The Printers (Mysore) Private Ltd vs Pothan Joseph

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

Court: supreme-court

Case Number: Civil Appeal No. 107 of 1960

Decision Date: 27 April, 1960

Coram: P.B. Gajendragadkar, K.N. Wanchoo, K.C. Das Gupta

In this case the Supreme Court of India recorded that the dispute arose between The Printers (Mysore) Private Limited, who were the appellant, and Pothan Joseph, who was the respondent, and that the judgment was delivered on 27 April 1960 by a bench consisting of Justice P. B. Gajendragadkar, Justice K. N. Wanchoo and Justice K. C. Das Gupta. The official citation of the decision appears as 1960 AIR 1156 and 1960 SCR (3) 713. The factual background disclosed that the respondent was the editor of the newspaper Deccan Herald, which was owned and published by the appellant, and that the parties had executed two contracts containing an arbitration clause. That clause provided that any difference arising in the interpretation or application of the contract should be referred to arbitration and that the resulting award would be binding, and it also stipulated that, besides the respondent’s monthly salary, he was to receive ten per cent of the profits of the newspaper. After the appellant terminated the respondent’s services, the respondent instituted a suit seeking accounts and the payment of the profit share claimed to be due to him. The appellant moved the trial court with an application under section 34 of the Arbitration Act 1940, contending that the suit should be stayed and that the dispute ought to be referred to arbitration in accordance with the contractual agreement. The trial judge declined to exercise his discretion in favour of the appellant and refused to stay the proceedings. On appeal the High Court affirmed the trial judge’s decision, and the appellant thereafter obtained special leave to appeal to this Court under article 136 of the Constitution of India. The Court held that the power conferred by section 34 of the Arbitration Act 1940 is discretionary; even when the statutory conditions are satisfied no party acquires an absolute right to a stay of court proceedings. The discretion must be exercised judicially, guided by the facts and circumstances of each case, and cannot be governed by rigid rules. Accordingly the Court emphasized that the trial judge must act with common sense and justice. The judgment quoted Gardner v Jay (1885) 29 Ch. D. 50 to illustrate that where the trial court’s discretion has been properly and judiciously exercised, an appellate court should not interfere merely because it might have reached a different conclusion. However, the Court also observed that if an appellate court finds that the trial court exercised its discretion in an unreasonable, capricious, or unjudicious manner, it is duty‑bound to intervene, citing Charles Osenton & Co. v Jhanaton (1942) A.C. 130. The Court further explained that the expressions “interpretation and application of the contract” in arbitration clauses cover not only disputes about the construction of contractual terms but also their effect, and that, unless the context suggests otherwise, a dispute concerning the working of the contract falls within the scope of such a clause. Finally, the Court cautioned that it would not lightly interfere under article 136 with the concurrent exercise of discretion by lower courts under section 34, and that any interference would require a finding that the lower courts had acted in a manifestly unreasonable or perverse way likely to defeat the ends of justice.

The Court observed that if a lower court fails to consider relevant facts, approaches the matter without due judgment, or acts unreasonably, it becomes the duty of the appellate court to intervene, citing Charles Osenton and Co. v. jhanaton, (1942) A. C. 130. The Court explained that the phrases “interpretation and application of the contract” that commonly appear in arbitration clauses, as they do in the contracts at issue, encompass not only disputes over the construction of the contract’s terms but also disputes concerning the effect of those terms; consequently, unless the surrounding context forces a different reading, any dispute concerning the operation of the contract falls within the scope of such a clause. Nevertheless, the Supreme Court would not readily interfere under Article 136 of the Constitution with the discretionary jurisdiction exercised by lower courts under section 34 of the Arbitration Act, 1940. The Court held that before it may rightly intervene, the appellant must demonstrate, based on the facts before the lower courts, that those courts exercised their discretion in a manifestly unreasonable or perverse manner that threatens to defeat the ends of justice. The judgment then set out the civil appellate jurisdiction for Civil Appeal No. 107 of 1960, which was filed by special leave from the judgment and order dated 21 September 1959 of the Mysore High Court, Bangalore, in Miscellaneous Appeal No. 68 of 1959. Counsel for the appellant included Purshottam Prikamdas, S. N. Andley, J. B. Dada‑Chanji, Rameshwar Nath and P. L. Vohra, while counsel for the respondent was K. R. Karanth and Naunit Lal. The judgment was delivered on 27 April 1960 by Justice Gajendragadkar. The respondent, Pothan Joseph, who served as editor of the Deccan Herald—owned and published by the appellant, The Printers (Mysore) Private Ltd., Bangalore—initiated proceedings against the appellant based on two contracts executed on 1 April 1948 and 20 February 1953. He sought the accounts of the newspaper’s operation from 1 April 1948 to 31 March 1958 and claimed payment of sums due under clauses 2(d) and 1(d) of those contracts. The appellant terminated the respondent’s services by a letter dated 28 September 1957, indicating that termination would become effective on 31 March 1958. A later letter dated 17 March 1958, however, informed the respondent that his services were terminated with immediate effect and instructed him to hand over responsibilities to his successor, Mr. T. S. Ramachandra Rao. On 14 July 1958 the respondent filed the present suit. The appellant argued that the two contracts contained an arbitration agreement, rendering the suit inadmissible, and therefore prayed for a stay of the suit and for the dispute to be referred to arbitration under section 34 of the Indian Arbitration Act, 1940.

