Harries, C.J:— Miscellaneous Appeal no. 203 of 1941 is an appeal by the plaintiffs from an order of the learned Subordinate Judge of Patna, dated the 3rd of May, 1941, staying the hearing of a suit under section 19 of the Indian Arbitration Act (IX of 1899). Civil Revision no. 240 of 1941 has been filed in the alternative praying for the same relief. It will be convenient to dispose of both the appeal and the revision petition in the same judgment.
To appreciate the points involved, it will be necessary to set out the facts giving rise to this litigation in some detail.
The plaintiffs are members of a joint Hindu family carrying on business in Patna and in various places in Bihar as dealers in cloth and brokers for the sale of cloth. They carry on business under the style and firm name of Manohar Das Bhimraj. The defendant company is a limited liability company having its registered place of business at Bombay and carries on business as cloth manufacturers.
By an agreement, dated the 31st of December, 1938, the plaintiff firm was appointed guarantee brokers of the defendant company for the sale of cloth at Patna and other places. This agreement was subsequently varied in a manner which is not relevant to this case. In pursuance of this agreement the plaintiff firm entered into various contracts with the defendant company for the purchase of cloth. It is to be observed that these contracts gave the defendant company no option to cancel the contracts or to refuse deliveries if the latter did not or could not work night shifts at their mill. On the 12th of November, 1939, it is alleged that a contract was entered into between the parties for the sale of 2,001 bales of cloth to the plaintiff firm at fifteen annas per pound. The delivery of the cloth was to take place between the months of January and June, 1940, as and when the cloth was manufactured. This contract, it is alleged, contained an arbitration clause by which all disputes arising there-under were to be referred to the decision of a single arbitrator.
According to the plaintiff firm, this contract was negotiated by their agent at Bombay, one Murlidhar Lathe. According to the usual practice, which, it is said, was well known to the defendant firm, Murlidhar Lathe, before signing the contract, informed the plaintiff firm at Patna by telephone of its main terms. Murlidhar, on receiving the assent of the plaintiffs to the terms of the contract, signed it on the 12th of November, 1939.
It is alleged by the plaintiff that on the 13th of November, 1939, a further clause was added to the contract, which was signed on that day by Murlidhar Lathe. This clause is in these terms:—
“The contract is made under a clear understanding that the management wants to work the mill night shift. If however the management does not work the mill night shift or stop working night shift due to increase in labour charges or whatsoever other reason this contract will be cancelled without claiming any allowance by the buyers. Whatever goods of the contract then ready will be taken delivery by the buyers at contract rate.”
It will be observed that this clause, which, it is said, was added to the original contract, gives the defendants a right to refuse further deliveries if the working of a night shift becomes impossible or difficult or even if the management no longer desired to work a night shift, According to the plaintiff firm, their agent Murlidhar at first refused to add his signature to this clause. It is alleged that he was subsequently persuaded to do so by one Babu Jwala Prasad Singhania, a member of the firm Ramgopal Ganpat Rai, who were the managing agents of the defendant company. According to the plaintiff company, Singhania informed Murlidhar that the managing agents were desirous of working a night shift at the mills and that if such a clause was added to the contract it would strengthen the hands of the managing agents in inducing the Board of Directors of the defendant company to work such night shifts. Further, it is alleged that it was made clear to Murlidhar that whatever happened the contract would not be cancelled and the defendants would not refuse delivery by reason of any stoppage of the night shift. Believing this representation, it is said that Murlidhar added his signature to the additional clause, and this he did without communicating with the plaintiff firm or taking their consent.
On the 20th of November, 1939, the plaintiff firm received a copy of the contract as signed by Murlidhar on the 13th of November, and then discovered for the first time that this clause giving the defendants a right to cancel the contract had been introduced. According to the plaintiffs, they at once wrote to the defendant company stating that they had never agreed to such a clause and that Murlidhar was not entitled to contract on such a basis with the defendants. On the 30th of November, 1939, the managing agents of the defendant company wrote to the plaintiffs that they did not desire to work a night shift at the mills and, therefore, they cancelled the contract of the 13th of November.
It is alleged that having entered into the contract for the purchase of this cloth, the plaintiff firm had made contracts with other buyers in Patna and Bihar and that by reason of the defendants' breach of contract in failing to deliver the cloth the plaintiffs had suffered loss to the extent of Rs. 1,53,420-6-0.
