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Smart Summary

Factual and Procedural Background

This appeal arises from an order of the Additional District Judge, Jammu, which made an order of injunction absolute in a dispute between parties who had entered into an agreement dated May 31, 1973. The respondents filed an application under Section 20 of the Arbitration Act seeking reference of their dispute to arbitration as per the agreement. The appellants opposed the application, contending that the agreement was illegal, procured under undue influence, and that the respondents lacked authority to bind the firm. The Additional District Judge accepted the respondents' contentions, granted an absolute injunction against the appellants, directed them to deposit sale proceeds in court, and allowed inspection of factory accounts by respondents’ inspectors. The appellants challenged this order by way of appeal.

Legal Issues Presented

  1. Whether the arbitration agreement was valid given the parties' status as separate firms and the alleged illegality and undue influence.
  2. Whether the order of injunction passed by the Additional District Judge under the Arbitration Act was appealable.
  3. Whether the principles governing the grant of injunction were properly applied by the court below, including considerations of irreparable loss, balance of convenience, and special equity.

Arguments of the Parties

Appellant's Arguments

  • The arbitration agreement was void because separate firms could not enter into an association as members.
  • The agreement was procured under undue influence and was illegal.
  • The respondents, being only partners of the firm, lacked authority to bind the firm in the association.
  • No case for injunction was made out, as there was no averment of irreparable loss to respondents that could not be compensated monetarily.
  • The balance of convenience did not favor the respondents, and the injunction would effectively shut down the appellants’ business, preventing them from meeting expenses and paying employees.

Respondent's Arguments

  • The appellants entered into the agreement knowingly and enjoyed its benefits; they should not be allowed to repudiate it.
  • The agreement did not create an association but was a mutual business management arrangement among firms.
  • The appellants had benefited from the arrangement and should not be permitted to back out.
  • The appeal was not maintainable because the Additional District Judge’s order was passed under Section 41 of the Arbitration Act, which applies provisions of the Code of Civil Procedure, including Order 39 Rule 1.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
AIR 1963 SC 1497 Interpretation of Section 11 of the Companies Act regarding association of members. Referenced by appellants to argue invalidity of arbitration agreement based on parties’ capacity to associate.
AIR 1937 All 65 (Full Bench) Revision lies against orders which are not appealable under Arbitration Act. Applied to treat the present appeal as a revision petition since the order was not appealable.

Court's Reasoning and Analysis

The court first addressed the maintainability of the appeal, holding that the order of injunction was passed under Section 41(a) of the Arbitration Act, which incorporates provisions of the Code of Civil Procedure, including Order 39 Rule 1. However, under Section 39 of the Arbitration Act, only certain categories of orders are appealable, and the order granting injunction does not fall within any of these categories. Therefore, the appeal was not maintainable as such.

Nevertheless, relying on precedent and Section 115 of the Code of Civil Procedure, the court treated the appeal as a revision petition, as the conditions for revision were met: the order was passed by a subordinate court and no appeal lay against it.

On the merits, the court found that the Additional District Judge erred by ignoring essential principles for granting injunctions. The respondents' application lacked details about irreparable loss or the nature and amount of benefits received under the agreement. There was no allegation that monetary compensation would be inadequate, especially considering the respondents were not persons of substantial means.

Conversely, granting the injunction would halt the appellants’ business, depriving them of profits and earnings. The court emphasized that injunction is an extraordinary remedy granted only when strict criteria are met, which was not the case here. No special equity or balance of convenience favored the respondents.

Furthermore, the agreement provided a formula for damages in case of default, which should have sufficed to deny injunction. The court also allowed for inspection of accounts by a Deputy Registrar assisted by respondents’ representatives, with monthly reporting to the Additional District Judge, as a less injurious alternative.

Holding and Implications

The court allowed the petition and modified the order of injunction passed by the Additional District Judge. Specifically, it set aside the order directing deposit of sale proceeds and the order permitting inspection of the factory by respondents, except inspection by a Deputy Registrar as detailed.

