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Sudhangsu Bhattacharjee v. Ruplekha Pictures .
Factual and Procedural Background
The appellant sued the respondent-firm for recovery of Rs. 40,189-6-3, relying on a statement of accounts annexed to the plaint which, the appellant alleged, had been signed and accepted on behalf of the respondent-firm by one of its partners. The plaint framed the cause of action as a claim based on an account stated and the implied promise to pay arising from that acknowledgment.
The respondent-firm applied under Section 34 of the Indian Arbitration Act to stay further proceedings, contending that the suit was brought "on the basis of the said Distribution Agreement" dated 13-8-1949 and relying on an arbitration clause in that agreement which provided for settlement of "all disputes and differences arising out of this agreement by reference to arbitration." A copy of the agreement and an affidavit (said to have been affirmed by the appellant in connection with an intended summary judgment application but not used) were annexed to the respondent's application. The appellant, by affidavit-in-opposition, denied that the suit was brought on the basis of that agreement and asserted the claim was based on an independent agreement dated 7-10-1950 (the date of the statement of accounts).
In reply, the respondent-firm made a number of allegations including denial that any accounts had been stated in writing between the parties, a challenge to the genuineness of the statement annexed to the plaint, allegations that entries in that statement were false, and that a sum of Rs. 15,000/- shown as paid on account had not in fact been paid (including reference to a cheque said to have been dishonoured). The learned Single Judge, Bachawat J., granted a stay on 27-6-1952 under Section 34, concluding that the items in the statement of accounts arose out of the 13-8-1949 contract and therefore fell within the arbitration clause.
The present appeal challenges that order staying proceedings. The appellant succeeded before the Division Bench: the stay was set aside, the respondent's application under Section 34 was dismissed, costs were awarded to the appellant, and three weeks were granted to the respondent to file its written statement. S. R. Das Gupta, J. concurred with the lead judgment.
Legal Issues Presented
- Whether, for the purposes of Section 34 of the Indian Arbitration Act, the suit as constituted by the plaint is "in respect of any matter agreed to be referred" by the arbitration clause relied upon by the respondent-firm.
- Whether the Court deciding an application under Section 34 may look beyond the plaint (to affidavits and other material placed before the Court) to determine whether the subject-matter falls within the arbitration agreement.
- Whether, where serious allegations are made that impugn the genuineness of documents and charge misconduct or fraud against the plaintiff, the Court should exercise its discretionary power under Section 34 to refuse a stay and allow a public trial instead of referring the matter to arbitration (applying the principle in Russell v. Russell).
Arguments of the Parties
Appellant's Arguments (as presented in the opinion)
- Mr. Lahiri argued that the learned Judge, when adjudicating an application under Section 34, should confine attention to the plaint to ascertain the nature of the suit; the Judge was not entitled to go beyond the plaint and rely on statements made elsewhere (either by respondent or by the plaintiff himself) to determine the subject-matter.
- The appellant contended that the suit was based purely on a statement of accounts (an independent agreement dated 7-10-1950, the date of the statement of accounts) and that by suing on the accounts the appellant had elected to stand or fall by the plaint; therefore the suit could not be said to be "in respect of any matter agreed to be referred" (i.e., arising out of the Distribution Agreement of 13-8-1949).
Respondent's Arguments (as presented in the opinion)
- Mr. Basu argued that the plaint implicitly referred to the 13-8-1949 Distribution Agreement because the statement of accounts bore a heading referring to the film covered by the contract and because the contract required monthly statements of accounts; thus the account stated was, in substance, an account made up in pursuance of the contract and the dispute required construction of the contract.
- The respondent's petition (application for stay) expressly alleged the suit had been brought on the basis of the Distribution Agreement and relied on the arbitration clause in that contract.
- In its affidavit-in-reply the respondent asserted specific factual allegations challenging the genuineness and correctness of the statement of accounts annexed to the plaint (for example, denial that accounts had ever been stated in writing between the parties, challenge to genuineness, and that a sum shown as paid had not in fact been paid).
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Russell v. Russell, (1880) 14 Ch D 471 (A) | The principle that where fraud is charged the Court will generally refuse to send the dispute to arbitration if the party charged with fraud desires a public enquiry; specifically, the Court should not refer a party's character to a private arbitrator against that party's will. | The Division Bench applied this principle to conclude that, because the respondent's affidavit made serious allegations challenging the genuineness of the appellant's statement of accounts and effectively charged the appellant with manufacturing a false document (thereby putting his character in issue), the discretion under Section 34 should be exercised to refuse a stay and allow a public trial instead of arbitration. |
Court's Reasoning and Analysis
The Court first identified the statutory test under Section 34 of the Indian Arbitration Act: when an application for a stay is made, the Court must determine (1) whether the plaintiff in the suit is a party to the arbitration agreement pleaded, (2) whether the person making the application is a party to that agreement, and (3) whether the suit is "in respect of any matter agreed to be referred." The parties' status under the arbitration agreement was not in dispute; the only issue was whether the suit concerned a matter agreed to be referred to arbitration.