The plaintiffs on the 12th of March, 1940, instituted a suit in the Court of the learned Subordinate Judge at Patna claiming Rs. 1,53,420-6-0 as damages for breach of contract. On the 9th of May, 1940, the defendants filed an application under section 19 of the Arbitration Act, 1899, praying that the proceedings should be Stayed pending arbitration. It is common ground that the contract as originally signed on the 12th of November contained an arbitration clause in these terms:—
“All disputes and questions whatsoever which shall arise between the parties hereto out of or in connection with this agreement or as to the construction or application thereof or the respective rights and obligations of the parties hereunder or as to any clause or thing herein contained or any account or valuation to be made hereunder or as to any other matter in any way relating to these presents shall be referred to arbitration subject to clause no. 25.”
Of course, the contract, as it stood after the addition made on the 13th of November, also contained this arbitration clause. It was, therefore, contended before the learned Subordinate Judge on behalf of the defendants that as the contract, as amended on the 13th of November, 1939, contained an arbitration clause, the civil suit should be stayed pending arbitration. On behalf of the plaintiffs it was contended that they had never agreed to the clause permitting cancellation on failure to work a night shift at the mills, and, therefore, the contract as amended was not binding upon them. They urged that they had never agreed to submit to arbitration any differences or disputes which might arise on the added clause and, therefore, there was no valid submission to arbitration, and the suit should proceed. They further contended that as the contract was being impeached such a matter could only be decided by a Court and not in arbitration proceedings. They also contended that as serious charges of fraud were brought against the defendants such ought to be decided by a Civil Court and not by arbitration. Other contentions were put forward, but as they were abandoned before this court it is unnecessary to refer to them in any detail.
The Arbitration Act, 1899, has now been repealed and a new statute has been enacted. It was common ground, however, that the new legislation in no way affected the position.
The learned Subordinate Judge in a thorough, careful and admirably written judgment held that no case had been made out for refusing a stay and accordingly he stayed the proceedings pending arbitration. It is to be observed that before this Court Counsel for the plaintiffs did not contend that the whole dispute should be decided by the Civil Court, but he urged that the preliminary question as to what constituted the contract in this case should be decided by the Court. If the Court decided that the added clause was a valid one. Counsel conceded that would end the matter as it afforded the defendants a complete defence. On the other hand, he contended that if the Court pronounced against the added clause, then and then only could the dispute be referred to arbitration. In fact, he admitted that if the added clause was held not to be binding on the plaintiffs all further questions as to damages and such like would have to be decided by arbitration.
A preliminary objection was taken before us on behalf of the defendants that no appeal lay in this case. The difficulty had been foreseen by the plaintiffs, who, as I have stated earlier, filed a revision as an alternative. Whether appeal lies in this case is a question of difficulty; but it is unnecessary to decide the point definitely because Sir Manmatha Nath Mukherji frankly conceded that if no appeal lay this Court could interfere in a proper case in revision. He also conceded that if the Subordinate Judge had stayed these proceedings in circumstances when he should not have passed an order of stay then he had exercised a jurisdiction not vested in him or had exercised his jurisdiction illegally or irregularly. In short, the preliminary objection was not pressed, because it was conceded that if the plaintiffs made out their case this Court could interfere either in appeal or revision.
According to the plaintiffs, the contract as signed on the 12th of November, 1939, contained all the terms except the clause giving the defendants a right to cancel the contract on failure to work a night shift. The defendants admit that Murlidhar did append his signature to a writing on the 12th of November, 1939, and they also admit that on that date the writing did not contain this added clause. However, the defendants do suggest that the contract had not been completely drafted and that the last line immediately before the added clause had not been added when Murlidhar signed on the 12th of November. In short, they contend that no real contract was signed on the 12th of November, and they explain Murlidhar's signature of that date by stating that Murlidhar was anxious to sign on the 12th of November as it was an auspicious day. It is contended that on that day he did not sign any completed contract but that the contract was only completed on the following day when Murlidhar signed the document for the second time.
It will be seen therefore, that there is a serious dispute in this case as to what constitutes the contract between the parties. According to the plaintiffs, a completed contract was entered into on the 12th of November, and their allegation is that by reason of fraud practised on Murlidhar a further clause was added on the 13th of November. It is to be observed that the plaintiffs also alleged that Murlidhar had no authority whatsoever from them to agree to any such addition as was made on the 13th of November. According to the defendants, however, Murlidhar was a partner of the plaintiffs' firm and had full authority to negotiate any form of contract on behalf of the plaintiffs.
