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  • section 4 of the English Arbitration Act, 1889,
  • section 19 of the Indian Arbitration Act.
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Cites
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Citation Codes
Equivalent Citations
citation codes
Case Number
Judges
Acts
  • section 4 of the English Arbitration Act, 1889,
  • section 19 of the Indian Arbitration Act.
Smart Summary

Factual and Procedural Background

On 14 August 1918 the appellant (seller) contracted to sell the respondent (buyer) 150,000 yards of hessian cloth to be delivered in three instalments in January, February and March 1919. The contract was not performed; the seller alleged default by the buyer, and the buyer alleged default by the seller. The contract contained an arbitration clause providing that any dispute arising out of the contract should be referred to arbitration under the Rules of the Bengal Chamber of Commerce and that an award could be made a rule of the High Court.

The seller referred the dispute to the Bengal Chamber of Commerce on 24 April 1919 and submitted a detailed account; the buyer replied and exchanges continued, the seller submitting his final reply on 17 July 1919. The buyer instituted a suit in this Court (Original Side) on 14 August 1919 for recovery of damages alleging seller's default. The seller received intimation of the suit on 24 August 1919 and was served on 26 September 1919. The arbitration tribunal made an award on 16 October 1919 in favour of the seller.

On 17 November 1919 the buyer applied to set aside the award on the ground that, by reason of the institution of the suit, the arbitrators were functus officio and the award void for want of jurisdiction. Mr. Justice Ghose set aside the award on 28 November 1919. The seller then applied for a stay of the suit under section 19 of the Indian Arbitration Act on 1 December 1919. Mr. Justice Greaves dismissed that application on 11 December 1919. The present appeal challenges the propriety of that dismissal.

Legal Issues Presented

  1. Whether the dismissal by Mr. Justice Greaves of the seller's application for a stay of the suit under section 19 of the Indian Arbitration Act was appropriate.
  2. Whether the institution of the suit on 14 August 1919 rendered the arbitrators functus officio and thereby voided the arbitration proceedings or the award.
  3. If the award has been set aside, whether the arbitration proceedings (or a fresh arbitration) can be legally revived and carried on to a valid award if the suit is stayed.
  4. Whether the discretionary power vested in the Court by section 19 should be exercised in favour of granting a stay in the circumstances of this case.

Arguments of the Parties

Appellant's (Seller's) Arguments

  • The seller contends that the breach of the contract was due to default on the part of the buyer.
  • The seller applied to the Bengal Chamber of Commerce under the arbitration clause and submitted his case; after the award was set aside the seller applied for a stay under section 19 so that arbitration could proceed.
  • The appellant explained the timing of the stay application by saying that the law as expounded in Dinabandhu v. Durga Prasad was not then clearly appreciated and that the writ was served during a long vacation making it difficult to obtain an order before the award was made.
  • The appellant also relied on the respondent's conduct: the respondent had full notice of the arbitration proceedings, actively participated for months, and then suddenly instituted the suit; the respondent offered no satisfactory explanation for that conduct.