The learned Single Judge (Bachawat J.) had held that the items in the statement of accounts arose out of the 13-8-1949 contract (the Distribution Agreement) and that the dispute therefore fell within the arbitration clause. The Single Judge relied upon the appellant's affidavit in which the appellant had stated that the items had been advanced in pursuance of the agreement and concluded that the dispute required construction of the contract.
The Division Bench (Chakravartti C.J., with S. R. Das Gupta, J. concurring) observed that, prima facie, if one confined attention strictly to the plaint the claim appeared to be founded on an account stated and might be enforceable without any reference to the contract. The Court acknowledged the appellant's argument that the Judge deciding a Section 34 application ought not to go beyond the plaint to determine the subject-matter. The Court also acknowledged the respondent's contention that the account related to the contract.
The Division Bench then proceeded to a separate, decisive ground. The respondent, by its affidavit-in-reply, had denied that any accounts had been stated and challenged the genuineness of the statement annexed to the plaint, alleging false entries and that a sum of Rs. 15,000 had been shown as paid though not paid. Those allegations were characterised by the Court as charging the appellant with having manufactured a false statement of accounts and attempting to use it in court — allegations that directly put the appellant's character and reputation in issue.
Applying the long-established principle from Russell v. Russell that where fraud is charged the Court will generally refuse to refer the matter to arbitration if the party charged desires a public inquiry, the Division Bench held that this principle should apply in the present case. The Court emphasized that the jurisdiction under Section 34 is discretionary ("may make an order staying the proceedings"), and that in the circumstances — uncertainty whether the suit was within the arbitration agreement, the substantial monetary claim, and, crucially, the serious allegations impugning the appellant's character — the discretion ought to be exercised against granting a stay.
The Court further noted that Bachawat J. had not addressed this specific aspect (the Russell v. Russell principle) when granting the stay and that consideration of it was crucial to the outcome.
Holding and Implications
Holding (core ruling): The appeal is allowed; the judgment and order of Bachawat J. dated 27-6-1952 are set aside, and the respondent's application under Section 34 of the Indian Arbitration Act is dismissed.
Direct consequences for the parties:
- The stay of proceedings previously ordered by Bachawat J. is vacated and the suit will proceed in the ordinary course before the trial court.
- The appellant is awarded costs here and below.
- The respondent is granted three weeks' time within which to file its written statement.
Broader implications / precedent: The Division Bench applied the established principle from Russell v. Russell concerning fraud allegations and the refusal to compel arbitration where character is put in issue. The opinion did not purport to create a new precedent but applied that existing authority to the facts before it.
Chakravartti, C.J:— This appeal can be disposed of on a short ground. It is an appeal against a judgment and order of Bachawat J. dated 27-6-1952, by which the learned Judge, acting under Section 34 of the Indian Arbitration Act, directed further proceedings in a suit brought by the appellant to be stayed. He did so on the ground that the subject-matter of the suit lay within the ambit of an arbitration clause.
2. In view of the ground upon which we are going to base our decision, it is not necessary to state the facts at any great length. It will suffice to say that the appellant brought a suit for the recovery of a sum of Rs. 40,189-6-3 on the basis of an account stated which he annexed to his plaint. That account, according to him, had been signed and accepted on behalf of the respondent-firm by one of its partners. The plaint proceeded to state that the respondent-firm had failed and neglected to pay the amount or any part thereof in spite of demands and asked for a decree for the amount claimed as also the usual incidental reliefs. It will be noticed that the suit, as laid in the plaint, is a suit based entirely on the acknowledgment of liability contained in the accounts stated and the promise to pay implied therein.
3. It is for a stay of that suit that the respondent-firm made an application under Section 34 of the Indian Arbitration Act. In para. 5 of the application it was stated that a suit had been brought “on the basis of the said Distribution Agreement referred hereinbefore”, and the agreement set up is one dated 13-8-1949, more particularly described in para. 3 of the application. Except stating in general terms that the suit had been brought on the basis of the agreement, the respondent-firm did not disclose what its defence to the claim would be or what dispute it wanted to raise. Reference was, however, made to an arbitration clause contained in the agreement which, so far as is material, provides that the parties have agreed “to settle all disputes and differences arising out of this agreement by reference to arbitration”. To the application for stay a copy of the agreement was annexed.