It has been strongly urged by Mr. P.R Das on behalf of the plaintiffs that this question as to whether the added clause forms part of the contract or not is not a question which can be decided in the arbitration. He has urged that the plaintiffs are impeaching the contract as it stands, and that being so, the question whether the contract as added to on the 13th of November is or is not binding on the plaintiffs is a question which must be decided by the Court. He has urged that dispute under a contract can only be referred to arbitration if the parties to the contract have so agreed. His contention is that the plaintiffs have never agreed that any question as to the right to cancel the contract on failure to work night shift should be referred to arbitration. Mr. Das contended that the present suit is not merely a suit for damages for breach of the contract of the 12th of November, 1939, but is in fact also a suit for a declaration that the clause added to the contract on the 13th of November, 1939, is not binding on the plaintiffs and that the true contract between the, parties is the contract as signed on the 12th of November, 1939. As I have stated, Mr. Das does not suggest that the question as to whether or not there has been a breach of the earlier contract is a matter which should not be referred to arbitration.
It is to be observed that there is no prayer for any relief such as a declaration. The prayer is confined to damages for breach of contract. The learned Subordinate Judge, however, observes that although there is no express prayer for a declaration the full facts are set out in the plaint and a finding on the question whether the added clause is binding or not is essential before the suit can be decided. The learned Subordinate Judge deals with the matter in these words:—
“It is true that no express declaration has been claimed in the plaint that the added clause is not binding on the plaintiffs but such a finding is necessarily involved in the claim for damages which the plaintiffs have made. All the material facts on which the added clause is said to be not binding on the plaintiffs have been alleged in the plaint.”
The suit, therefore, is in effect a suit for a declaration that the added clause is not binding and for damages for breach of the contract without the added clause.
That being the state of affairs, Mr. Das has urged that the whole of the contract of the 13th of November, 1939, is impeached by the plaintiffs, It is clear that if the contract containing the arbitration clause is impeached then the suit should not be stayed and the matter should be decided by a Civil Court. This is clearly laid down in Kitts v. Moore. In that case the Court of Appeal in England held that a Court has jurisdiction to interfere by injunction, on equitable grounds, to restrain a defendant from proceeding to arbitration where an action has been brought impeaching the instrument containing the agreement for reference. At page 259 Lindley, L.J observed:—
“Under those circumstances, the plaintiff brings an action for an ordinary partnership account, and asks for an injunction to restrain the arbitration proceedings: and he does so upon the footing that the agreement which contains the arbitration clause is, for some reason, not binding—whether for fraud, or mistake, or surprise or for some other reason I do not say, because the statement of claim has not been launched: but his equity is to impeach that agreement. Then he says Courts of Equity have always granted an injunction to restrain a reference to arbitration under an agreement which is impeached until the right to impeach it has been determined. That this is a right statement of what was the practice of the Courts of Equity before the Judicature Act is shown by the cases of Mylne v. Dickinson, South-Western Railway Company v. Coward and Maunsell v. Midland Great Western (Ireland) Railway Company; in all which cases the Court of Chancery did grant an injunction to stay a reference to arbitration upon the ground that the agreement containing the arbitration clause was impeached.”
At page 261 the learned Lord Justice observed:—
“There is no single case which in any way curtails the power of this Court to stop an arbitration founded upon an agreement which is impeached.”
A similar view was taken by the Indian Courts. In Firm Jai Narain Babu Lal v. Firm Narain Das Jaini Mal a Bench of the Lahore High Court held that where there is a dispute as to the factum or validity of the contract such a dispute did not fall within the purview of an arbitration clause and should be decided by a Civil Court.
In the case of Sardarmull Jessraj v. Agar Chand Mehata Rankin, J. held that when a contract is impeached on equitable grounds the court could restrain arbitration proceedings commenced under it by issuing an injunction. He further held that no such injunction should be granted when the contract is merely denied. It is to be observed that in the present case the contract as finally signed on the 13th of November, 1939, is being impeached by the plaintiffs on equitable grounds, namely, fraud. The view of Rankin, J. that a stay should only be given when the contract is impeached on equitable grounds has, however, been doubted in two recent cases. In Harinagar Sugar Mills, Ltd. v. Skoda (India), Ltd. Panckridge, J. doubted the correctness of this view. At page 565 the learned Judge observes:—
“With regard to the alleged agreement of June 7th, 1935, I refrain from expressing any opinion as to the merits of the respective cases of the parties. There is no doubt that the plaint raises an issue as to the factum of the contract; for, if the gentleman who signed the contract as representing the plaintiffs had in fact no authority to do so, there was no contract between the parties and, accordingly, no agreement, to refer to arbitration. The defendants urge me to apply the principles enunciated by Rankin, J. in Sardarmull Jessraj v. Agar Chand Mehata and Company. In that case certain parties to a document containing an arbitration clause purported to refer disputes arising out of the agreement contained in the document to arbitration. The opposite parties denied the execution of the document, and filed a suit for the purpose of having the document declared ineffective. As soon as the suit was filed they asked for an injunction restraining the defendants from proceeding with the arbitration pending the hearing of the suit, and Rankin, J. refused the injunction, although he intimated that an injunction should be granted in cases where a contract was impeached upon equitable grounds. The plaintiffs' application was not one under section 19 of the Arbitration Act, since the reference to arbitration preceded the suit. I must confess I have some misgiving as to the correctness of Rankin, J.'s decision. It is conceded that an arbitrator has no jurisdiction to decide whether the contract containing the arbitration clause was in fact entered into.
