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Citation Codes
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Case Number
Advocates
  • S.Shamsul Hassan
  • Narbadesawar Prasad Singh
  • Madan Prasad Singh
  • J.C.Sinha
Judges
  • S.N.P Singh, C.J
  • S.K Jha, J.
Acts
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Citation Codes
Equivalent Citations
citation codes
Case Number
Advocates
  • S.Shamsul Hassan
  • Narbadesawar Prasad Singh
  • Madan Prasad Singh
  • J.C.Sinha
Judges
  • S.N.P Singh, C.J
  • S.K Jha, J.
Acts
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Smart Summary

Judgment Summary — S.K. Jha, J. (with concurrence of C.J. S.N.P. Singh)

Factual and Procedural Background

This appeal arises from Money Suit No. 11 of 1969 pending in the Court of the 3rd Additional Subordinate Judge, Motihari. The defendant in that suit is the appellant before this Court under Section 39(1)(v) of the Arbitration Act, 1940. The plaintiff in the suit and respondent in the appeal is the State of Bihar, which sued for recovery of Rs. 7,34,500 (as explained in paragraph 19 of the plaint).

When the suit notice was served, the appellant applied to the trial court for a stay of proceedings both under Section 151 of the Code of Civil Procedure and under Section 34 of the Arbitration Act. By an order dated 18 November 1971 the learned Additional Subordinate Judge refused the stay: he held the Section 151 application not maintainable and declined to grant a stay under Section 34. The appellant did not challenge the finding on Section 151 and confined the present appeal to the refusal of stay under Section 34.

The appellant asserted the existence of an arbitration agreement arising out of a contract for excavation of the Main Western canal in Nepal. He alleged appointment procedures (one arbitrator by the Department, one by the appellant, Umpire to be a retired Judge of the Patna High Court) and that he had appointed Sri R.L. Raju as arbitrator and, after the respondent failed to nominate, constituted R.L. Raju as sole arbitrator (presumably under Section 9 of the Act). The respondent had earlier filed a petition under Section 33 of the Act (on 13 January 1968) in the Court of the 1st Subordinate Judge, Patna (registered as M.J.C. No. 6 of 1968) challenging that appointment and asserting that no agreement was duly executed in accordance with Article 299 of the Constitution, i.e., there was no agreement in law. While that miscellaneous judicial case remained pending, the respondent instituted the present recovery suit.

Legal Issues Presented

  1. Whether the learned Additional Subordinate Judge erred in refusing to stay the suit proceedings under Section 34 of the Arbitration Act, 1940.
  2. Whether, on the material before the trial court, the appellant had established the existence of an arbitration agreement or a contract containing an arbitration clause as required by Section 2(a) of the Act (i.e., whether the contract/submission in writing had been proved prima facie).
  3. Whether the trial court was correct in treating the matter as one where, because the existence of the basic contract was in dispute (pending M.J.C. No. 6 of 1968), it should normally refuse a stay under the summary procedure of Section 34.
  4. Whether a written arbitration agreement is always required before a court can exercise power under Section 34 (challenged by the appellant as a point of law raised against the trial court's reasoning).

Arguments of the Parties

Appellant's Arguments

  • There existed a valid arbitration agreement covering disputes arising out of the excavation contract for the Main Western canal in Nepal; the arbitration mechanism was agreed (Department-appointed arbitrator, appellant-appointed arbitrator, Umpire to be a retired Patna High Court Judge).
  • After a dispute arose (appellant claimed approx. Rs. 15,28,520), the appellant appointed Sri R.L. Raju as arbitrator and invited the respondent to nominate its arbitrator; when the respondent failed to nominate, the appellant constituted R.L. Raju as sole arbitrator (presumably under Section 9 of the Act).
  • The trial court erred in proceeding on the assumption that a written arbitration agreement must be produced before the power under Section 34 could be invoked; an arbitration agreement may in appropriate circumstances be established from correspondence or other materials and need not always be a single written instrument in a particular form.

Respondent's Arguments

  • The respondent asserted in M.J.C. No. 6 of 1968 that there was no agreement duly executed by the parties in accordance with Article 299 of the Constitution; accordingly, there was no agreement in law and no arbitration agreement to enforce.
  • The respondent challenged the validity of the appointment of Sri R.L. Raju as arbitrator by filing a petition under Section 33 of the Act in the Patna Court, keeping the question of arbitrability and existence of a valid arbitration agreement before that court.