In this matter, the appellant, a printing company that publishes the Deccan Herald in English and Prajavani in Kannada, had asked the trial‑court judge to stay the suit filed by the respondent on the ground that an arbitration agreement existed between the parties. The trial judge, however, exercised his discretion to refuse the application and allowed the suit to proceed. Consequently, the appellant appealed the decision to the Mysore High Court, but the appellate court dismissed the appeal and upheld the trial judge’s order, although it gave different reasons for doing so. The High Court observed that the trial judge had gone “much further than he should have done” in dealing with the appellant’s application and therefore it was appropriate that the case be tried before a different judge. Since the respondent did not raise any objection to this observation, the High Court ordered that the suit be transferred to the file of the Additional Civil Judge, Bangalore. Thereafter, the appellant applied to the High Court for a certificate of fitness for appeal to this Court; that application was denied on the basis that the order under appeal could not be described as a judgment, decree or final order within the meaning of Article 133 (1) of the Constitution. Because of that classification, the High Court considered it unnecessary to decide whether, on the merits, the matter was suitable for appeal to the Supreme Court. The appellant subsequently obtained special leave to appeal from this Court, and the present appeal therefore came before us. The principal issue that required determination was whether the courts below had erred in refusing to stay the respondent’s suit despite the existence of an arbitration agreement between the parties. Before addressing the substantive arguments raised by the parties, it was necessary to recite the material facts that gave rise to the present litigation. By a contract dated 1 April 1948, the appellant engaged the respondent to act as editor of the Deccan Herald for a period of five years, on terms and conditions specified in that contract. Clause (5) of the same agreement provided that the respondent’s employment could be extended for another five years, and the parties executed a subsequent contract on 20 February 1953 to that effect. The respondent’s services were abruptly terminated on 17 March 1958. Earlier, on 16 October 1957, the respondent had sent a letter to the appellant asserting certain claims under the Working Journalists Act and demanding one‑tenth of the profits earned by the Deccan Herald from 1948 up to the date of termination of his employment under the two contracts. The appellant rejected that claim. After a series of letters exchanged between the parties failed to resolve the dispute, the respondent instituted the present suit, contending that the two contracts entitled him to a share of one‑tenth of the profits generated by the newspaper during his period of employment and that he therefore sought an account of those profits and his corresponding share.