This being so, it is surely somewhat paradoxical that he should be allowed to go with the arbitration, when the entire substratum of the proceedings is in question. Moreover, after he has made his award it may be that the Court will hold the contract has not been entered into, in which case all the proceedings before him become infructuous.”
A similar doubt as to the limitation of the Court's powers to stay enunciated by Rankin, J. was expressed by Beaumont, C.J in Ramdas Khatau & Co. v. The Atlas Mills Co. Ltd.. In any event, even if the view of Rankin, J. be accepted, the case is an authority for the proposition that where an agreement is impeached on equitable grounds a stay of proceedings in the Civil Court should not be granted. It is, therefore, clear that where an agreement is impeached on the ground of fraud the court should not stay proceedings but allow the civil suit to proceed with the hearing of the suit.
The learned Subordinate Judge, however, distinguished these cases on the ground that in the present case the contract as a whole is not impeached, and all that is impeached is a clause in it, namely, a clause said to have been added on the 13th of November, 1939. With great respect to the learned Subordinate Judge, I think he took too narrow a view of the case. What the plaintiffs allege is that the contract as it stood after Murlidhar's signature on the 13th of November, 1939, is not the true contract between the parties but on the contrary the true contract is the contract of the 12th of November, 1939. What the plaintiffs contend is that they agreed to refer disputes to arbitration which arose out of the contract of the 12th of November, 1939, and that they have agreed to refer no disputes to arbitration which arise out of the alleged contract as added to on the 13th of November, 1939. In short, they impeach the whole agreement as signed on the 13th of November, 1939, and contend that another document contains the real agreement. If the matter is looked at in this way, it appears to me that the whole of the contract as signed on the 13th of November is being impeached in this suit. What is said is that no dispute under the contract of the 18th of November can be referred to arbitration, though it is conceded that all disputes under the earlier contract must be referred. In my view, the plaintiffs do in fact impeach the whole contract as it now stands whilst conceding that the contract as it originally stood is one in which disputes must be submitted to arbitration.
The learned Subordinate Judge was of opinion that as the plaintiffs only impeached one clause of the contract the dispute was confined to the question as to what the contract really was Relying on authorities, which I shall discuss presently, the learned Subordinate Judge was of opinion that an arbitrator has jurisdiction and is bound to decide what was the precise contract entered into between the parties. Therefore, he was of opinion that in the present case the arbitrator could and was bound to decide the precise nature of the contract and, therefore, he could and ought to decide whether the added clause was or was not binding. The learned Subordinate Judge relied upon a single Judge decision of the Calcutta High Court in Alibhoy Mahomed v. Baijnath Kalloram. In that case A and B entered into several contracts for the sale and purchase of hessian which were contained in advice notes. The advice note no. 31 contained a writing upon it which stated that it was in settlement of advice note no. 28. The contracts provided that all disputes whatsoever arising on or out of the contract should be referred to arbitration. Disputes having arisen they were referred to arbitration and an award was given in favour of B. A applied to set aside the award on the ground that the said writing on the advice note no. 31 was forged and so the arbitrators had no jurisdiction to decide the question of forgery which went to the very root of the contract. Greaves, J. held that it was competent for the arbitrators under the terms of the submission to decide whether or not this interpolation was in the contract as originally made. The learned Judge relied upon an English case; Produce Brokers Company, Limited v. Olympia Oil and Cake Company, Limited.
It is to be observed that this Calcutta case was not one where the Court refused to stay an arbitration. The arbitration had been held and an award had been given, and the application before the court was one to set aside an award. With great respect to this decision, I am unable to accept the reasoning in it. As I have said, the learned Judge bases his decision upon Produce Brokers Company, Limited v. Olympia Oil and Cake Company, Limited and, in my view, the case decided by the House of Lords does not support the learned Judge's view.
