Michael Golodetz And Others vs Serajuddin and Company
Rewritten Version Notice: This is a rewritten version of the original judgment.
Court: Supreme Court of India
Case Number: Civil Appeal No. 493 of 1960
Decision Date: 12 December, 1962
Coram: J.C. Shah, P.B. Gajendragadkar, K.N. Wanchoo, K.C. Das Gupta
In this matter the Supreme Court of India rendered its judgment on 12 December 1962. The case was titled Michael Golodetz and Others versus Serajuddin & Company. The opinion was authored by Justice J.C. Shah, and the bench also consisted of Justices P.B. Gajendragadkar, K.N. Wanchoo and K.C. Das Gupta. The parties were identified in the record as the petitioners, Michael Golodetz and others, and the respondent, Serajuddin & Company. The judgment was cited as 1963 AIR 1044 and 1964 SCR (1) 19, with additional citator references including E 1975 SC 469, RF 1981 SC 2085 and others. The dispute arose under the Arbitration Act of 1940, specifically section 34, which deals with the power of a court to stay a suit when an arbitration agreement exists.
The factual background involved a written contract for the supply of goods between an Indian firm, identified as the respondents, and a firm carrying on business in the United States of America, identified as the appellants. The contract contained an arbitration clause stipulating that any dispute would be resolved by arbitration in New York pursuant to the rules of the American Arbitration Association. When a dispute later emerged, the American firm invoked the arbitration clause and referred the matter to the designated foreign tribunal. In response, the Indian firm instituted a suit in the original side of the Calcutta High Court seeking cancellation of the contract and a perpetual injunction to restrain the American firm from taking any steps towards enforcement of the contract. The American firm subsequently filed a petition in the same High Court requesting a stay of the suit under section 34 of the Arbitration Act, 1940.
The petition was heard by a single judge of the High Court. The judge held that a party dissatisfied with the manner in which a foreign tribunal conducts its proceedings must contest those proceedings according to the law governing the tribunal, and that the Indian respondents had not demonstrated sufficient reasons to deny a stay of the suit. The order of the single judge was appealed under the Letters Patent, and the appellate court set aside the earlier decision. Following that, the American firm obtained special leave to appeal before this Court.
The principal question before the Supreme Court was whether the court of first instance had exercised its discretion properly in granting a stay of the suit. The Court held that an arbitration clause in a commercial contract between merchants residing in different countries forms an integral part of the contract on which the parties rely when they enter into the agreement. However, the presence of such a clause does not automatically deprive a court of its territorial jurisdiction to entertain a suit filed by one of the parties, even if that suit appears to breach the arbitration covenant. The Court further observed that ordinarily the parties are required to resort to the tribunal specified in the contract for the resolution of disputes arising under that contract, but the Court may refuse its assistance when the party seeking relief is without sufficient reason for abandoning the bargain. The judgment concluded that the determination of whether sufficient reasons exist to refuse a stay is a question of fact that must be decided by considering all the circumstances of the case.
The Court explained that, when parties include an arbitration clause at the time they execute a contract, the courts may still decline to assist in the arbitration if the party seeking assistance does not provide adequate reasons for withdrawing from the agreement. The determination of whether sufficient reasons exist for refusing a stay of proceedings is a matter that must be assessed by the court after considering all relevant circumstances. The Court emphasized that deciding if the facts of a particular case justify refusing a stay is essentially a factual inquiry. In the case before it, all the evidence submitted by the parties was located in India, and the existing restrictions imposed by the Government of India on the availability of foreign exchange made it impossible for the respondents to transport their witnesses to New York for examination before the arbitrator. Consequently, the arbitration proceeding would effectively be conducted ex parte. After reviewing the balance of convenience, the Court concurred with the High Court’s conclusion that a stay should not be granted.
The appeal arose under civil appellate jurisdiction, identified as Civil Appeal No. 493 of 1960, and was taken by special leave from the judgment and order dated 29 April 1959 of the Calcutta High Court, which itself was an appeal from Original Order No. 177 of 1958. Counsel for the appellants argued the case, while counsel for the respondent, including the Solicitor General of India, presented the opposing arguments. The judgment was delivered on 12 December 1962 by Justice Shah. The appellants were described as an importing firm conducting business under the name “M. Golodetz & Company” with its principal place of business at 120 Wall Street, New York, United States. The respondents were a firm engaged in various businesses, notably as exporters of manganese ore, with their main office situated on Bentinck Street in Calcutta.
