously urged by the learned counsel for the defendant-appellant that the arbitration clause in the instant case quoted above is wide enough to cover the dispute which will arise in the suit, as the right for eviction, and recovery of mesne profits would have a bearing on the terms of the contract of lease and recourse will have to be taken to the terms of the contract for the purpose of deciding the matter in dispute. We fail to appreciate this line of argument. The right to evict the defendant and obtaining possession of the mill from him is not based on the contract of lease and by no stretch of imagination it can be said that recourse will have to be taken to the terms of the contract for-determining whether the plaintiff has that right when it is not disputed that the lease expired on 28-4-66, and the defendant had not exercised his option for further renewal of the lease in accordance with the terms of the contract of lease.

7. Coming to the claim of the plaintiff for recovery of mesne profits at the rates pleaded by him in the plaint, it will appear that under the law the mesne profits do not represent rent. So the suit is not for recovery of rent. It may be that to claim mesne profits pleaded in the plaint the plaintiff may refer to the lease for showing the intention on the part of the parties that after five years if the defendant retained possession he will have to pay a certain amount every month. Likewise, the defendant may refer to other clauses in the contract of lease to show that the intention on the part of the parties was to claim a lesser amount. But for the determination of the right of the plaintiff to recover mesne profit the terms of the lease will have no bearing. At best, the document of lease may be referred to by the parties as collateral evidence for determination of the figure or the amount. When it is said by the Supreme Court in the case cited that in deciding the dispute recourse has to be taken to the terms of the lease, or when it is said that in deciding, the dispute the lease will have a bearing, it always means that when recourse has to be taken for determining a right which is in dispute, or without referring to the lease that right cannot be determined, then alone it can be said that the arbitration clause in the lease will come into play. Here we find that no right claimed, by the plaintiff in the suit, that is, for delivery of possession on the expiry of the lease and for the recovery of mesne profits, requires any reference to the terms of the lease for its determination by the court. In rejecting the application of the defendant under Sec. 34 of the Arbitration Act the court below has not in-any way gone against the law laid down by the Supreme Court in the case Union of India v. Salween Timber Co.. We think that the decision of the court below is in accordance with the law laid down by the Supreme Court.

8. We agree with the court below that the mere fact of the plaintiff having given notice to the defendant for appointment of an arbitrator in accordance with the arbitration clause would not militate against the decision of the court refusing to stay proceedings in the suit in exercise of its jurisdiction under Sec. 34 of the Arbitration Act. It was conceded by Sri Gupta for the defendant-appellant that the said fact cannot be used as estoppel in the case. This circumstance has no material bearing.

9. We also do not otherwise think that it was a fit case which ought to have been stayed under Sec. 34 of the Arbitration Act. Assuming that, the arbitrator had arbitrated upon the dispute, he would have certainly declared the plaintiff entitled to delivery of possession and also for recovery of some amount of mesne profits. The matter would have again come before the court for passing of a decree which could be executed by a court of law. Since the matter has become sufficiently old and a reference to arbitration if at all in, law the matter could be referred, would further delay the matter.

10. In this view also the rejection of the application of the defendant will be amply justified.

11. For the reasons given above we dismiss this appeal with costs.

12. Appeal dismissed.