In Produce Brokers Company, Limited v. Olympia Oil and Cake Company, Limited the House of Lords held that under a clause in a contract referring to arbitration any dispute arising under the contract, it was competent to the arbitrator finally to determine the existence of a custom affecting the rights and obligations of the parties under the contract, where such custom is not inconsistent with the terms of the contract. At page 322 Lord Loreburn observed:—
“When an arbitrator has power, as here, to decide all disputes arising out of a contract, including questions of law, surely he must decide what the contract is, and he cannot decide that without introducing the custom.”
It is true the learned Lord says that the arbitrator must decide what the contract is, but it is to be observed that the dispute in that case was really a dispute as to the construction of a contract. It was a commercial contract, and the question was whether a custom was or was not imported into the contract. There was no dispute in that case such as forgery of a term or the introduction of a term as the result of fraud. The dispute was purely whether or not custom or usage was imported into the contract. At page 323 Lord Atkinson dealt with the matter in these words:—
“Prima facie one would suppose that authority to decide disputes arising out of a contract necessarily conferred authority to decide what were the terms of that contract. It would appear to me to be impossible for any judge or arbitrator to determine whether any particular dispute arose out of a contract unless and until he knows what that contract is. This involves that the arbitrator must in such a case construe the contract which the parties entered into, and thus determine what they meant to express by the language they have used. If, for instance, in a contract relating to any art or trade or business the parties use terms having technical meanings in that art, trade or business, then those terms should prima facie have that meanings attributed to them, simply because the parties to the contract presumably used those terms in their technical sense. In such a case it would appear to me that arbitrators or an umpire would, under such a submission as exists in this case, necessarily have authority to determine what was the technical meaning of those technical terms.
It would, I think, be quite impossible for any court of law not to treat such a determination as one made with full authority, and final in itself. Now, is there any essential difference between such a case as that and a case where it is sought to construe the language of a contract in relation to, and through the medium of, a trade usage or custom? In my opinion there is not. The language expressing a trade custom is taken to be imported into the language used by the contracting parties, whether written or verbal, because it is presumed that they had the usage in their minds when they made their contract, made it in reference to that usage, and intended that the usage or custom should form part of it. If they have used language in their contract inconsistent with the custom, that is one of the most effectual ways of negativing this presumption, excluding the custom, and declaring that their contract is unaffected by it”.
In this passage Lord Atkinson makes it clear; that when he said that the arbitrator was bound to decide what the contract was he meant that the arbitrator was bound to construe the contract and ascertain what the parties really meant. The learned Lord was not dealing with the case where a term in the contract is alleged to be a forgery or is alleged to have been introduced as the result of fraud or such like. Lord Parker at page 327 observed:—
“Questions as to the true meaning and effect of the contract, with the possible exception of questions as to the ambit of the submission itself, are therefore left to the arbitrator. In order to ascertain the meaning and effect of the contract the arbitrator is bound to admit evidence of and consider all relevant facts. The existence or non-existence of any state of circumstances, which, if proved, would be relevant on any issue as to the true meaning and effect of the contract, must consequently be within the submission. Clearly mercantile contracts, such as the one in question, fall to be interpreted by the light of any custom prevailing in the trade. ‘It has long been settled says Parke B. in Hutton v. Warren, ‘that, in commercial transactions, extrinsic evidence of custom and usage is admissible to annex incidents to written contracts, in matters with respect to which they are silent. The same rule has also been applied to contracts in other transactions of life, in which known usages have been established and prevailed; and this has been done upon the principle of presumption that, in such transactions, the parties did not mean to express in writing the whole of the contract by which they intended to be bound, but a contract with reference to those known usages'. It follows that existence or non-existence of the custom alleged in the present case is relevant to the true meaning and effect of the contract, and is, therefore, within the submission.”
From these observations of the learned Lords it is clear that they do not hold that the arbitrator must decide whether a term of a contract has been interpolated or not or whether it has been introduced by fraud, mistake or surprise. The case clearly deals with the question of the construction of the contract and all that it lays down is that it is within the jurisdiction of the arbitrator to decide what the contract really is and what it really means. If the parties contracted with reference to mercantile usage or custom, then the arbitrator must ascertain what such usage or custom is and whether it has been imported into the contrast. In my view, Produce Brokers Company, Limited v. Olympia Oil and Cake Company, Limited is no authority to support the proposition laid down by Greaves, J. in Alibhoy Mahomed v. Baijnath Kalooram.