In the suit the respondent, who had been employed by the Deccan Herald, asserted that he was entitled to a one‑tenth share of the newspaper’s profits for the period of his service. Accordingly, he demanded that the accounts of the Deccan Herald be examined and that an account be prepared showing his proportionate share. The trial judge examined the submissions made by both sides and concluded that the matters raised did not give rise to a dispute that could be referred to arbitration under the parties’ arbitration agreement. The judge observed that the parties had, before the trial, tried to resolve their differences through the mediation of Mr Behram Doctor. That mediation, however, broke down because, in the judge’s view, the appellant was not genuinely engaged in settlement negotiations but was instead attempting to defer, defeat and delay the respondent’s actions. The judge further held that the defence of limitation raised by the appellant was a question that should be decided by a court of competent jurisdiction rather than by an arbitral tribunal. Although the respondent argued that the appellant had damaged his reputation and therefore he should be allowed to clear his name before a court, the trial judge was not persuaded by that contention. In rejecting the appellant’s application to stay the suit, the judge noted that if the newspaper’s accounts were not kept separately, a qualified accountant could apportion expenses and capital outlays among the various business activities of the appellant, leaving the arbitral tribunal with only a minimal issue to resolve. The judge was certain that the contract granting the respondent a one‑tenth share of profits implicitly required that the accounts of the Deccan Herald be maintained separately. On the basis of these considerations the trial judge declined to stay the proceedings and allowed the suit to continue in the appropriate court.

On appeal, the High Court affirmed the trial judge’s conclusions. The appellate court held that the controversy between the parties did not fall within the scope of the arbitration agreement. In reviewing the other determinations of the trial court, the High Court reiterated that Mr Behram Doctor had not been designated as an arbitrator; rather, his involvement reflected only an exploratory step by the parties to consider arbitration. The court noted the appellant’s status as a large corporate entity and recalled the respondent’s apprehension that the appellant might evade the respondent’s claim. Nonetheless, the High Court was not persuaded by those apprehensions and did not attribute any fault to the appellant for its conduct before the trial court. The appellate court also expressed the view that issues concerning limitation and the interpretation of the contractual provisions were not suitable for resolution by an arbitral tribunal and should be addressed by a judicial forum. Moreover, the court observed that the appellant had altered its position with respect to the pleas raised under the arbitration agreement: the arguments advanced during the mediation before Mr Behram Doctor differed markedly from those presented in the present suit. Accordingly, the High Court found no basis to stay the suit and upheld the trial judge’s refusal to order a stay.

The High Court then examined additional facts that it regarded as pertinent to the dispute. It observed that a considerable amount of animosity existed between the parties and that there was no basis for mutual accommodation. Consequently, the Court found that the appellant’s argument that resort to arbitration might facilitate a speedy resolution was unpersuasive, and, on the whole, the Court concluded that the order of the trial court refusing to stay the suit should be affirmed. The appellant, however, maintained that the reasons offered by the High Court for refusing the stay were unsatisfactory and that the discretion vested in the High Court in this regard had not been exercised properly or judiciously. Section 34 of the Arbitration Act provides the court with authority to stay legal proceedings when an arbitration agreement is in force, subject to the conditions enumerated in that provision. While the Court acknowledged that the conditions laid down in Section 34 were satisfied in the present case, it also noted that the statute expressly allows the court to decline a stay even when an arbitration agreement exists and the statutory requirements are met, if the court is convinced that sufficient reasons exist to prevent referral of the matter to arbitration. In other words, the power to stay proceedings is not a matter of right but is discretionary; consequently, a party bound by an arbitration agreement cannot automatically claim a stay of court proceedings solely on the basis of that agreement. Nevertheless, the Court emphasized that such discretion must be exercised in a proper and judicial manner. Ordinarily, when the parties have agreed to refer their dispute to a domestic tribunal, the court would ordinarily direct them to appear before the chosen tribunal and would stay the pending court action. As with all exercises of judicial discretion, the discretion conferred by Section 34 cannot be governed by rigid rules, and it would be both difficult and inappropriate to prescribe inflexible standards for its application. No single test can be formulated whose automatic application would resolve every instance of exercising such discretion. As Lord Bowen observed in Gardner v Jay (1885) 29 Ch D 30, “discretion, like other judicial discretion, must be exercised according to common sense and according to justice.” Accordingly, in exercising its discretion under Section 34, the court should not refuse a stay merely because one of the parties is reluctant to appear before an arbitrator or wishes to withdraw from the arbitration agreement, nor should a stay be denied solely on the ground that the parties’ relationship has become hostile or that arbitral proceedings might be delayed because of that hostility.