According to a written contract dated 5 July 1955, the respondents agreed to sell, and the appellants agreed to purchase, twenty‑five thousand tons of manganese ore on the terms set out in that agreement. The contract incorporated an arbitration clause stating: “Arbitration: Any dispute arising out of the contract is to be settled by arbitration in New York according to the rules of the American Arbitration Association.” Between September 1956 and August 1957 the respondents delivered five thousand four hundred seventy‑eight tons of manganese ore. Disagreements later emerged concerning the respondents’ obligation to ship the remaining undistributed quantity of ore. On or about 15 January 1958 the appellants referred these disputes to the arbitration of the American Arbitration Association and sought compensation, alleging that the respondents had unlawfully defaulted on their duty to ship the balance of the goods. Subsequently, on 2 February 1958 the respondents instituted a suit in the original side of the Calcutta High Court, seeking a decree that the written contract of 5 July 1955 be declared void, rescinded, and cancelled, and that a perpetual injunction be issued restraining the appellants, their servants, and their agents from taking steps that would enforce the purported contract, as well as seeking a declaration, if necessary, that the contract was discharged and that the parties held no further rights or obligations thereunder.
The respondents asked the Court to order that any steps taken in alleged enforcement of the contract be halted, and that, if necessary, a declaration be made that the contract was discharged and that the parties no longer possessed any rights or obligations under it. They contended that the appellants had accepted the manganese ore delivered up to August 1957, which they said fully satisfied the appellants’ liability; consequently they argued that the contract was thereby discharged and that all rights and liabilities of the parties had terminated. In an alternative pleading the respondents asserted that the appellants had either repudiated the contract or committed breaches of it, and that on that ground the contract was either discharged, void, or voidable at the respondents’ option, and that they had accordingly avoided it. In a further alternative they claimed that performance of the contract had become impossible, that the contract was frustrated and therefore discharged, and that they were thereby released from any further performance obligations.
The appellants responded by filing a petition in the High Court of Calcutta seeking an order, under section 34 of the Arbitration Act 1940, to stay the suit identified as No 194 of 1958, which had been instituted by the respondents, and also asked for an injunction restraining the respondents, their agents and servants from proceeding with the hearing of that suit. Justice Ray, who heard the petition, held that the arbitration clause referring disputes to a foreign arbitral body fell within the operation of section 34 of the Indian Arbitration Act, 1940, and that the appropriate remedy for a party aggrieved by the conduct of the foreign proceedings or by the award was to contest those proceedings before the foreign tribunal in accordance with the law applicable to that tribunal. Accordingly, Justice Ray found no sufficient reason to refuse a stay of the suit, since the parties had agreed to refer the disputes to arbitration. On appeal under the Letters Patent, the High Court reversed this decision, observing that the trial judge had not exercised discretion properly because he had ignored material circumstances revealed by the evidence. The appellate court noted that all relevant evidence concerning the contract and the disputes was located in India, and that, because of Government‑imposed restrictions on foreign exchange, the respondents would face special difficulties in producing that evidence before a foreign tribunal, making such a forum unsafe and inconvenient for a just determination. The court also recorded that the Advocate General, appearing for the appellants, conceded that the entire dispute would be governed by Indian law, the Indian Arbitration Act and the Indian Contract Act, and therefore the discretion to refuse a stay should be exercised. On these bases the High Court set aside Justice Ray’s judgment and vacated the order.
The order that had been passed by the lower judge was set aside, and, with the grant of special leave, the present appeal was filed. For the purposes of this appeal the Court proceeded on the premise that section 34 of the Arbitration Act, 1940 confers on an Indian court the power to stay any legal proceeding that is initiated by one party to an arbitration agreement against another party, even where the agreement provides for the dispute to be submitted to a foreign arbitral tribunal. In the usual situation, when a party who is bound by an arbitration agreement institutes a suit to obtain a determination of a matter that the parties have agreed to refer to arbitration, the court ordinarily prefers to stay the suit. Such a stay directs the plaintiff to present the dispute to the tribunal that the parties have selected for adjudication. The court is generally reluctant to tolerate a breach of the solemn duty to approach the chosen tribunal, unless there are sufficient and compelling reasons to do otherwise, particularly where the other party remains ready and willing to cooperate fully with the arbitration process. This principle is applicable to arbitrations conducted by both foreign and domestic tribunals.
