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: 1 November 1954

Coram: Vivian Bose, Mukherjea J.

In this matter, the Supreme Court of India recorded a judgment dated 1 November 1954 concerning the dispute titled Anderson Wright Ltd. versus Moran And Company. The judgment was authored by Justice Vivian Bose, who also constituted the bench for the decision. The case before the Supreme Court was an appeal against a decision of an appellate bench of the Calcutta High Court dated 24 February 1953. That appellate judgment had set aside, on appeal, the earlier order and judgment of a single judge who sat on the Original Side of the Calcutta High Court and had ruled on an application filed under section 34 of the Arbitration Act. The Supreme Court therefore had to consider the correctness of the reversal of the lower court’s order and to examine the factual background surrounding the application under the arbitration provision.

The factual matrix, which was not contested, may be summarized as follows. On 7 July 1950 the respondent, Moran and Company Limited, issued two documents identified as Bought Notes to the appellant, Anderson Wright Ltd. Both notes were drafted in identical terms and each note indicated that the appellant was purchasing six hundred thousand yards of hessian cloth, making a total purchase of twelve lakh yards under the two contracts. The contracts stipulated that delivery of the cloth would commence in January 1951 and would continue each month thereafter at a rate of one lakh yards per month under each note. Payment for each monthly delivery was to be made in cash at the time of delivery, and each delivery was to be treated as a distinct and separate contract. The Bought Notes began with the salutation, “Dear Sirs, We have this day Bought by your order and on your account from our Principals.” The notes also contained a comprehensive arbitration clause which provided that any matter, question, dispute, difference, claim or controversy arising out of, concerning, in connection with, or in consequence of the contract—whether the obligations of either party were subsisting at the time of the dispute, whether the contract had been terminated, purportedly 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. The notes were signed by the respondent, Moran and Company, which described itself in the signature block as acting as a broker.

It is admitted that the goods covered by the Bought Notes were delivered to the appellant for every month from January through June 1951, except for the delivery that was due in March 1951. The appellant subsequently demanded that the respondent deliver the missing March consignment. In response, the respondent sent a letter dated 27 March 1951 stating that its principals disowned any liability for the March delivery because, according to the respondent, the appellant had defaulted by failing to give the required shipping instructions within the time prescribed in the contracts. The appellant rejected this allegation, denying any default on its part and also refusing to accept the respondent’s claim that it was acting on behalf of any principal. On 27 April 1951 the appellant forwarded its bills to the respondent, seeking remuneration for the undelivered goods. The bills amounted to a claim for damages arising from the alleged non-delivery.

In this case, the appellant sent a demand to the respondent for the amount of Rs 1,13,042-3-0 as compensation for the failure to deliver the goods. Because the respondent did not meet this demand, the appellant considered referring the dispute to the arbitration of the Bengal Chamber of Commerce as prescribed in the contracts. While the appellant was preparing to take that step, the respondent instituted a suit against the appellant in the Original Side of the Calcutta High Court, identified as Suit No 2516 of 1951. The present application under section 34 of the Arbitration Act was filed in connection with that suit. The plaint alleged that the plaintiff had acted merely as a broker and, in that capacity, had facilitated two contracts of sale and purchase evidenced by the two Bought Notes previously mentioned. The plaint asserted that the actual seller was a firm called Gowarchand Danchand and that, because the plaintiff was not a party to the contracts, it could not be held liable under their terms. The relief sought in the plaint comprised a declaration that the plaintiff was not a party to those contracts and therefore bore no liability, together with an injunction restraining the respondent from claiming any damages arising from 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, praying that the proceedings in the suit be stayed so that the dispute could be resolved under the arbitration clause contained in the contracts. The application was heard by Judge Das Gupta, who granted the prayer and ordered a stay of further proceedings in the suit. In the judge’s view, the central issue was not whether a contract existed between the appellant and the respondent, but whether the respondent, who had admitted passing the two Bought Notes to the appellant, could be held liable under the contract because it described itself as a broker. The judge concluded that the answer to that question depended on the interpretation of the contract itself, and that any dispute arising out of, concerning, or relating to the contracts fell within the scope of the arbitration clause.

The respondent challenged this decision by filing an appeal to the Appellate Division of the High Court. The appeal was heard by a bench consisting of Chief Justice Chakravartti and Justice Sarkar. Both judges delivered separate judgments that concurred in the result, allowing the appeal and setting aside the order that had stayed the suit. The appellant then approached this Court, invoking a certificate under article 133(1)(a) of the Constitution. The precise question before this Court was whether, on the facts of the case, the appellant was entitled to an order under section 34 of the Arbitration Act that would stay the proceedings of the suit launched by the respondent.