It is to be observed that Walsh, J. in the case of Sushil Chandra Das & Co. v. Sukhamal, Bansidhar was also of the opinion that the decision of Greaves, J. could not be supported. At page 480 he observed:—
“I do not agree with the contention urged before us by the applicants that the decision of the question whether there has been a completed contract so as to bind the parties to submission in writing rests with the arbitrators. Questions of fact and law upon which the jurisdiction of the arbitrators depends are for the courts. If Alibhoy Mahomed v. Baijnath Kalooram decided otherwise, I disagree with the decision.”
In my view, it is not for an arbitrator to decide whether a contract, as put forward by one of the parties, contains forged clauses or interpolations or contains clauses which have been inserted as the result of fraud, mistake or such like. Such disputes go to the factum and existence of the contract, and in my view should be decided and must be decided by the Civil Courts. In the present case the added clause makes an entirely different contract. It is true, it is a contract relating to the sale of 2,001 bales of cloth, but it is a contract of sale upon vastly different terms. The introduction of the added clause makes a very great difference to the legal rights and duties of the parties, and after its introduction the contract becomes a very different matter. It appears to me that where the subsequent contract is impeached on the ground of fraud as this contract is, that question must be decided by the Courts and having decided it any further question which might arise can and should be decided by arbitration. The point is not free from difficulty; but after giving the matter the best consideration I can, I am unable to agree with the view of the learned Subordinate Judge. In my view, the suit should not be stayed, and the issue as to whether the added clause is binding on the plaintiffs should first be decided by the Civil Court.
It had been urged before the learned Subordinate Judge that as the defendants had cancelled the contract and repudiated liability under it they could no longer rely upon the arbitration clause. The learned Subordinate Judge pointed out, however, that the defendants were repudiating liability under an alleged term in the contract and that is so. In such a case the principle laid down in Jureidini v. National British and Irish Millers Insurance Company, Limited cannot possibly apply. This is a case which falls within the principles laid down in Stebbing v. Liverpool and London and Globe Insurance Company, Limited and a stay could not be refused on the ground that the defendants disclaimed liability in this case. Mr. P.R Das did not press this point in appeal before us, and I need not, therefore, discuss the question any further.
It was also urged before the learned Subordinate Judge that the arbitration clause in this case was not valid by reason of the fact that it provided for an arbitrator entirely of the defendants' choice. The arbitration clause is not happily worded, and it gives the defendants a right to object to an arbitrator appointed by the plaintiffs. That, however, does not mean that the plaintiffs are bound to accept a sole arbitrator appointed by the defendants. The learned Subordinate Judge pointed out, and in my view rightly, that the arbitration clause contained a submission to a single arbitrator, and in his view if the parties could not agree the Court could under the Arbitration Act appoint an arbitrator. The view of the learned Subordinate Judge is, in my judgment, the only view possible in this case, and that view was accepted by Mr. P.R Das before us, and he no longer pressed the point.
Mr. Das lastly contended that even if this was not a case where the whole contract was impeached and, therefore, not within the principles laid down in Kitts v. Moore and other cases already cited in this judgment, yet the proceedings should not be stayed because serious allegations of fraud were involved in the dispute. He urged that where a prima facie case of fraud was made out a civil suit should not be stayed. The learned Subordinate Judge was of opinion that if a suit involved a prima facie case of fraud its hearing should not be stayed but in his view no prima facie case of fraud had been made out and, therefore, a stay should be granted.
Mr. Das has urged that the learned Subordinate Judge was wrong in holding that no prima facie case of fraud had been made out. He pointed out that previous to this contract in dispute the parties had entered into five earlier contracts and in no contract was there any term giving the defendants a right to refuse delivery when they failed to work a night shift. He also pointed out that the plaintiffs alleged that Murlidhar to the defendants' knowledge always consulted the plaintiffs before signing the contracts and that on this occasion he did consult the plaintiffs before signing the document on the 12th of November but did not consult the plaintiffs before signing the additional clause on the 13th of November. Mr. Das also relied upon the affidavit of Murlidhar as to how he came to append his signature to the added clause on the 13th of November. Murlidhar states that it was represented to him that such a clause should be added in order that the managing agents might get their own way and induce the defendants to work a night shift. Murlidhar further says that it was represented to him that come what may the defendants would not rely upon the clause and refuse further deliveries to the plaintiffs. If the statements of Murlidhar be accepted, then it can be said that he was tricked or deceived into signing this added clause. Mr. Das has contended that the conduct of the plaintiffs thereafter makes it clear that Murlidhar had no authority to agree to such a clause even if he had not been induced by fraud to do so. It is pointed out that, the contract was received by the plaintiffs on the 20th of November, 1939, and that immediately on its receipt the plaintiffs wrote to the defendants protesting against this clause and also to Murlidhar asking for his explanation. This, it is suggested, shows that the plaintiffs would never have agreed to such a clause and that Murlidhar had no authority whatsoever to enter into such an agreement on their behalf. On the other hand, it has to be observed that the defendants deny receipt of any letter from the plaintiffs and also allege that Murlidhar had authority to enter into such a contract and that the plaintiffs were aware that he had done so. There can be no doubt that the plaintiffs' allegations are serious and, if established, might well amount to a case of fraud.
