Anderson Wright Ltd vs Moran And Company

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Not extracted

Decision Date: 01 November 1951

Coram: B.K. Mukherjea, Vivian Bose

In this matter the Supreme Court of India delivered its judgment on the first of November, 1951 involving Anderson Wright Ltd as the petitioner and Moran and Company as the respondent. The opinion was authored by Justice B.K. Mukherjea and the bench was composed of Justice B.K. Mukherjea together with Justice Vivian Bose and Justice Jagannadhadhas B. The case is reported in the 1955 volume of the All India Reporter at page 53 and in the 1955 Supreme Court Reports (First) at page 862. Subsequent citation references include entries such as E 1973 SC2071 (5) and R 1975 SC 469 (6) as well as D 1985 SC1156 (59) and R 1989 SC 839 (18,25). The dispute fell under the Arbitration Act of 1940, specifically section thirty-four, which governs applications for a stay of legal proceedings where an arbitration agreement exists between the parties.

The Court articulated a precise set of conditions that must be satisfied before a stay may be granted under section thirty-four of the Arbitration Act. Firstly, the proceeding seeking the stay must have been instituted by a party who is bound by an arbitration agreement against another party who is also bound by that agreement. Secondly, the suit or legal action intended to be stayed must concern a matter that the parties have expressly agreed to refer to arbitration. Thirdly, the applicant requesting the stay must be a party to the litigation and must not have taken any steps in the proceeding after his appearance that would prejudice the arbitration process; additionally, he must demonstrate that at the inception of the proceedings he was ready and willing to undertake all actions necessary for the proper conduct of arbitration. Fourthly, the Court must be convinced that no sufficient reason exists to prevent the matter from being referred to arbitration in accordance with the agreement. The Court emphasized that the foundational prerequisite for any stay is the existence of a binding arbitration agreement between the parties to the suit. Determining whether the present dispute falls within the arbitration clause therefore requires first confirming that such an agreement exists, and then examining (i) the precise nature of the dispute raised in the suit and (ii) the scope of matters covered by the arbitration clause. It is the Court’s duty, when faced with an application for stay under section thirty-four, to first resolve the question of whether a valid arbitration agreement binds the parties. If the Court finds that the arbitration agreement and the contract containing it are indeed between the parties to the suit, then the dispute, being one concerning the parties’ rights and liabilities under that contract, would be covered by the arbitration clause, which is expressed in the broadest possible terms. Conversely, if the Court concludes that the plaintiff was not a party to the arbitration agreement, the application for a stay must be dismissed.

The Court held that if it were found that the respondent was not a party to the arbitration agreement, the application for a stay would have to be dismissed and the matter sent back for determination of whether the respondent was or was not a party to the arbitration agreement. In reaching that conclusion, the Court referred to the authorities Heyman v. Darwins ([1942] A.C. 356), Khusiram v. Hanutmal ((1948) 53 C.W.N. 505), A. M. Mair and Company v. Gordhandas ([1960] S.C.R. 792) and Patiram Y. Kankarah Company ((1915) I.L.R. 42 Cal. 1050). The judgment was rendered in a civil appellate jurisdiction as Civil Appeal No. 205 of 1953, an appeal from the judgment and order dated 24 February 1953 of the High Court of Judicature at Calcutta. That judgment itself arose from an appeal against Original Order No. 19 of 1952, which in turn stemmed from the order of 23 August 1951 in Ordinary Original Civil Jurisdiction Matter No. 157 of 1951 of the High Court of Calcutta. Counsel for the appellant, K. P. Khaitan together with his colleagues, appeared on behalf of the appellant, while the Attorney-General for India, M. C. Setalvad, assisted by his team, represented the respondents. The judgment dated 1 November 1954 was delivered by Justice Mukherjea. This appeal challenged a decision of an appellate bench of the Calcutta High Court dated 24 February 1953, which had reversed an earlier order of a single judge on the original side of the Court made on an application under section 34 of the Arbitration Act. The material facts, which were not in dispute, were summarized as follows: on 7 July 1950 the respondent, Moran and Company Limited, issued two “Bought Notes” to the appellant company. Both notes were identical and required the appellant to purchase a total of twelve lakh yards of hessian cloth, six lakh yards under each note, on terms and conditions set out therein. Delivery was to be made monthly from January 1951 at a rate of one lakh yards per month under each note, and payment was to be made in cash on delivery, each delivery constituting a separate and distinct contract. The notes began with the salutation “Dear Sirs, We have this day bought by your order and on your account from our principals.” The particulars of the goods, price, delivery schedule and other contractual terms were then detailed, including an arbitration clause stating that all matters, questions, disputes, differences or claims arising out of, concerning, in connection with, in consequence of or relating to the contract—whether the obligations of either party were subsisting at the time of the dispute, and whether the contract had been terminated, purported to be terminated or completed—shall be referred to the arbitration of the Bengal Chamber of Commerce under the rules then in force of its Tribunal of Arbitration, and that the arbitration shall be conducted according to those rules. The notes were signed by Moran and Company, which described itself as a broker.