Respondent's (Buyer's) Arguments

  • The buyer contends that the breach was due to the seller's default.
  • The respondent argued that by instituting the suit the arbitrators were functus officio and therefore the arbitration award was void for want of jurisdiction.
  • The respondent advanced an objection whether, if the suit were stayed, the arbitration proceedings could be legally revived and carried on so as to terminate in a valid award.
  • The respondent also submitted that the application for stay should have been made earlier — immediately after service of the writ or soon after notice of the suit.
  • It was further urged (in broader submissions) that a Court of Appeal should not readily interfere with the decision of the primary Court on such a question.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Doleman & Sons v. Ossett Corporation Principle that where two competent tribunals (Court and arbitrators) are available, the Court may in its discretion stay the suit and leave the plaintiff to arbitration; institution of suit renders arbitrators functus officio from that moment. Characterised as of fundamental importance and applied to hold that institution of suit did not retrospectively invalidate arbitration proceedings conducted before the suit; cited to explain functus officio effect.
Dinabandhu Jana v. Durga Prasad Jana Application of the Doleman principle under paragraph 18 of the second schedule of the Civil Procedure Code (i.e., the domestic application of the same approach). Held to support the Court's approach and noted as followed by this Court; relied on to show established local authority for staying suits in favour of arbitration.
Willesford v. Watson Observation that if parties choose a domestic forum (arbitration) the courts have a primâ facie duty to act on that agreement. Cited to support the proposition that the primâ facie duty of the Court is to give effect to agreements to refer disputes to arbitration.
Law v. Garrett; Lyon v. Johnson; Clegg v. Clegg Adoption/approval of the position that parties' agreement to arbitrate should be given effect. These authorities are cited to reinforce the primâ facie duty to stay actions where contractually referred to arbitration.
Kitchen v. Turnbull Lord Hatherly L.C.'s statement that an agreement to refer is binding and ought not lightly be overturned. Used to underline that agreements to refer should be respected and are a strong factor in favour of staying proceedings.
Freeman v. Chester Rural District Council; Vawdrey v. Simpson; Barnes v. Youngs Authorities supporting the proposition that a Court of Appeal should not readily interfere with a primary Court's decision on such matters. Cited to acknowledge the principle of appellate restraint while also recognising that erroneous exercise of discretion is correctible on appeal.
Mason v. Haddan; Hodgson v. Railway Passengers' Assurance Company; Fox v. Railway Passengers' Assurance Company; Denton v. Legge; Vawdrey v. Simpson; Doleman v. Ossett Corporation; Clough v. County Livestock Insurance Association Authorities establishing that the burden lies on the party opposing the stay to show why the agreement to submit should not be given effect. Cited to support the allocation of burden to the respondent to show sufficient reason to refuse a stay; relied upon in concluding the respondent had not met that burden.

Court's Reasoning and Analysis

The Court proceeded by applying the established principle (derived from Doleman and followed in Dinabandhu Jana) that where parties have agreed to arbitrate and one party nevertheless institutes a court action, the Court has a discretion under section 19 to stay the suit and leave the plaintiff to arbitration, provided the arbitration remedy is actually available.

The Court analysed the chronology and legal effects as follows:

  • There was a valid reference to arbitration on 24 April 1919 and arbitration proceedings were properly instituted and carried on until the plaintiff (buyer) instituted the suit on 14 August 1919.
  • Following the authority in Doleman, the institution of the suit had the immediate legal effect of rendering the arbitrators functus officio (their authority to proceed was extinguished) from the moment the suit was instituted; however, that effect did not retrospectively invalidate the arbitration proceedings which had properly taken place prior to 14 August 1919.
  • The Court considered whether arbitration could be revived and concluded that Rule VIII of the Bengal Chamber of Commerce's Rules permitted substitution and appointment of new arbitrators where arbitrators became incapable of acting; the Court held that the arbitrators had “become incapable of acting” when the suit was instituted and therefore Rule VIII empowered the Registrar to reconstitute the tribunal and proceed either on the existing record or de novo.
  • On the respondent's objections: the Court found no evidence of bias or impropriety by the arbitrators, no assertion that the matters were exclusively questions of law for the Court, and answered the legal doubt about revival by applying Rule VIII to permit a valid continuation of arbitration if the suit were stayed.
  • The Court emphasised the allocation of burden: the respondent opposing the stay must show sufficient reason why the agreement to arbitrate should not be enforced. The respondent failed to discharge that burden—he had participated in arbitration for months, then suddenly sued without giving satisfactory explanation and made no endeavour to show why arbitration should not proceed.
  • Having considered appellate restraint and the weight due to the primary Court's view, the appellate Court concluded the discretionary power under section 19 had been erroneously exercised by the lower Court in refusing the stay.

Holding and Implications

Holding: The appeal was allowed; the order of the lower Court was set aside and the suit was stayed. The parties were permitted to proceed with arbitration before the Bengal Chamber of Commerce with the Tribunal reconstituted under Rule VIII. Costs were awarded to the appellant both in this Court and in the Court below.

Implications:

  • The direct effect is that the respondent is deprived of the remedy by suit in respect of the dispute and must proceed by arbitration as agreed in the contract, with the Chamber empowered to reconstitute the tribunal and continue the proceedings.
  • The opinion applies established authorities and rules (including Doleman, Dinabandhu Jana and Rule VIII of the Chamber) to resolve issues about the effect of institution of suit on arbitration and revival of arbitration; the decision operates within existing doctrinal lines and is presented as an application of those authorities to the facts rather than as establishing a novel precedent.

Attorneys recorded in the opinion: for the appellant O.C. Gangoly & Co.; for the respondent A.K. Rudra.