4. The respondent-firm annexed a further document to its application. That was a copy of an affidavit, said to have been affirmed by the appellant in connection with an intended application for a summary judgment in the suit under Chapter 13A of the Rules of the Original Side, but, in fact, never used. That affidavit contains some reference to a statement of accounts in respect of expenses, advances and charges due to the appellant “from 4-7-1949 to 25-9-1950.” It may be stated here that the statement of accounts annexed to the plaint is also a statement relating to the identical period.
5. In his affidavit-in-opposition, the appellant denied that his suit had been brought on the basis of the agreement and asserted that its basis was an independent agreement, dated 7-10-1950, which is the date of the statement of accounts. In the affidavit-in-reply, affirmed on behalf of the respondent-firm by one or its partners, a great many allegations were made against the appellant of which the following are relevant:
“With reference to para. 3 of the said affidavit, I deny that there was ever any accounts stated in writing between the petitioner and the respondent Sudhangsu Bhattacharyya or that a sum of Rs. 40,189-6-3 was found due thereon. I challenge the genuineness of the statement annexed to the plaint. The entries therein are also false. A sum of Rs. 15,000/- has been shown to have been paid on Studio account but no such payment was made.”
6. It is unnecessary to refer to the further allegations which may be summed up by saying that the respondent-firm characterised the appellant's claim as “wholly false and fictitious” and which included a reference to a cheque for Rs. 15,000/-, said to have been issued by him and said to have been dishonoured.
7. Section 34 of the Indian Arbitration Act requires the Court to see, when an application under the section is made, whether the plaintiff in the suit sought to be stayed is a party to the arbitration agreement pleaded; secondly, whether the person making the application is also a party to the said agreement and, thirdly, whether the suit is “in respect of any matter agreed to be referred”. There is no dispute in the present case that the appellant and the respondent-firm are parties to the arbitration agreement set up by the latter. The only material question, therefore, is whether the appellant's suit was one concerning a matter which had been agreed to be referred to arbitration by the arbitration clause.
8. Bachawat J. answered that question in the affirmative. He read the plaint along with the appellant's affidavit to which I have referred and came to the conclusion that all the items in the statement of accounts arose out of the contract of 13-8-1949. It may be stated here that by the terms of the contract, the plaintiff-appellant undertook to supply to the respondent-firm funds to the extent of Rs. 35,000/- in connection with the production of a film named “Abarta” and he was to be repaid out of the receipts derived from the exploitation of the picture in certain areas contracted for. Bachawat J. held that although the contract was dated 13-8-1949, and the period concerned by the statement of accounts commenced on 4th July preceding, yet there was nothing to show that the expenses included in the accounts had not been paid by the appellant after the conclusion of the agreement.
9. He held that the appellant himself had stated in his affidavit that all the items of money included in the statement of accounts had been advanced in pursuance of the agreement and that being so, the learned Judge concluded that the dispute regarding the appellant's claim must be taken to have had its origin in the agreement. According to him, the statement of accounts did not contain an independent and separate agreement concluded on 7-10-1950. He appears to have taken the view that although the effect of one of the partners of the respondent-firm signing the statement of accounts might be to create an acknowledgment of liability and also a promise to pay, it had still to be seen whether the appellant could claim payment except in the manner provided for in the contract, and that for that reason it would be necessary to construe the contract for the purpose of resolving the dispute between the parties.
10. Accordingly, the learned Judge reached the conclusion that the dispute was one within the ambit of the wide words of the arbitration clause which were “arising out of the contract”.
11. Certain other matters are discussed by the learned Judge in his judgment, but it is not necessary to refer to them, as they were not canvassed before us.
12. On behalf of the appellant it has been argued by Mr. Lahiri that the learned Judge, who was dealing with an application under Section 34 of the Indian Arbitration Act, had only to pay regard to the plaint by which the suit had been commenced and ascertain therefrom the nature of its subject-matter. He was not entitled to travel beyond and to collect either from statements made by the respondent-firm or from statements made by the plaintiff himself elsewhere than in the plaint, what the subject-matter of the suit was. If attention was confined to the plaint, so the argument proceeded, the suit could only be regarded as a suit based on the statement of accounts and to refer to or depend on the contract in no way whatsoever. The contract had not even been mentioned and the appellant had elected to take his chance by suing the respondent-firm on the accounts stated and to stand or fall by his claim, as laid in his plaint. Whether he succeeded or failed, his suit could not be regarded as a suit “in respect of any matter agreed to be referred”.
13. It was contended on the other hand by Mr. Basu that in whatever manner the plaint might have been framed, some reference to the contract was implicit in it, inasmuch as the statement of accounts contained a heading which referred to the film in regard to which a contract had been concluded between the parties. He referred us also to a clause contained in the contract which required the appellant to submit monthly statements of accounts to the respondent-firm and what he obviously intended to argue was that the account stated was nothing else than an account made up in pursuance of that clause in the contract. In any event, Mr. Basu proceeded, his client had raised the question in his petition that the suit had been brought on the basis of the contract and, therefore, a construction of the contract in the suit was inevitable.