It was admitted that the goods referred to in the Bought Notes had been delivered to the appellant in every month from January through June 1951, except for the delivery that was due in March 1951. The appellant demanded that the respondent deliver the March goods, but the respondent replied by a letter dated 27 March 1951, stating that its principals disowned any liability for those goods because the appellant had allegedly failed to give shipping instructions within the time stipulated in the contracts. The appellant denied that it had defaulted in giving shipping instructions and also rejected the respondent’s claim that it acted on behalf of any principal. Consequently, on 27 April 1951 the appellant sent a demand bill to the respondent claiming damages of Rs. 1,13,042-3-0 for the non-delivery of the March goods. When the respondent did not satisfy this demand, the appellant considered referring the dispute to the arbitration of the Bengal Chamber of Commerce, as expressly provided for in the contracts. While the appellant was preparing to initiate arbitration, the respondent, on 11 June 1951, instituted a suit against the appellant in the Original Side of the Calcutta High Court, identified as Suit No. 2516 of 1951, and the present application under section 34 of the Arbitration Act was filed in respect of that suit. The plaint alleged that the respondent had acted merely as a broker, and in that capacity had facilitated two contracts of sale and purchase evidenced by the two Bought Notes, the actual seller being a firm named Gowarchand Danchand. It further asserted that, because the respondent was not a party to the contracts, it could not incur any liability under their terms. Accordingly, the plaint prayed for a declaration that the respondent was not a party to the contracts and therefore bore no liability, and it also sought an injunction restraining the respondent from claiming any damages under those contracts. The writ of summons was served on the appellant on 23 June 1951. On 19 July 1951 the appellant filed an application under section 34 of the Arbitration Act, requesting that the proceedings in the suit be stayed so that the dispute could be resolved through the arbitration clause contained in the contracts. The application was heard by Das Gupta J., who granted the stay and ordered that no further proceedings be taken in the suit. In the learned judge’s opinion, the real issue in the case was not whether a contract existed between the appellant and the respondent, but whether the respondent, having admittedly transmitted the two Bought Notes to the appellant, could be held liable under the contract because it described itself as a broker.

In that case, the trial judge observed that the central question was whether the respondent, who had apparently acted as a broker, could be held liable under the contract simply because it described itself in that manner. The judge explained that answering this question required an interpretation of the contract itself, and that any dispute arising out of, concerning, or relating to the contract would fall within the scope of the arbitration clause contained in the agreement. The respondent was dissatisfied with this conclusion and appealed to the Appellate Division of the High Court. The appeal was heard by a bench comprising the Chief Justice and another judge. Both judges delivered separate opinions that nevertheless reached the same result: they allowed the appeal and set aside the order that had stayed the suit. The appellant then brought the matter before this Court, relying on a certificate issued under article 133(1)(a) of the Constitution. The question for consideration was whether, based on the facts, the appellant was entitled to a decree under section 34 of the Arbitration Act that would stay the suit initiated by the respondent.

Section 34 of the Arbitration Act was quoted in full: it permitted any party to an arbitration agreement, or any person claiming under such a party, to apply to the court to stay any legal proceedings that had been commenced against another party to the agreement, provided that the matter was one that had been agreed to be referred to arbitration. The statute required that the applicant file the application before filing a written statement or taking any other steps in the litigation, and that the court be satisfied that there was no sufficient reason not to refer the dispute to arbitration and that the applicant, at the time the proceedings began and thereafter, was ready and willing to do everything necessary for the proper conduct of the arbitration.