It would not always be reasonable or proper to refuse a stay of legal proceedings merely because certain questions of law are likely to arise in resolving the dispute between the parties. Conversely, when fraud or dishonesty is alleged against a party, the party whose character is attacked may contend that it should be afforded an opportunity to vindicate its reputation in an open trial before the court rather than before the domestic tribunal. In a proper case the court may regard that circumstance as a relevant factor in deciding whether to grant a stay, as noted in the authority (1) (1885) 28 Ch. D 30 58. If a considerable delay occurs in making an application for stay and such delay can reasonably be attributed to the parties’ abandonment of the arbitration agreement, the court may treat the delay as a material consideration in its stay analysis. Similarly, when the dispute raises complicated questions of law or constitutional issues and the court is satisfied that it would be inexpedient to leave such complex determinations to the arbitrator, it may, in appropriate circumstances, refuse to grant a stay on that ground. In those situations the arbitrator is empowered to state a special case for the opinion of the court under section 13(b) of the Act. Consequently, the decision whether to stay proceedings under section 34 must always be made by the court in a judicial manner, taking into account the specific facts and circumstances of each case. When the trial court has exercised the discretion conferred by section 34, the appellate court should be cautious in interfering with that exercise. At the appellate stage the higher court is normally not justified in overturning the trial court’s discretion merely because it might have reached a contrary conclusion had it considered the matter initially. If the trial court applied its discretion reasonably and in a judicial fashion, the appellate court’s different view does not, by itself, warrant interference. Generally, an appellate court may not substitute its own exercise of discretion for that of the trial judge, but where the trial court acted unreasonably, capriciously, ignored relevant facts, or adopted an unjudicial approach, the appellate court is entitled—and often obligated—to intervene. In such cases the trial court’s exercise of discretion is legally wrongful and improper, thereby justifying the appellate court’s interference.

The Court observed that when a trial judge exercises discretion in a manner that is legally wrongful or improper, such exercise must be corrected by the appellate court. This rule is firmly established in precedent. The Court quoted Viscount Simon, L. C., in Charles Osenton & Co. v. Johnston, stating that “the law as to the reversal by a court of appeal of an order made by a judge below in the exercise of his discretion is well established, and any difficulty that arises is due only to the application of well settled principles in an individual case.” In the present matter the Court noted an additional consideration. The appeal had been entertained by special leave under Article 136, which meant that the appellant did not possess an automatic right to contest the High Court’s decision. Rather, the Supreme Court could decide, at its own discretion, whether to entertain a challenge to the correctness or propriety of that decision. Consequently, the Court stressed that in determining whether to interfere with the order under appeal it must keep in mind that the remedy sought by the appellant is itself discretionary. Guided by these principles, the Court proceeded to examine whether the appellant’s grievance against the High Court’s order warranted affirmation.

The Court turned to the first issue for decision, namely the construction of the contracts between the parties. It pointed out that two agreements had been executed, but because their terms were substantially identical, the Court would focus on the later contract dated 20 February 1953. Under that contract the respondent was appointed Editor of the Deccan Herald, with a salary fixed at Rs 1,500 per month as provided in paragraph 1(a). Paragraphs 1(b) and 1(c) described additional amenities to which the respondent was entitled. Clause (d) of paragraph 1 stipulated that, whenever the newspaper recorded a profit in its annual accounts, the Editor would be entitled to one‑tenth of that profit; the respondent’s present claim was founded upon this clause. The obligations binding the respondent to remain in the appellant’s service were set out in paragraph 2(a) and 2(b). Paragraph 3 dealt with the possibility of renewing the contract for another five‑year term if such renewal served the mutual advantage of the parties. That same paragraph also imposed a non‑competition covenant, requiring the respondent, during the continuance of his employment, not to be directly or indirectly interested in any other newspaper business or journalistic activity that competed with the appellant’s enterprise.

It was provided in the contract that, should the agreement be terminated, the respondent was prohibited for a period of three years after termination from being directly or indirectly involved in any newspaper business of the same kind as that carried on by the appellant within the Mysore State. This restriction was intended to serve as consideration for the benefits that paragraph 1, and especially clause (d) of that paragraph, conferred upon the respondent. Paragraph 4 of the same contract contained an arbitration clause. The clause stipulated that any difference of opinion arising between the parties in respect of the interpretation or the application of the contract must be referred to arbitration. The parties were allowed to name an arbitrator jointly; if they could not agree on a single arbitrator, each side would appoint one arbitrator and the two appointed arbitrators would then select a third person to complete the arbitral panel. The award rendered by that panel was declared to be final and binding on both parties.