The defendants, of course, deny the allegations in toto, but Mr. P.R Das has urged that their conduct suggests that there is considerable truth in the allegations made by the plaintiffs. He has pointed out, and indeed the learned Subordinate Judge has pointed out, that the defendants have not been consistent in their versions as to how this clause came to be added.
The first version given by the defendants is contained in a letter from their solicitors (Ex. D) dated the 7th of March, 1940. The explanation given in that letter is as follows:—
“It (the contract) was signed by Murlidhar Lathe on the 12th of November, 1939. But subsequently on the 13th idem certain matters not clearly indicated in the terms of the contract were settled and reduced to writing by an endorsement on the contract itself, which was duly signed by Murlidhar Lathe. The terms and conditions contained in the said endorsement on the contract are a part and parcel of the contract and are as much binding on your clients (the plaintiffs) as the other terms and conditions of the contract. Our clients have nothing to do with the question whether Mr. Murlidhar Lathe made any and what communication to his other partners at Patna before or after signing the contract on the 12th or 13th of November, 1939. As a partner Mr. Murlidhar had full authority to do what he did. Even, if, as is falsely alleged in your notice under reply, Mr. Murlidhar was not a partner, but only a duly authorised agent to make the contract, it was fully within his powers to do what he did, and the contract is binding on your clients.”
In this explanation the suggestion is that there was a contract on the 12th of November, 1939, but that certain matters had not been clearly set out and that a further clause was added clarifying the terms as originally settled. It will be seen that in a later explanation it is suggested that there was no completed contract on the 12th of November, and that on the 13th of November the contract was finally completed on terms previously arranged between the parties.
The subsequent explanation as to how this clause came to be added is given in paragraph 6 of the affidavit of Ramgopal Ganpatrai, dated the 10th of December, 1940. In that affidavit it is stated that on the 10th of November, 1939, Murlidhar Lathe told Ramgopal Ganpatrai that he wanted 2,000 bales of cloth. He was informed that the mill could not manufacture more of such goods, whereupon Murlidhar Lathe pressed Ramgopal Ganpatrai to work night shift so that the goods could be supplied. It is said that Ramgopal Ganpatrai pointed out that there were difficulties in working a night shift, but Murlidhar Lathe said that if he was afraid of not being able to do so the defendants could protect themselves by inserting a condition that the company would have the right to cancel the contract if a night shift was not Avorked. Ramgopal Ganpatrai said that he would consider the matter and would give his reply. On the 12th of November, which was Diwali Moorat day, Murlidhar Lathe again saw Ramgopal Ganpatrai and pressed him to draw up a contract as the day was auspicious for signing a commercial agreement. Ramgopal Ganpatrai said that he had to attend a meeting of the Managing Committee of the Native Merchants' Association of Bombay on that day and accordingly he would not be able to draft a contract. Murlidhar again pressed him to draw up the contract and the latter began to do so. Before he could finish it, he received a telephone message from the President of the Native Merchants' Association asking him to attend but he continued to write out the contract. Thereafter a second and third telephone message was received, by which time Ramgopal Ganpatrai had written the contract with the exception of the added clause and a sentence which preceded it. He then told Murlidhar Lathe that he could not complete writing the contract and asked him to call again on the following day. So anxious was Murlidhar Lathe to sign the contract on that auspicious day that he appended his signature to the document, although the terms had not been completely written out. Murlidhar Lathe agreed that the remainder of the contract should be written the next day. On the following day between 3 and 4 P.M Ramgopal Ganpatrai completed the writing of the terms of the contract and Murlidhar Lathe again signed it upon the request of Ramgopal Ganpatrai.
From this explanation it would appear as if the terms of the added clause had been agreed upon some time previously and that it was not included in the contract as written on the 12th of November because Ramgopal Ganpatrai had to leave hurriedly. There can be no doubt that this subsequent version differs very materially from the earlier version given by the defendants' solicitors, and Mr. P.R Das strongly relies upon this fact in support of his contention that the version of Murlidhar Lathe is true and should be accepted. It is further pointed out that Murlidhar Lathe was a resident of Bihar and Diwali day in Bihar was the 10th November and not the 12th. It is, therefore, said that the defendants' version that Murlidhar Lathe was anxious to sign the document on the 12th because the day was auspicious cannot possibly be true. Of course, it may be that Murlidhar Lathe being resident in Bombay regarded the 12th of November as Diwali day as other citizens of Bombay appear to have done.