The Court identified four conditions that must be satisfied for a stay to be granted under this provision. First, the proceedings must have been commenced by a party to an arbitration agreement against another party to the same agreement. Second, the proceedings sought to be stayed must concern a matter that the parties had agreed to refer to arbitration. Third, the applicant for the stay must be a party to the legal action and must not have taken any step in the proceeding after his appearance. Fourth, the court must be convinced that there is no sufficient reason why the matter should not be referred to arbitration in accordance with the agreement. The Court noted that the third condition appeared to be fulfilled in the present case, and that the fourth condition was a matter for the court’s own determination. The remaining two conditions, concerning the identity of the parties to the arbitration agreement and the scope of the subject-matter, formed the core of the dispute that the Court would need to resolve.

In this case, the Court observed that the controversy between the parties focused on the second and third conditions required for a stay under section 34 of the Arbitration Act, namely that the respondent must be a party to an arbitration agreement and that the subject-matter of the suit must fall within the scope of that agreement. The Court explained that unless the applicant for a stay can demonstrate both that the respondent is bound by an arbitration agreement and that the dispute raised in the suit is covered by the arbitration clause, the Court cannot entertain a request to stay the proceedings.

The appellate bench of the High Court had held that the only question in dispute was whether the plaintiff was a party to the contract alleged to contain the arbitration clause. According to the plaintiff, the contract was not between the plaintiff and the appellant but was a contract between the appellant and a third party; consequently, the arbitration agreement embedded in that contract was said to bind only those two parties and could not affect the plaintiff. The High Court therefore concluded that the matter forming the basis of the suit did not arise under the contract and was entirely outside the ambit of the arbitration agreement. Based on that conclusion, the learned judges declined to examine the first requirement—that a binding arbitration agreement existed between the parties to the suit. Although the learned Chief Justice considered that point, he refrained from delivering a decision on it, expressing the view that deciding the issue might prejudice the parties and could create a bar of res judicata against one of them.

The Court at the present stage held that, given the facts, it was necessary for the appellate judges to determine whether the plaintiff in the suit, which the applicant sought to stay, was in fact a party to the arbitration agreement. This determination was material because it would influence the resolution of the other question on which the learned judges based their judgments. The Court reiterated that the first and essential prerequisite for granting a stay under section 34 is the existence of a binding arbitration agreement between the parties to the suit that is sought to be stayed. Moreover, the question of whether the dispute in the suit falls within the arbitration clause presupposes such an agreement and requires an analysis of two aspects: (1) the precise nature of the dispute raised in the suit; and (2) the scope of disputes covered by the arbitration clause. The plaintiff’s contention in the present suit was that the contract concerned the appellant and another party, not the plaintiff, and therefore the plaintiff could not be bound by the arbitration agreement.

The appellant claimed that the contract had been concluded between the appellant and a third party, and not between the appellant and the plaintiff. As a result, the plaintiff was not bound by that contract and could not be held liable for any damages arising under it. The substantive dispute therefore focused on whether the plaintiff had incurred any liability under the contracts evidenced by the two Bought Notes to which it had signed, regardless of the capacity in which it signed. The question of the plaintiff’s status as a party to the agreement was regarded as a matter that could not be submitted to the arbitrators. Consequently, the arbitrators were unable to entertain that issue and therefore could not render a decision on the plaintiff’s participation in the agreement. Counsel, however, cited Lord Porter’s observation in Heyman v. Darwins (2), stating that this does not mean that in every instance (1) Vide per Viscount Simon in Heyman v. Darwins, [1942] A C. 356 at 360. The passage continued that if such a rule were applied, the Court must refuse a stay when jurisdiction is disputed. The passage further explained that if such a rule were applied, any claim of lack of jurisdiction would defeat an arbitration agreement until the jurisdictional question was finally resolved (2). When an application for stay is made, the Court receives the facts and arguments and must, on the evidence before it, determine as best it can whether the arbitrator possesses jurisdiction. The stay application also provides an opportunity for the Court to consider these and other relevant factors before deciding whether the suit should be stayed. Section 34 of the Arbitration Act is essentially a copy of section 4 of the English Arbitration Act of 1889. The observations that had been quoted earlier received endorsement from Mr. Justice S. R. Das in the case of Khusiram v. Hanutmal (1). He held that when an application under section 34 raises a question concerning the formation, existence or validity of the contract containing the arbitration clause, the Court is not obligated to refuse a stay. The Court may, at its discretion, decide the existence or validity of the arbitration agreement, even though doing so may incidentally require a finding on the validity or existence of the underlying contract. The present Court expressed full agreement with the principle articulated in the earlier decision, emphasizing the Court’s discretion in such matters. It reiterated that, when asked to stay a suit under section 34, the Court must first determine whether a binding arbitration agreement exists between the parties to the suit. In the present case, if the Court finds that the arbitration agreement and the contract containing it were between the parties to the suit, the dispute will be covered by the arbitration clause.