The direct effect is that the injunction as originally granted is lifted, allowing the appellants to continue business operations without the severe restrictions imposed earlier. The respondents retain the right to recover damages as per the agreement’s formula. No broader precedent was established, and no order as to costs was made.

    M/S. Sharma Ice Factory v. M/S. Jewel Ice Factory And Others

    1. This is an appeal against an order of the Additional District Judge, Jammu, making an order of injunction absolute.

    2. The respondents filed an application before the Additional District Judge, Jammu, under Section 20 of the Arbitration Act, on the basis of an agreement between the parties dated May 31, 1973, that in view of certain differences having arisen between the parties the dispute may be referred to the arbitration of Mr. R.C Gupta, as provided for in the agreement itself. This application was resisted by the appellants who submitted that the agreement was illegal and that it was procured under undue influence and that the respondents merely being partners of the firm could not enter into Association on behalf of the firm. The Additional District Judge after hearing the parties accepted the contentions of the respondents and made the order of injunction absolute against the appellants directing them to deposit the entire sale proceeds in court and allowed inspection of the accounts of the factory by the Inspectors to be deputed by the respondents. Hence this appeal to us. Mr. Sharma appearing in support of the appeal has submitted three points before us. In the first place, he has submitted that the arbitration agreement was itself void inasmuch as the parties could not have entered into association as members of separate firms. In support of his argument he has relied on a decision of the Supreme Court reported in AIR 1963 SC 1497, which has interpreted Section 11 of the Companies Act. It was further submitted that no case for issuance of an injunction against the appellant has been made out by the respondents and there is no averment in the application seeking injunction against the Page: 26appellant that the respondents are likely to suffer irreparable loss which could not be compensated in money value. It was also submitted that having regard to the general balance of convenience no special equity was made out in favour of the respondents for granting an injunction. Lastly it was pointed out that the order of injunction would amount to complete closure of the business of the appellant who will not be able to meet the expenses of the factory or disburse the salaries of its employees.

    3. Mr. Kotwal, appearing for the respondents has submitted that the appellants had entered into the agreement with their open eyes and having enjoyed certain benefits now want to resile from the agreement which they should not be permitted to do. He has also submitted that the agreement did not constitute an Association but it was only a common business management pool by which certain firms had entered into mutual agreement to manage their affairs under certain principles. It was also argued that the appellants had reaped benefits from the Association and they should not be allowed to back out from the agreement at this stage. Finally, it was argued that the appeal itself was not maintainable because the Additional District Judge could have passed an order only under Section 41 of the Arbitration Act which applied the provisions of the Code of Civil Procedure and by necessary intendment even provisions of Order 39 Rule 1.

    4. We would first take up the point regarding the maintainability of the appeal. In our opinion the contention is well founded and must prevail. The order of injunction was, undoubtedly, passed by the Additional District Judge in a proceeding under the Arbitration Act which was pending before him. The only power which the Additional District Judge, could have exercised was under Section 41(a) of the Arbitration Act, which runs thus:

    “(a) the provisions of the Code of Civil Procedure (X of 1977) shall apply to all proceedings before the court and to all appeals under this Act.”

    5. Although the injunction was issued on the basis of Order 39, Rule 1, it was done only since this particular provision had been made specifically applicable by virtue of Section 41(a) of the Arbitration Act. It, therefore cannot be doubted for a moment that the order passed by the Additional District Judge was an order under the provisions of the Arbitration Act. This being the position in order to be appealable it must fall within any of the categories laid down by Section 39 of the Arbitration Act. Section 39 of the Arbitration Act runs as follows:—

    “Appealable order: (I) An appeal shall lie from the following orders passed under this Act (and from no others) to the court authorised by law to hear appeals from original decrees of the court passing the order:—

    An order:

    (i) Superseding an arbitration.

    (ii) On an award stated in the form of a special case.

    (iii) Modifying or correcting an award.

    (iv) Filing or refusing to file an arbitration agreement.

    (v) Staying or refusing to stay legal proceedings when there is an arbitration agreement.

    (vi) Setting aside or refusing to set aside an award.”