    Jokiram Kaya v. Ghaneshamdas Kedarnath

    Mookerjee, J.:— We are invited in this appeal to consider the propriety of an order of dismissal made by Mr. Justice Greaves on an application for stay of a suit under section 19 of the Indian Arbitration Act. The material facts which led up to the order are not in dispute and may be briefly narrated for our present purpose.

    On the 14th August, 1918, the appellant sold to the respondent 150,000 yards of hessian cloth, to be delivered in three equal instalments in January, February and March, 1919. The contract was not carried out; the seller contends that the breach was due to default on the part of the buyer; the buyer asserts, on the other hand, that the default was on the part of the seller. The contract contained an arbitration clause in the following terms;

    “Any dispute whatsoever arising on or out of this contract shall be referred to arbitration under the Rules of the Bengal Chamber of Commerce, applicable for the time being, for decision, and such decision shall be accepted as final and binding on both parties to this contract. The award may, at the instance of either party and without any notice to the other of them, be made a Rule of the High Court of Judicature at Fort William.”

    On the 24th April, 1919, the seller referred the dispute to the arbitration of the Bengal Chamber of Commerce in terms of the submission just set out, and his letter gave a detailed account of what, according to his version, had taken place between the parties. The statement of the seller was forwarded by the Registrar of the Chamber to the buyer for his remarks. The buyer sent a reply in due course; this was transmitted by the Registrar to the seller who submitted his final reply on the 17th July, 1919. On the 14th August, 1919, the purchaser instituted a suit on the Original Side of this Court for recovery of damages from the seller on the allegation that the seller was in default. The seller received intimation of this suit on the 24th August, 1919, but the writ of summons was not actually served on him till the 26th September, 1919. On the 16th October, 1919, the arbitration tribunal of the Chamber made an award in favour of the Seller. On the 17th November, 1919, the buyer made an application to this Court to set aside the award, on the ground that by reason of the institution of the suit, the arbitrators were functii officio and that consequently the award was void for want of jurisdiction. This application was granted, and the award was set aside by Mr. Justice Ghose on the 28th November, 1919. On the 1st December, 1919, the seller applied for stay of the suit under section 19 of the Indian Arbitration Act. On the 11th December, 1919, Mr. Justice Greaves dismissed the application. We have now to examine whether the order of dismissal was, in all the circumstances of the case, appropriately made.

    section 19 of the Indian Arbitration Act provides as follows:

    “Where any party to a submission to which this Act applies, or any person claiming under him, commences any legal proceedings against any other party to the submission, 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 after appearance and before filing a written statement or taking any other steps in the proceedings, apply to the Court to stay the proceedings; and the Court, if satisfied that there is no sufficient reason why the matter should not be referred in accordance with the submission 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, may make an order staying the proceedings.”

    This section corresponds to section 4 of the English Arbitration Act, 1889, which was interpreted in the judgment of the Court of Appeal in Doleman & Sons v. Ossett Corporation . The principle enunciated in this decision was held applicable to a case under paragraph 18 of the second schedule of the Civil Procedure Code, by this Court in Dinabandhu Jana v. Durga Prasad Jana and is of fundamental importance in this class of cases. Where, for the determination of the controversy between the parties, two competent tribunals are available, the Court and the arbitrators, and one of them chooses the latter but in fact has recourse to the former, it is not open to his opponent to enforce specific performance of the contract or to plead the contract as a conclusive bar to the suit; but he may apply to the Court to stay the suit in the exercise of its judicial discretion, so as to leave the plaintiff in the suit no other remedy than to proceed by arbitration. It is consequently plain that a Court invited to exercise its judicial discretion to deprive a party of the remedy by suit, must be satisfied that the remedy to proceed by arbitration is really available.

    Now, in the case before us, there was a valid reference to arbitration on the 24th April, 1919. What then was the effect of the institution of the suit on the 14th August, 1919? The position is best expressed in the words of Fletcher Moulton, L.J in Doleman & Sons v. Ossett Corporation :

    “The law will not enforce the specific performance of such agreements (that is, agreements to refer to private tribunals), but, if duly appealed to, it has the power in its discretion to refuse to a party the alternative of having the dispute settled by a Court of law, and thus to leave him in the position of having no other remedy than to proceed by arbitration. If the Court has refused to stay an action, or if the defendant has abstained from asking it to do so, the Court has seisin of the dispute, and it is by its decision, and by its decision alone, that the rights of the parties are settled. It follows, therefore, that in the latter case the private tribunal, if it has ever come into existence, is functus officio, unless the parties agree de novo that the dispute shall be tried by arbitration, as in the case where they agree that the action itself shall be referred.”