In the facts of this case, the appellant was entitled to obtain an order under section 34 of the Arbitration Act that would stay the suit that the respondent had commenced. Section 34 of the Arbitration Act is worded as follows: “Where any party to an arbitration agreement or any person claiming under him commences any legal proceedings against any other party to the agreement 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 before filing a written statement or taking any other steps in the proceedings, apply to the judicial authority before which the proceedings are pending to stay the proceedings; and if satisfied that there is no sufficient reason why the matter should not be referred in accordance with the arbitration agreement 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, such authority may make an order staying the proceedings.” In order for a stay to be granted under this provision, four conditions must be satisfied. First, the proceeding must have been instituted by a party to an arbitration agreement against another party to the same agreement. Second, the legal proceedings that are sought to be stayed must relate to a matter that the parties have agreed to refer to arbitration. Third, the applicant for the stay must be a party to the legal proceedings and must not have taken any step in the proceedings after his appearance. It is also required that the applicant demonstrate that he was, at the commencement of the proceedings and continues to be, ready and willing to do everything necessary for the proper conduct of the arbitration. 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 arbitration agreement. The Court found that the third condition was satisfied on the facts of the present case, and the fourth condition is a matter that the Court alone must determine. The dispute between the parties therefore turns on the remaining two conditions, namely the first and second conditions. Unless the applicant can establish that the respondent is a party to an arbitration agreement and that the subject matter of the suit falls within the scope of that agreement, the applicant cannot obtain a stay of the proceedings under section 34. The learned judges of the High Court appellate bench held that the only issue in dispute between the parties to the suit was whether the plaintiff was a party to the contract. The plaintiff alleged that the contract was not between it and the appellant but was a contract between the appellant and a third party, and consequently the arbitration clause could not bind the plaintiff.

In the case before the Court, the plaintiff argued that the contract which contained the arbitration agreement was executed only between the appellant and a third party, and therefore the arbitration clause bound only those two parties. Consequently, the plaintiff contended that the arbitration agreement could not bind or affect it in any manner. The plaintiff further maintained that the dispute giving rise to the present suit did not arise under the contract, that it was unrelated to the contract, and that it lay entirely outside the scope of the arbitration clause. The appellate judges consequently based their decision on the conclusion that the matter in dispute between the parties to the suit did not fall within the ambit of the arbitration clause. Because of that finding, the learned judges did not deem it necessary to examine the preliminary issue of whether a binding arbitration agreement existed between the parties to the suit. The learned Chief Justice, although he briefly considered that preliminary point, deliberately refrained from pronouncing a decision on it. He expressed the view that making a determination on that question— which was the sole issue in the suit—might prejudice the parties and could create a bar of res judicata against one or the other.

The Court considered that, given the facts, the appellate judges should have addressed the question of whether the plaintiff was a party to the arbitration agreement that the applicant sought to enforce. That determination was material because it would influence the other question on which the learned judges based their judgments. The first and essential prerequisite for granting a stay under section 34 of the Arbitration Act is the existence of a binding arbitration agreement between the parties whose suit is to be stayed. The inquiry into whether the dispute falls within the arbitration clause presupposes such an agreement and requires analysis of two aspects: (1) the nature of the dispute in the suit, and (2) the range of disputes covered by the arbitration clause, as explained by Viscount Simon in Heyman v. Darwins, [1942] A.C. 356 at 360. The plaintiff’s contentions were that the contract was in fact between the appellant and another party, not between the plaintiff and the appellant, and therefore the plaintiff was not bound by the contract nor liable for any damages arising therefrom. In substance, the controversy centered on whether the plaintiff incurred any liability under the contracts evidenced by the two Bought Notes to which it was a signatory, regardless of the capacity in which it signed. The question of the plaintiff’s status as a party to the agreement could not be addressed by the arbitrators, and, as Lord Porter observed in Heyman v. Darwins, the arbitrators lacked jurisdiction to decide that issue.

In this case the Court referred to the passage from Heyman v. Darwins ([1942] A.C. 356, 393), observing that a claim that an arbitrator lacks jurisdiction does not obligate the Court to refuse a stay of the suit in every circumstance. The Court explained that if this were so, any assertion of lack of jurisdiction would defeat an agreement to refer disputes to arbitration, at least until the jurisdictional question itself was resolved. Accordingly, when an application for a stay is made, the Court is placed in possession of the relevant facts and arguments and must, on the basis of the evidence before it, determine as best it can whether the arbitrator possesses jurisdiction. The stay application therefore provides an opportunity for the Court to consider these and other matters before deciding whether the suit should be stayed.Section 34 of the Arbitration Act, which closely mirrors section 4 of the English Arbitration Act of 1889, was cited as the statutory basis for such applications. The observations quoted above received approval from Mr. Justice S. R. Das in Khusiram v. Hanutmal ((1948) 53 C.W.N. 505 at 518). Justice Das held that where an application under section 34 raises a question concerning the formation, existence, or validity of the contract that contains the arbitration clause, the Court is not compelled to deny a stay. Rather, the Court may, at its discretion, resolve the issue of the arbitration agreement’s existence or validity, even though doing so may incidentally require it to consider the validity or existence of the underlying contract.The Court affirmed its complete agreement with the view articulated by Justice Das. It reiterated that when the Court is invited to stay a suit under section 34, its first duty is to ascertain whether a binding arbitration agreement exists between the parties to the suit. If it is established that both the arbitration agreement and the contract that incorporates it were concluded between the parties, then the dispute before the Court concerns the parties’ rights and liabilities under that contract. Such a dispute would fall within the scope of the arbitration clause, which is worded in the widest possible terms, in line with the principle set out by this Court in A. M. Mair and Company v. Gordhandass ([1950] S.C.R. 792). Conversely, if the Court finds that the plaintiff was not a party to the agreement, the application for a stay must be dismissed.The Court further noted that the appellate judges of the High Court correctly held that the decision in A. M. Mair and Company v. Gordhandass was not conclusive in the present case regarding whether the dispute in the suit is covered by the arbitration agreement.