Table of Precedents Cited

No precedents were cited in the provided opinion.

Court's Reasoning and Analysis

The Court examined whether the trial court had acted upon any erroneous legal principle or misapplied the law in refusing the stay under Section 34. The appellant's principal contention was that the trial court wrongly required a written arbitration agreement. The Court considered that submission in context.

Key points of the Court's analysis:

  • The Court acknowledged the general legal proposition that an arbitration agreement need not always be contained in a single formal instrument and may sometimes be inferred from correspondence or other materials; in other words, an agreement to refer disputes to arbitration can be culled from the conduct or communications of the parties.
  • However, in this case the appellant's primary reliance was on the alleged construction contract which purportedly contained the arbitration clause. That contract itself was the subject-matter of dispute in M.J.C. No. 6 of 1968 (pending in Patna), where the respondent denied the existence of any valid agreement under Article 299.
  • The appellant had not produced evidence "worth the name" before the trial court to show even a prima facie legally binding contract or an arbitration agreement as defined in Section 2(a) of the Act. The appellant conceded the contract was not in the required F-2 form nor signed by the parties as required by law, and did not point to any separate written submission in respect of arbitration beyond the contract itself.
  • As the Act requires a submission in writing, the party seeking a stay must establish that the contract or submission in writing exists. If the existence of the contract itself is disputed, arbitrators cannot decide that preliminary point in the normal course, and therefore courts will ordinarily refuse a stay under Section 34 because Section 34 provides a summary remedy and is not suited to prolonged factual inquiries.
  • The Court also discussed the related principle that where a contract has been totally repudiated by one party the arbitration clause may nevertheless survive for the purpose of measuring claims arising out of the breach, depending on whether the contract was put out of existence by something outside itself or by something arising out of the contract; but this principle did not alter the result here because, if the plaintiff's averments are ultimately found true, there would be no contract in law and hence no arbitration clause to enforce.
  • On the material before the appellate Bench and on perusal of the trial court's order, the Court found no basis to say the trial judge's discretion was exercised perversely or without judicial reason; the refusal to grant a stay was within judicial discretion on the facts and materials before him.

Holding and Implications

APPEAL DISMISSED.

Direct consequences and immediate effects:

  • The appellate court upheld the trial court's refusal to stay the suit under Section 34 of the Arbitration Act, 1940.
  • There shall be no order as to costs.
  • The appellant remains subject to the trial court's proceedings in Money Suit No. 11 of 1969 — the suit is not stayed by reason of the appellant's unproven claim to an arbitration agreement on the material then before the court.

Broader implications:

  • The judgment reiterates that a party seeking a stay under Section 34 must, at least on the prima facie materials, establish the existence of a submission in writing (as defined by the Act); where the existence of the underlying contract itself is disputed and is the subject of separate proceedings, the court will normally refuse a stay because Section 34 is a summary remedy not intended for protracted enquiry.
  • The opinion does not purport to lay down a new precedent beyond applying these established principles to the facts; no new legal rule was announced and the Court expressly declined to decide finally whether a valid arbitration agreement in fact existed between the parties.

Other Observations

The Court observed that M.J.C. No. 6 of 1968 (challenging the arbitrator's appointment) had been pending for some time and remarked that it required speedy disposal; however, the Court declined to give any direction to the Patna Court in that regard and noted that the appellant could take appropriate steps before the appropriate court to expedite that separate proceeding.

Show full summary ...

    M.S Ramaiah v. The State Of Bihar .

    S.K Jha, J.:— The defendant of Money suit No. 11 of 1969 pending in the Court of the 3rd Additional Subordinate Judge, Motihari, is the appellant under Section 39(1)(v) of the Arbitration Act, 1940 (hereinafter to be referred to as “the Act”.) The appeal is directed against an order passed by the learned Additional Subordinate Judge on the 18th of November, 1971, rejecting the prayer of the appellant for staying further proceedings in the suit either under Section 151 of the Code of Civil Procedure or under Section 34 of the Act.