The High Court held that the present suit lay outside the scope of the arbitration agreement because, in its view, neither party contested the applicability of the contract’s terms to the dispute. The High Court interpreted the phrase “application of the contract” to mean a dispute concerning whether the contract itself applied, and since the parties did not argue that the contract was inapplicable and no dispute over its interpretation arose, the Court concluded that paragraph 4 was inapplicable to the present proceedings. Counsel for the appellant, Mr Purshottam, argued that the High Court’s construction of the word “application” was erroneous. He submitted that, in the contractual context, a difference of opinion concerning the application of the contract should be understood to refer to the working out of the contract or giving effect to its provisions. The Court agreed with this submission. It observed that the expression “interpretation or application of the contract” is commonly used in arbitration agreements to encompass disputes concerning both the construction of contractual terms and their effect. Unless the surrounding circumstances dictate a contrary meaning, a disagreement about how the contract is to be implemented ordinarily falls within the arbitration clause. The Court noted that, because both parties had signed the contract, a question of its applicability could not realistically arise. However, differences may, and indeed have, arisen concerning the manner in which the contract should be performed and enforced, and such differences are precisely what the arbitration clause was intended to address. Accordingly, the Court concluded that the High Court erred in holding that the present dispute was outside the ambit of paragraph 4.

In this case the Court observed that had the High Court declined to stay the proceedings solely on the basis of contract construction, the appellant would certainly have prevailed. However, the High Court’s decision was not founded exclusively, or even principally, on that issue. The language of the High Court’s judgment indicates that it also examined the other material facts brought before it and the substantive findings recorded by the trial judge. Although the High Court differed from the trial judge on certain points, it nonetheless concluded without difficulty that there was no justification for disturbing the trial court’s discretionary exercise under section 34. Consequently, even though the appellant succeeded before the Supreme Court on the question of how the arbitration agreement should be interpreted, the Court noted that, given the usual constraints it imposes on its jurisdiction under Article 136, the appellant must still demonstrate why interference with the concurrent discretionary decisions of the two lower courts would be warranted. Such a demonstration would inevitably depend on the additional relevant facts that both courts considered and relied upon, albeit in different manners.

The Court then turned to describe the broader factual landscape upon which the trial judge and the High Court based their respective conclusions. It was evident that the dispute did not arise from an ordinary commercial transaction containing a standard arbitration clause. The agreement in question was between a journalist and his employer, whereby the journalist’s remuneration was determined in an unusual way: he was to receive a specified percentage of the profit that the newspaper Deccan Herald earned each year. According to the respondent, he was taken aback when the newspaper’s General Manager told him that seventy‑five percent of the total expenditure incurred in the various activities of the appellant was being charged to Deccan Herald, and that capital liabilities were allocated in the same proportion. The respondent believed that this accounting method conflicted with the essential provisions of his contract. He further alleged that after learning of this system he protested to the Director, Mr Venkataswamy, who was actively involved in the appellant’s affairs, and that Mr Venkataswamy assured him that, beginning in 1955, the accounts were being kept separately. The respondent’s own letter dated 24 May 1955 (exhibit D‑1) suggests that the information from the General Manager disillusioned him and marked the commencement of the present dispute. On 18 February 1956 the respondent invoked the arbitration clause, informing Mr Venkataswamy that Mr Behram Doctor had consented to act as arbitrator and render an award (exhibit D‑2). In reply, addressed to the respondent as Managing Director, Mr Venkataswamy responded in a letter dated March