    Consequently, when a reference to arbitration has been made and the private tribunal has come into existence, the effect of the institution of the suit is that, from that very moment, the arbitrators become functii officio, that is, their authority to deal further with the matter becomes extinguished. The institution of the suit cannot, however, retrospectively affect the validity of the reference which, when it was made, was in exact conformity with the agreement of the parties. If this view were not adopted, the result would follow that a party to a submission, who had appeared throughout and had taken his chance before the arbitrators, might, at the very last moment, when the award, possibly an adverse award, was about to be made, and when there would be no time left for his opponent to obtain a stay order, institute a suit and thereby render infructuous the entire proceedings. Such a conclusion cannot, in our opinion, be defended, either 011 principle or on the authorities. We are not concerned here with a case where, after the institution of a suit by one of the parties, his opponent makes a reference to arbitration and obtains an award without stay of the suit. There it might possibly be contended, with some approach to plausibility, that the arbitration proceedings were void from their very inception. It might also be a question of nicety in a case of that description, whether when an award so made had been set aside, a fresh reference to arbitration was permissible on the hypothesis that the agreement to refer was not exhausted by a reference which had proved ultimately infructuous because initially incompetent. In the case before us, on the other hand, the arbitration proceedings were properly instituted and carried on, till up to the moment of the institution of the suit; that suit could not, on any conceivable principle of law, relate back to the date of reference and affect the validity of the proceedings which had followed thereon. We must hold accordingly that the effect of the cancellation of the award on the 28th November, 1919, did not affect that portion of the arbitration proceedings which had taken place before the 14th August, 1919, when the suit was instituted.

    The question next arises, whether, if the suit were now stayed, the bar to the continuance of the arbitration proceedings would be so effectually removed as to allow their termination in a valid award. In our opinion, the answer must be in the affirmative in view of Rule VIII of the Rules of the Tribunal of Arbitration, adopted by resolution of the Bengal Chamber of Commerce on the 16th January, 1912, and confirmed on the 27th February, 1912:

    “If any arbitrator or umpire decline or fail to act, or if he did or become incapable of acting, the Registrar may substitute and appoint a new abitrator or umpire in manner aforesaid (that is, in the manner stated in Rule V) and the Court so reconstituted shall proceed with the arbitration, with liberty to act on the record of the proceedings as then existing and on the evidence, if any, then taken in the arbitration, or to commence the arbitration de novo.”

    In the present case, we may hold, without unduly stretching the language of the Rule, that the arbitrators “became incapable of acting,” when the suit was instituted, and their authority lost all life and power. No doubt, they themselves did not at the time realise this, and proceeded to discharge their duties as if they were still capable of acting under an authority yet unimpaired and in full operation. That cannot, however, affect or alter the true legal position. Consequently, if the suit is stayed, it would be competent to the Chamber to substitute and appoint new arbitrators, and the Court so reconstituted will then be able to proceed with the arbitration.

    This view furnishes a satisfactory solution of the difficulty apprehended by the respondent, that if the matter were remitted for arbitration to the same arbitrators as had acted before, he might not have a fair chance. We desire to add however, that the respondent has not laid the foundation for a real grievance in this respect; he had, so far as may be gathered from the materials on the record, ample opportunity to place his case before the arbitrators, and there is no shadow of a suggestion that they had acted unfairly or improperly. But we need not elaborate that aspect of the matter, for, if the suit is stayed, the arbitration proceedings will be revived and carried on to a conclusion before a tribunal reconstituted under Rule VIII. We hold accordingly that if the application for stay of the suit under section 19 of the Indian Arbitration Act is granted, though the respondent will thereby be deprived of his remedy by suit, the remedy to proceed by arbitration will be still available. In this view of the matter, we must next consider, whether, in the circumstances of this case, the discretionary power vested in the Court under section 19 should be exercised in favour of the appellant.