    2. Shorn of all details the short facts relevant for the disposal of this appeal are that the State of Bihar, which is the plaintiff in the suit and respondent here, instituted the aforesaid money suit for recovery of a sum of Rs. 7,34,500/- from the appellant which has been explained by the respondent in paragraph 19 of the plaint. We are not concerned with the merits of the claim. When notice of the suit was served on the appellant, he filed an application before the learned Additional Subordinate Judge for staying further proceedings in the suit both under the provisions of Section 151 of the Code and Section 34 of the Act. The ground on which stay was prayed for was that, according to the appellant, there was an arbitration agreement between the parties to the suit which would cover the amount in dispute arising out of a contract. The learned Additional Subordinate Judge having given detailed reasons held that the application under Section 151 of the Code was not maintainable, and, that if at all stay could be granted, it would be under the provisions of Section 34 of the Act. Learned counsel for the appellant did not, and rightly so, challenge the legality of that part of the impugned order by which Section 151 of the Code was held to be inapplicable. As a matter of fact, no civil revision has been filed at all against that part of the order. We are, therefore, not concerned in this appeal with regard to the decision of the court below regarding the maintainability of the application under Section 151 of the Code. Learned counsel for the appellant rightly confined his submissions to the first part of the order by which the court below has refused to stay the proceedings of the suit under Section 34 of the Act.

    3. The appellant's case is that there was an arbitration agreement between the parties in respect of disputes regarding the contract for excavation of Main Western canal in Nepal to the effect that in case of any dispute the same shall be settled through arbitration under the provisions of the Act. The further case of the appellant is that one of the terms settled by negotiations and agreed to between the parties was that in case of dispute between the contractor appellant and the concerned Department of the State Government, the same shall be settled by arbitration for which purpose an arbitrator shall be appointed by the Department and another arbitrator by the appellant and an Umpire was to be appointed by the two arbitrators, as chosen in the manner above, and such an Umpire shall be a retired Judge of the Patna High Court. The appellant's further case is that a dispute arose in respect of the work done by the appellant under the aforesaid contract and he claimed a sum of Rs. 15,28,520/- and odd from the respondent. Having raised such a dispute, the appellant on his part appointed one Sri R.L Raju, a retired Chief Engineer of Mysore State, as an arbitrator and called upon the respondent under a letter dated the 2nd of September, 1967, to nominate its arbitrator. When in spite of repeated reminders the respondent omitted and neglected to nominate an arbitrator on its part, the appellant was constrained to constitute the above-mentioned Sri R.L Raju as the sole arbitrator, presumably under the provisions of Section 9 of the Act. The admitted case of the parties is that the respondent has already filed a case under Section 33 of the Act on the 13th January, 1968, in the Court of the 1st Subordinate Judge, Patna, challenging the appointment of Shri R.L Raju as an arbitrator and that case has been registered as M.J.C No. 6 of 1968, which is still pending for disposal. In that case the respondent has asserted that there was no agreement duly executed by the parties in accordance with the provisions of Article 299 of the Constitution of India. There was, therefore, according to the respondent, no agreement in the eye of law at all. That is the subject matter of dispute between the parties in the aforesaid miscellaneous judicial case pending in the Patna Court. While that case is taking its own course, the respondent has instituted the present suit for recovery of its alleged dues against the appellant. On these facts, the appellant asserted before the court below that since there was a valid and binding arbitration agreement between the parties, there was no reason why the court below should not order stay of the proceedings in the suit.

    4. The main reason why the court below has refused the prayer of stay is that no arbitration agreement between the parties had been proved.

    5. Mr. J.C Sinha, learned counsel for the appellant, while attacking the impugned order, laid great stress on the fact that the court below has approached the matter from a completely erroneous view of law inasmuch as it has proceeded upon the assumption that there must be a written arbitration agreement before the power of the Court under Section 34 of the Act can be invoked. In this connection learned counsel drew our attention to the following portion of the judgment of the learned Additional Subordinate Judge.

    “The defendant has not filed any written arbitration agreement nor has he mentioned anywhere in his petition that he has got a written arbitration agreement. He has simply made out a case that there is an arbitration agreement between him and the plaintiff. He has further mentioned that the matter regarding the existence of such an agreement is pending in M.J.C No. 6 of 1968 in the Court of Sub-Judge Patna.”