In the earlier arbitration dispute, the record indicated that the controversy centred on whether the appellants had executed the contract in their own capacity as principals or had acted as agents of the Bengal Jute Mill Company. The determination of that question was held to depend on a proper construction of the contract, and consequently the matter was classified as a dispute under, arising out of, or concerning that contract. The judgment proceeded on the premise that a contract indeed existed between the parties and that the only issue was the character in which the parties stood. The respondents contended that the appellants were not bound as principals, whereas the appellants maintained that they were. Justice Fazl Ali, delivering the judgment, observed that the appellate judges of the High Court had erred by treating the respondent’s challenge to the appellants’ position under the contract as having the same effect as a claim that the contract had never been concluded.

In the present suit it was not admitted that the respondent was a party to the contract; that very point formed the subject-matter of the litigation. Nevertheless, because the application was made under section 34 of the Arbitration Act, the Court possessed jurisdiction to determine whether a binding arbitration agreement existed between the parties to the suit. Chief Justice Chakravartti, and, in the present view, correctly, held that if the person whose interest in the agreement is questioned is a signatory and a formal contracting party, that circumstance is sufficient for the Court to deem him a party to the agreement for the purposes of section 34. The respondent before the lower Court argued that this test was not satisfied in the present facts. Counsel for the respondent, relying on several decided cases, argued that in situations of this description the “Bought Note” served merely as an intimation to the buyer, that the buyer’s orders had been fulfilled and purchases were made from parties other than the respondent, and that therefore the respondent did not become a party to the purchase-and-sale contract even as an agent. He remained a broker or intermediary, and the provisions of section 230(2) of the Contract Act could not be invoked against him. Counsel for the opposite side countered that English law, which treats the liability of an agent contracting for an undisclosed principal differently from Indian law, could not guide the resolution of this question. It was further submitted that the decision in Patiram Banerjee v Kanknarrah Co., Ltd. ((1915) I.L.R. 42 Cal. 1050) was wrongly decided because it rested on English authorities that do not apply in India. The respondent had signed a comprehensive document detailing every aspect of the contract, making it implausible to characterize him as merely an intermediary conveying information to the buyer. The Court observed that the issue was not free from doubt and required careful consideration, and because the High Court had not addressed it and its views were unavailable, the appropriate course was to remit the matter for a hearing and determination on that point. Accordingly, the Court allowed the appeal, set aside the judgments of both lower courts, and remitted the case to the appellate bench of the Calcutta High Court for further determination.

In this case, the Court observed that the decision in v. Kanknarrah Co., Ltd. ((1915) I.L.R. 42 Cal. 1050), which the respondent had relied upon, was erroneous because it was founded on English authorities that do not apply to Indian law. The Court further noted that the respondent had signed a detailed document which set out every term of the contract in full, and therefore it could not be said that the respondent was merely an agent acting for an undisclosed principal or simply a broker passing information to the buyer. The Court expressed the view that the question of the respondent’s status was not settled beyond doubt and required careful examination. Since the issue had not been decided by the learned Judges of the High Court and their opinions on the matter were unavailable, the Court considered that the appropriate step was to return the case to the High Court for a fresh hearing and a determination of the issue.

The Court consequently allowed the appeal and set aside the judgments of both lower courts. It directed that the matter be remitted to the appellate bench of the Calcutta High Court, which, in accordance with section 34 of the Arbitration Act, will decide whether the respondent was a party to the arbitration agreement. The Court explained that if the High Court concludes that the respondent was indeed a party to the agreement, the present suit will be stayed and the appellant will be permitted to proceed with arbitration pursuant to the arbitration clause. Conversely, if the High Court finds that the respondent was not a party, the appellant’s application will be dismissed. The Court awarded the costs of this appeal to the appellant and indicated that any further costs between the parties will depend on the final result. The appeal was therefore allowed.