It is also urged that defendants are not telling the truth on another point. They stated through their solicitors in the first letter that Murlidhar Lathe was a partner. In the application for stay they described the plaintiffs as members of a joint family and the firm as a family firm. In such a case Murlidhar Lathe, who was not a member of the family, could not be a partner.
In my view there are charges of fraud in this case which need investigation. The charges made on behalf of the plaintiffs are supported by the affidavit of Murlidhar Lathe, and if the statements of the latter are accepted then a case of fraud might well be held to be made out. In such a case it must be held that there is a prima facie case of fraud, though, of course, I do not hold that fraud has been established. Nothing, which I have said in this judgment, must be construed as holding that the plaintiffs have proved their case. All I hold is that there is a prima facie case which needs inquiry and investigation.
The question then arises as to what a Court should do when a prima facie case of fraud is made out. If the person opposing, an application to stay a civil suit is charged with fraud, a Court will invariably refuse to stay at the request of such person so charged. A charge of fraud is a very serious matter, and anybody charged with it has a right to have such a charge investigated by the Court.
On the other hand, if the party resisting an application to stay a civil suit is the party making a charge of fraud, different considerations arise as the person charged does not desire trial by a Civil Court. In such a case the Court will stay the suit unless a prima facie case of fraud is made out. This is clearly laid down in the case of Russell v. Russell. At page 481 Jessel, M.R observed:—
“The next question I have to consider is, what foundation there is for the charges, because, if the mere making of a charge of fraud would entitle the person making it to call upon the Court, in the exercise of its discretion, to refuse to refer to arbitration, there would be a very easy way of getting rid of all these clauses of arbitration. I am satisfied that the mere making of a charge will not do that, even in a case where the Court ought to exercise its discretion by refusing to refer the case to arbitration. There must be sufficient prima facie evidence of fraud, not conclusive or final evidence, because it is not the trial of the action, but sufficient prima facie evidence……
I consider, therefore, that whether or not there may be a case in which, at the instance of the person charging fraud, the Court can properly refuse to refer the matter to arbitration, there is no such prima facie case of fraud made out as ought to influence the Court, and therefore I think I ought to grant the Defendant's motion.”
A similar view was taken by Romer, J. in Barnes v. Youngs. In that case articles of partnership provided that a partner might be expelled for breach of certain acts therein specified, and if any question should arise whether a case had happened to authorise the exercise of this power, such question should be referred to arbitration. The defendants served a notice on the plaintiff to determine the partnership on the ground that he had committed a breach within the expulsion clause, but gave no details of the particular act complained of; the plaintiff thereupon brought an action to restrain the defendants from acting on this notice; the defendants moved to stay proceedings and refer all matters in dispute to arbitration. It was held that the preliminary question whether or not the notice of expulsion was valid was one more suitable for decision by the Court, than by an arbitrator, and that as there was a suggestion of a fraudulent exercise of the power of expulsion, the Court, in the exercise of its discretion, ought not to stay proceedings and enforce a reference. This decision of Romer, J. was later overruled by the Court of Appeal in Green v. Howell but not on the ground that the suit was allowed to continue because of the allegation of fraud. In fact, the Lords Justices expressly approved of the view of Romer, J. that the suit should not be stayed where there were allegations of fraud. The decision was overruled on an entirely different ground.
Having regard to the state of the authorities, I am satisfied that this is a proper case in which the suit should not be stayed. A. prima facie case of fraud has been established and, that being so, the allegations of fraud should, in my view, be investigated by a Civil Court which is a far more competent tribunal to decide such questions than a lay arbitrator.
For the reasons which I have given, I am satisfied that the plaintiffs' suit should not be stayed until it has been decided whether or not the added clause is binding upon the plaintiffs. If the decision upon that question is in favour of the plaintiffs, further proceedings in the suit will be stayed and all other questions must be referred to arbitration as provided in the contract. I would, therefore, either in appeal or in revision set aside the order of the Court below and direct that Court should proceed to hear and determine such part of the suit as is concerned with the validity or otherwise of the clause which was added on the 13th of November, 1939, and to proceed thereafter as directed in this judgment. The plaintiffs are entitled to one set of costs in these proceedings, and I would assess the hearing fee at ten gold mohurs.
Manohar Lall, J.:— I entirely agree.
K.D
Appeal and revisional application allowed.