14. Had it been necessary to decide between these rival contentions of the parties, I would have to examine this part of the case in greater detail. ‘Prima facie’ at least, it does appear that the suit was based purely on a statement of accounts and no reference to the contract would be necessary for the purpose of either decreeing or dismissing it. If accounts had been stated and if the statement had been signed on behalf of the respondent-firm, there was an acknowledgment of liability and a promise to pay which was sufficient cause of action, without more, for the purpose of supporting the suit. Section 34, the relevant part of which I have already quoted, does not refer to what the defendant says, but speaks only of legal proceedings commenced “in respect of any matter agreed to be referred”. The reference appears to be to the constitution of the legal proceedings as laid in the plaint and if the plaint be the sole material to which attention must be confined, the present suit could in no way be said to involve any construction of or reference to the contract.
15. There is, however, a reference to the film at the top of the statement of accounts and if the plaintiff's affidavit can at all be referred to, a question may arise as to whether a dispute regarding a liability, said to arise from a statement of accounts relating to advances made in pursuance of the agreement, is a dispute arising out of the contract, when the advances were being sought to be recovered by means of a straight claim in a suit instead of by the method for which the contract provided. I do not, however, consider it necessary to deal further with this aspect of the case, because in my opinion a different ground is sufficient for its disposal.
16. I have already referred to the nature of some of the allegations made on behalf of the respondent-firm in its affidavit-in-reply. There, the firm was denying that any accounts had ever been stated in writing between it and the appellant. The clear insinuation in that statement is further emphasised or rather repeated bluntly when the affidavit proceeds to state that the declarant challenges the genuineness of the statement annexed to the plaint. In other words, the affidavit is charging the appellant with having set up and trying to use as genuine a statement of accounts which was not a genuine document at all. The affidavit alleges further that the entries contained in the statement of accounts are false and that the appellant has shown therein a sum of Rs. 15,000/- as paid by him without paying it. Clearly, the affidavit is charging the appellant with having manufactured a false statement of accounts and with trying to use it as a genuine document in a Court of law and further with having made false entries in that account which he was putting forward as true. These allegations clearly put the character of the appellant in issue and put him on his defence against serious charges.
17. The principles which the Court has to follow when it finds such allegations made before it on an application for a stay of a suit were laid down by the great Master of the Rolls, Sir George Jessel, in the case of — ‘Russell v. Russell’, (1880) 14 Ch D 471 (A), and they have never been dissented from. It was observed in that case that where fraud was charged, the Court would in general refuse to send the dispute to arbitration if the party charged with the fraud desired a public enquiry. A distinction was made in respect of the case where the party, charging the fraud, objected to arbitration, but that case may be left on one side as it is not the case here. With regard to the other case, namely, the case of a party charged with fraud objecting to arbitration, Jessel M.R observed as follows:
“Where the party charged with the fraud desires it, I can perfectly understand the Court saying, ‘I will not refer your character against your will to a private arbitrator’. It seems to me in that case it is almost a matter of course to refuse the reference.”
18. To my mind, the principle applied by Sir George Jessel in — ‘Russell v. Russell (A)’ ought to apply in the present case. In the first place, to say the least, it is by no means clear that the suit is one in respect of a matter agreed to be referred. In the second place, there is a fairly substantial sum in, the claim which is in excess of the amount covered by the contract. But the consideration which must overweigh all is that the respondent, by making allegations of a serious character, has put the reputation and the character of the appellant at stake and in such circumstance stances the Court will allow him an opportunity to have his character vindicated at a public trial and not send him to a private tribunal with all the disadvantages incidental thereto. The jurisdiction under Section 34 of the Indian Arbitration Act is only discretionary, because the section only says that the Court “may make an order staying the proceedings”. In my opinion, the present case is one where the discretion should not be exercised in favour of staying the proceedings, but should be exercised in favour of refusing stay.
19. The attention of Bachawat J. does not seem to have been drawn to this aspect of the case and the learned Judge had no occasion to apply his mind to it. In my opinion, this aspect of the case is crucial and the order I have proposed is the only order which the facts would justify.
20. In the result, this appeal is allowed, the judgment and order of Bachawat J. dated 27-6-1952, are set aside and the respondent's application under Section 34 of the Indian Arbitration Act is dismissed.
21. The appellant will have his costs here and below. Mr. Basu asks for three weeks' time within which his client may be allowed to file its written statement. The time prayed for is granted.
S.R Das Gupta, J.:— I agree.
B/D.H.Z
22. Appeal allowed.
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