On March 5 1956 Mr. Venkataswamy replied that he was not the Managing Director and argued that the respondent could not rely on clause 4 of the contract because no monies were payable under element 1(d). Consequently the Court observed that Mr. Venkataswamy’s immediate answer to the respondent’s request for arbitration was that the arbitration clause could not be invoked (D.3). On April 23 1956 he sought to qualify that statement by saying he merely intended to convey that no occasion for invoking the arbitration agreement had arisen. The Court noted that this explanation appeared unsatisfactory because it did not address the respondent’s reliance on the contractual arbitration provision (D.10). Nevertheless, Mr. Venkataswamy consented to meet Mr. Behram Doctor, and on March 9 1956 the respondent supplied him with Doctor’s address and requested that he see Doctor. Accordingly, he communicated the meeting request to Mr. Behram Doctor, as reflected in document D.6, thereby initiating contact between the parties. The parties subsequently met on May 9 1956, when Mr. Behram Doctor received both the respondent and Mr. Venkataswamy at a joint session. Minutes of that meeting, retained by Mr. Behram Doctor and supplied to each side, show that he attempted to mediate and that both parties appeared willing to accept his mediation to settle the dispute. The appellant’s copy of the minutes contains a remark that Mr. Venkataswamy told Mr. Behram Doctor he had arrived on an unofficial visit and was speaking without the consent of the other directors. That remark does not appear in the version of the minutes provided by Mr. Behram Doctor to the respondent, and the Court does not seek to determine why it was omitted. Consequently, although Mr. Behram Doctor was never formally appointed as arbitrator and no written reference named him as such, the parties nevertheless endeavoured to resolve their differences through his assistance, an effort that ultimately failed. From the material before the Court, it may be inferred that the appellant was not eager to continue pursuing the dispute along the lines originally contemplated before Mr. Behram Doctor’s involvement. The record also suggests that, for several years, the accounts of the Deccan Herald were not maintained separately as the respondent asserts they should have been. The respondent contends that the accounts have not been kept separately throughout the ten‑year period, a matter that remains to be investigated. If the accounts were indeed maintained in a combined manner, the issue of how to allocate the expenditure would inevitably arise.

It was observed that the issue could be resolved by applying an ad hoc principle devised for that purpose. The appellant also raised a plea of limitation, contending that the first contract had merged into the second and that the respondent’s cause of action could arise only under the latter agreement. Consequently, it was suggested that the two contracts should be considered together when determining the limitation period. The appellant further argued that the respondent had been aware of the method by which the accounts were maintained each year and could therefore be deemed to have acquiesced to that accounting procedure. If the appellant pursued this point, it would require an examination of how the respondent’s conduct might affect his present claim. The appellant additionally alleged that the respondent had adopted a black‑mailing attitude towards the appellant, an accusation that the respondent regarded as an assault on his character. Relations between the parties had become highly embittered, and the respondent feared that, as a powerful company, the appellant might deliberately delay the proceedings and attempt to defeat the claim by protracting the arbitration process. It now appeared unlikely that the parties could agree to appoint a single arbitrator; consequently, if the dispute proceeded before the domestic tribunal, the two arbitrators each chosen by the parties might have to nominate a third arbitrator to complete the tribunal, a situation that could easily lead to a deadlock. The trial court had made attempts to settle the dispute, but those efforts failed, and the respondent complained that the appellant had displayed an unhelpful and non‑cooperative attitude. It was evident that when the parties entered into the present contract and agreed that any differences regarding the interpretation and application of the contract would be referred to arbitration, they had not anticipated the complications that later arose, which explains why an arbitration clause was incorporated in the contract. Both courts had examined all these facts; although their approaches and final decisions differed on material points, they ultimately agreed that the discretion vested in them should be exercised by refusing to grant the stay sought by the appellant. In view of these circumstances, the Court felt it would not be appropriate to substitute its own discretion for that exercised by the lower courts. The Court acknowledged that, had it been considering the appellant’s application under section 34, it might have reached a different conclusion, and it might have hesitated to confirm the trial‑court order if the matter were before a first‑instance appellate court; however, because the case now came before the Court under article 136, it was therefore able to

In the present matter, the Court explained that it would intervene in the concurrent exercise of discretion by the lower courts only when it was convinced that such exercise of discretion was clearly and unmistakably unreasonable, capricious or perverse, and that it threatened to defeat the ends of justice. After a careful review of all the circumstances and facts that had been recorded in the case, the Court concluded that the appellant had not demonstrated any circumstance that would justify such interference. Accordingly, the Court found that the appellant had not made out a case for the Court to step into the decision‑making process of the courts below. For that reason, the Court dismissed the appeal. The dismissal was made without any order as to costs, meaning that no party was required to pay the costs of the other. The final direction therefore confirmed that the appeal was dismissed.