    6. The order passed by the court below does not fall within any of the categories enumerated by Section 39 of the Arbitration Act. Moreover, the provisions of sub-section (1) of Section 39 of the Arbitration Act, clearly provides that an appeal shall lie from the orders mentioned in the categories and from no others. It is therefore, manifest that an appeal against an order of the court below granting an injunction under Section 41 of the Arbitration Act was not appealable.

    7. Nevertheless, there can be no doubt that this appeal could be treated as revision as prayed for. It has been held by a Full Bench of the Allahabad High Court in AIR 1937 All 65 (FB), that a revision would lie against such an order. Even Section 115 of the CPC is wide enough to include an order of the nature passed by the court below. Section 115 of the CPC runs thus:—

    “The High Court may call for the record of any case which has been decided by any court subordinate to the High Court and in which no appeal lies thereto, and if such subordinate court appears. …………”

    8. This section lays down two conditions for the application of the original jurisdiction of the court:

    (i) that the order must have been passed by a court subordinate to the High Court, and,

    (ii) no appeal lies thereto.

    9. Both these conditions are satisfied in the present case. It is obvious that the court of the Additional District Judge was a court subordinate to the High Court and in view of the provisions of Section 39 of the Arbitration Act, the order impugned was not appealable. We have, therefore, treated this appeal as an application in revision.

    10. It was then contended by Mr. Kotwal, that if this court was to interfere in revision, there must be an error of jurisdiction or of law. We are, however, satisfied in this case that the learned Additional District Judge, has passed an Page: 27order completely ignoring the well settled principles laid down by this court in granting orders of injunction. The application filed by the respondents before the court below did not mention any details at all as to the nature of the irreparable loss likely to be suffered by the respondents if injunction was vacated. Nor is there anything in the application to show the nature and the amount of benefits which the respondents had secured under the agreement. It was also not alleged by the respondents that if injunction was not granted, the respondents would suffer irreparable loss which could not be compensated in money value from the appellants in view of the fact that he was not a man of substantial means. On the other hand, if injunction is granted it will bring the entire business of the appellant to a standstill and deprive him of his reasonable profits and rightful earnings. The learned Judge seems to have completely overlooked the aforesaid considerations which formed the sine qua non for granting an injunction which is not a matter of routine but an extraordinary remedy to be granted only on the principles mentioned above.

    11. Even on the balance of convenience no special equity has been averred much less proved by the respondents. On the other hand, we find that the agreement itself lays down a certain formula or a yardstick to determine damages in case a default is committed by any party to the agreement. This, therefore, should have been sufficient ground for the court below to have refused injunction. If however, injunction is refused this will not interfere with working of the business of the respondents which will continue in full force. If the respondents suffer any damages they can recover it from the appellants. Thus it is manifest that the grant of injunction against the appellants works serious injustice to them. We are, therefore, satisfied that the order of the Additional District Judge is vitiated by a serious and material irregularity in the exercise of his jurisdiction. We however, need not go into further details because Mr. Sharma, learned Counsel for the appellants has agreed that he will have no objection if the Deputy Registrar of this court is deputed to inspect the accounts of the Ice Factory and to determine the sale proceeds from time to time. The Deputy Registrar will be assisted by a representative of the respondents whenever he visits the factory and the representative will be allowed to lay his point of view before the Deputy Registrar. The Deputy Registrar shall submit his monthly reports to the Additional District Judge, Jammu.

    12. For the foregoing reasons the petition is allowed, and the order of injunction passed by the court below is modified to this extent that the order for deposit of sale proceeds is set aside as also the order of inspection of the factory by the respondents, except in the manner as indicated above. The Deputy Registrar shall be paid a sum of Rs. 100/- (One hundred rupees) per visit to be shared in the ratio of 70 (respondents) and 30 (appellants).

    13. We refrain from making any observation on the validity of the agreement in this petition. There will be no order as to costs.

    14. Petition allowed.

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    M/S. Sharma Ice Factory v. M/S. Jewel Ice Factory And Others
    (Apr 12, 1974)