In this case the Court explained that if the arbitration agreement and the contract containing it were found to be between the parties to the suit, the dispute would relate to the rights and liabilities of those parties on the basis of the contract itself and would therefore come within the scope of the arbitration clause, which is expressed in the widest possible terms, in accordance with the principle announced by this Court in A. M. Nair and Company v. Gordhandass (1) (1948) 53 C.W.N. 505 at 518. However, if the plaintiff were held not to be a party to the agreement, the application for a stay would necessarily have to be dismissed. The appellate Judges of the High Court, in the view of this Court, were correct in holding that the decision in A. M. Nair and Company v. Gordhandass (1) was not conclusive for the present case on the question of whether the dispute in the suit fell within the arbitration agreement. The report of that earlier case shows that the dispute there concerned whether the appellants had entered into the contract in their own right as principals or as agents of the Bengal Jute Mill Company. The resolution of that question depended upon a true construction of the contract and was therefore a dispute arising out of or concerning the contract. That judgment proceeded on the footing that a contract indeed existed between the parties and that the sole question was the character of the parties’ relationship, with the respondents contending that the appellants were not bound as principals and the appellants asserting the opposite. Justice Fazl Ali, in delivering the judgment, pointed out that the error apparently made by the learned Judges of the appellate bench of the High Court was to treat the dispute raised by the respondent regarding the appellants’ position under the contract as having the same effect as a dispute as to whether the contract had ever been concluded. In the present matter it is not admitted that the respondent was a party to the contract; in fact that is the very controversy that the suit seeks to resolve. Nevertheless, because the question has been raised in this application under section 34 of the Arbitration Act, the Court unquestionably possesses jurisdiction to determine whether a binding arbitration agreement exists between the parties to the suit. As expressed by Chief Justice Chakravartti and, in this Court’s opinion, correctly stated, if the person whose interest in the agreement is in issue is a signatory to the contract and is formally a contracting party, that fact will suffice for the Court, for purposes of section 34, to hold that he is a party to the agreement. The respondent before the lower court contended that this test was not satisfied in the present case. That point was also raised before this Court by counsel for the appellant, who, relying on several authorities, argued that the test had not been met.

In the cases that had been decided, the Court observed that where a Bought Note served only to inform the buyer that the buyer’s orders had been executed and that purchases had been made from parties other than the issuer of the note, the issuer did not become a party to the contract of purchase and sale, even in the capacity of an agent. The issuer remained a broker or intermediary, and consequently the provision of section 230(2) of the Contract Act could not be applied against him.

Mr Khaitan, however, contended that English law differed markedly from Indian law on the question of an agent’s liability when acting for an undisclosed principal, and that English authorities therefore offered no guidance for resolving the present dispute. He further argued that the decision in Patiram Banerjee v. Kanknarrah Co., Ltd. (1915) I.L.R. 42 Cal. I050, which the respondent relied upon, had been wrongly decided because it was based on English authorities that did not apply in India.

The Court noted that the respondent had signed a detailed document that set out every particular of the contract that had been entered into. From that fact, the Court held that it could not be said that the respondent was merely an agent executing a contract on behalf of another person whose identity he had not disclosed, nor that he was simply an intermediary conveying information to the buyer.

In the Court’s opinion, the issue was not free from doubt and required careful examination. Because the question had not been decided by the learned Judges of the High Court and their views on the matter were unavailable, the proper course was to remit the case for a hearing and a decision on that point. Accordingly, the Court allowed the appeal, set aside the judgments of both lower courts, and directed that the matter be returned to the appellate bench of the Calcutta High Court. The High Court was instructed to determine, in the proceedings under section 34 of the Arbitration Act, whether the respondent was a party to the arbitration agreement. If the High Court found that the respondent was indeed a party, the suit would be stayed and the appellant would be permitted to proceed by arbitration in accordance with the arbitration clause. Conversely, if the finding was adverse to the appellant, the application would be dismissed. The appellant was awarded its costs of the appeal, and any further costs between the parties would depend on the ultimate result. The appeal was thus allowed.