    On behalf of the respondent, it has been forcibly argued that a Court of Appeal should not readily interfere with the decision of the primary Court on a question of this description. The appellant has not disputed this position, which is, indeed, supported by high authority: Freeman v. Chester Rural District Council , Vawdrey v. Simpson , Barnes v. Youngs . It is clear, however, that the discretion must be judicially exercised, and an erroneous exercise of the discretionary power is capable of correction by a Court of Appeal; otherwise, a statutory provision would have been made that the order was final and not liable to be challenged by way of appeal. We must, consequently, examine the circumstances of the case and form our own conclusion, attaching due weight to the view adopted by the Court below. Now, it is firmly settled that where parties have agreed to refer a dispute to arbitration, and one of them, notwithstanding that agreement, commences an action to have the dispute determined by the Court, the primâ facie leaning of the Court is to stay the action and leave the plaintiff to the tribunal to which he has agreed. As Lord Selborne L.C, observed in Willesford v. Watson , if parties choose to determine for themselves that they will have a domestic forum instead of resorting to the ordinary Courts, then a primâ facie duty is cast upon the Courts to act upon such an agreement. This expression of opinion was adopted with approval in Law v. Garrett , Lyon v. Johnson and Clegg v. Clegg . Lord Hatherly L.C emphasised the same point of view, when in Kitchen v. Turnbull , he said that the parties having come to an agreement to refer, such agreement must be considered binding between them and ought not lightly to be overturned. Hence, it has been ruled that the burden of showing cause, why the agreement to submit should not be given effect to, is upon the party opposing the application for stay, and it is for him to induce the Court to exercise its discretion in his favour with a view to allow the action to proceed: Mason v. Haddan , Hodgson v. Railway Passengers' Assurance Company , Fox v. Railway Passengers' Assurance Company , Denton v. Legge , Vawdrey v. Simpson , Doleman v. Ossett Corporation , Clough v. County Livestock Insurance Association . This view has been followed in this Court in the case of Dinbandhu Jana v. Durga Prasad .

    Tested in the light of these principles, how do the parties stand? The burden lies on the respondent to show that some sufficient reason exists, why the matter should not be referred to arbitration, and not on the appellant to show that no such reason exists. The respondent has not brought forward any substantial reason why the agreement between him and the appellant, to refer matters in dispute to arbitration, should not be acted upon. It hag not been suggested that the arbitrators are likely to be biassed or interested persons; nor has it been said that the matters in dispute involve solely or chiefly such questions of law as must ultimately be decided by the Court. On the other hand, the main question in controversy is, whether the breach of contract was due to the default of one party or the other, a matter which the arbitrators would presumably be well qualified to investigate. A doubt, however, was expressed on behalf of the respondent, whether even if the suit were stayed, the arbitration proceedings could be legally revived and carried on so as to terminate in a valid award. This was a perfectly legitimate question to raise, and we have already decided that the proceedings can be revived and carried on before a reconstituted tribunal. The only other objection which has been taken by the respondent is that the application for stay should have been made earlier, that is, immediately after the appellant was served with the writ of summons, if not shortly after lie had notice of the suit. The appellant, however, has explained that at the time the law on the subject as expounded in Dinabandhu v. Durga Prasad was not very clearly appreciated, and that as the summons was served during the long vacation, it was not easy to make the requisite application for stay and to obtain all order before the award could actually be made. The appellant, has further urged that the conduct of the respondent has by no means been such as would entitle him to sympathy or indulgence from the Court. The respondent had full notice of the arbitration proceedings and submitted his case to the tribunal; it was only after the arbitration proceedings had continued for nearly four months that he suddenly changed his front and instituted the suit. No reason has been assigned, no explanation has even been attempted, to justify this action of the respondent. We must further take this along with the fact that the respondent has made no endeavour to discharge the burden which lay upon him to satisfy the Court that the matter in dispute should not be decided by arbitration. The cumulative effect of all this leads to the conclusion that the respondent has failed to establish sufficient grounds for the exercise of our discretion in his favour so as to allow his action to proceed. The inference is thus inevitable that the application for stay cannot rightly be refused.

    The result is that the appeal is allowed with costs both here and in the Court below. The order of the lower Court is set aside and the suit is stayed. The parties will be at liberty to proceed with the arbitration in the Chamber of, Commerce with the Tribunal reconstituted under Rule VIII in the manner indicated above.

    Fletcher, J.:— I agree.

    N.G

    Attorneys for the appellant: O.C Gangoly & Co.

    Attorney for the respondent: A.K Rudra.

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    Jokiram Kaya v. Ghaneshamdas Kedarnath
    (Mar 9, 1920)