    6. It was contended on behalf of the appellant that the court below has been under a wrong impression of the legal provisions in thinking that there must be an arbitration agreement in writing. Shorn of its context, the observation quoted above may have been subject to such an attack. But reading the order as a whole, I am not in a position to hold that the order suffers from any infirmity in law. The case of the defendant appellant, as already stated above, has been that there was a contract for certain construction work, of which contract the arbitration clause was but a part. What the court below has said is that the existence of that socalled contract is itself the subject matter of dispute in M.J.C No. 6 of 1968. But that apart, no evidence worth the name has been adduced by the appellant before the court below to show, even prima facie, that there was any legally binding or enforceable contract of which the arbitration clause may have been a part. It was never the case of the appellant that apart from the contract of construction work there was any other contract embodying the arbitration clause which could be treated as an arbitration agreement within the meaning of Section 2(a) of the Act. It is true, as submitted by Mr. Sinha, that it is not necessary in all cases to show that there is an arbitration agreement in writing as such. An agreement to refer a certain dispute to arbitration may very well be culled out from the pieces of correspondence between the parties. But that is not the case here. The sheet anchor of the case of the appellant was the deed of contract itself, which according to him, also incorporated an arbitration clause. Learned counsel for the appellant fairly stated that so far as that contract was concerned, that was certainly not in F-2 Form as is required by law nor has any of the parties signed any such agreement. It is in that context that the observation quoted above extracted from the impugned order has to be judged, and, so judged on the facts of the instant case, the criticism levelled against that portion of the order is not warranted. I must hasten to add that I may not be misunderstood as expressing any opinion one way or the other as to whether there is or is not any valid and binding contract between the parties and again whether there is or is not a valid and binding arbitration agreement. What I am emphasising is merely this—the appellant had failed to satisfy the court below, as he has failed to satisfy as, that there was any arbitration agreement as defined in Section 2(a) of the Act. As the Act requires a submission in writing, the fact that a contract or submission in writing exists, is to be established by the person who applies for stay. On the assumption that a contract which contains a submission in writing exists, an application for stay may be made, because on that assumption the arbitrators have jurisdiction. If, however, the fact of contract itself is disputed, the arbitrators cannot decide that point and the court in normal course would refuse stay. The reason is obvious. The provisions of Section 34 of the Act are in the nature of a summary procedure and do not normally include any lengthy or protracted enquiry. Another principle of law, which is well settled in deciding the scope of Section 34 of the Act, is this. Where there has been a total breach of Contract by one party so as to relieve the other of obligations under it, an arbitration clause, if its terms are wide enough, still remains even though the injured party has accepted the repudiation. The reason is obvious. The contract was not put out of existence though all future performance of the obligations undertaken by each party in favour of the other might cease. The contract, in such cases, survives for the purpose of measuring the claims arising out of the breach and either party may rely on the arbitration clause. But the real test always is as to whether there has been a determination of the contract by something outside itself in which case the arbitration clause is determined with it, or by something arising out of the contract, in which case the arbitration clause remains effective and can be enforced. In the present case if the averments made by the plaintiff be ultimately found to be true, there would be no contract in the eye of law and as such no agreement or arbitration clause to survive as a part of such a contract.

    7. On the materials produced before us and on a perusal of the order passed by the court below, I am constrained to hold that this is not one of those cases where it can be said that the discretion in refusing to stay the proceedings has been exercised not in a judicial manner. There is thus no scope of any interference with the order impugned.

    8. The appeal, therefore, must fail and is accordingly dismissed. But in the circumstances, there shall be no order as to costs.

    9. I may, however, observe that learned counsel for the appellant seems to be justified in having made a grievance that M.J.C No. 6 of 1968 pending disposal in the court of the learned Subordinate Judge at Patna has now lingered for quite sometime and requires speedy disposal. But that again is a matter in which the appellant himself can take such suitable steps before the appropriate court to have the matter decided as expeditiously as possible. I am not in a position to give any direction to that court in this regard in the instant case.

    10. S.N.P Singh, C.J:— I agree.

    Appeal dismissed.

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    Comments

    M.S Ramaiah v. The State Of Bihar .
    (Mar 25, 1976)