The authority emanating from section 34 is inherent in the court, which insists—unless a satisfactory justification to the contrary is demonstrated—that the parties must honour the entire bargain they have entered into. Failing to enforce the bargain would permit a party to the contract to act inconsistently with its own obligations, a situation the court seeks to avoid. This concern is amplified when the contract contains a clause obligating the parties to submit any dispute arising under it to a foreign arbitral tribunal. A provision in a commercial transaction between merchants who reside in different countries, agreeing to resolve differences by arbitration, forms an essential part of the transaction on which the parties rely when they enter into the contract. Nevertheless, this does not stop the court, by virtue of its territorial jurisdiction, from entertaining a suit filed by one of the parties, even if that suit breaches the arbitration covenant. The court may decline to assist in a case where the party seeking judicial intervention lacks a sufficient reason for abandoning the bargain. When the court refuses to stay the suit, it is effectively refusing to enforce the party’s contractual commitment because special circumstances render such enforcement inequitable. Ordinarily, the court expects the parties to resolve contractual disputes before the tribunal that they contemplated at the time of contracting, not because the court wishes to relinquish its jurisdiction over matters within its competence, but because it aims to uphold the sanctity of contracts. While the court’s jurisdiction to try the suit remains undisputed, its discretion to stay the proceedings is exercised on equitable grounds. Consequently, the court is under no obligation to grant a stay merely because the parties, under a commercial contract, have agreed to submit their dispute to an arbitrator, particularly a foreign one.
In this case the Court examined whether a suit should be stayed when the parties had agreed that any dispute would be submitted to an arbitration tribunal situated in a foreign country. The Court noted that it must consider all of the surrounding circumstances before reaching a conclusion as to whether there were sufficient reasons to refuse a stay. The Court emphasized that the determination of whether the circumstances of a particular case justify refusing a stay is essentially a question of fact, and that each case must be assessed on its own peculiar facts.
The appellants, through their petition for a stay, asserted that the petition was filed in good faith and at the earliest possible opportunity. They claimed that they were ready and willing to do everything necessary for the proper conduct of the arbitration proceedings and that there was no adequate reason why the matters giving rise to the suit could not be referred to arbitration in accordance with the arbitration agreement contained in the contract.
The respondents, by way of a counter‑affidavit, contended that all of the evidence and all of the witnesses relating to the subject‑matter of the suit were located in India and that no part of such evidence was present in New York. They further submitted that the contract dated 5 July 1955 was governed by Indian law and that the Indian Contract Act should therefore determine the rights and obligations of the parties. The respondents argued that the suit raised difficult questions of law applicable to the contract and, on that basis, the parties should not be compelled to submit the dispute to adjudication by lay persons. They also maintained that even if the arbitration clause were binding on the respondents, it envisaged a foreign arbitration to be held in New York; consequently any award would be a foreign award, the arbitrators would not be subject to the control of Indian courts, and the provisions of the Arbitration Act, including section 34, would not be available to the appellants.
In their counter‑affidavit the appellants did not dispute the respondents’ assertion that all of the relevant evidence was in India and none was in New York. The appointed attorney for the appellants, in paragraph 11 of his counter‑affidavit, merely affirmed that there was no sufficient reason why the matters on which the suit was based should not be referred to arbitration pursuant to the arbitration clause in the agreement. He denied that any valid or sufficient reason existed for refusing such a reference and warned that it would be an injustice to allow the respondents, after the contract had been concluded, to select at will which clauses were binding and which were “inoperative.”
In paragraph 12 the same counsel stated that he did not admit that evidence concerning the matters mentioned in paragraph 10(a) of the respondent’s affidavit was necessary or could not be presented before the arbitrators as alleged. He further denied that any denial of justice would result from holding the arbitration in the manner contemplated by the parties, and he did not concede that it would be necessary or impossible for the respondent to send a representative or bring any witness to New York. Finally, he argued that if the suit were not stayed, the petitioners would suffer considerable prejudice and hardship.
The appellant did not admit that the evidence described in paragraph ten(a) of the respondent’s affidavit was necessary or could not be produced before the arbitrators as alleged. The appellant specifically denied that holding arbitration under the agreement deliberately concluded by the parties would result in any denial of justice. The appellant also rejected the claim that it would be necessary or impossible for the respondent to send a representative or to bring any witness to New York. Conversely, the appellant asserted that if the suit were not stayed, the petitioners would suffer substantial prejudice and hardship. The High Court then examined whether the pleas raised by the respondents satisfied the requirement of “sufficient reason” under the Arbitration Act. In doing so, the High Court observed that the respondent’s affidavit remained largely unchallenged and that all material evidence relating to the dispute was located in India. The Court considered this circumstance a strong ground for declining to exercise its discretion in favour of the appellants. The Court further noted that severe restrictions on foreign‑exchange provision to individual citizens made it practically impossible for the respondents to transport witnesses to New York. Because the respondents could not appear before the arbitrators, any arbitration proceeding would effectively be ex parte and would cause injustice to the respondents. While acknowledging that the appellants would experience some inconvenience in defending the suit in India, the High Court balanced this inconvenience against the overall circumstances. The Court concluded, and the present judgment concurs, that the established facts amounted to a “sufficient reason” for refusing to grant a stay of the suit.
Counsel for the appellants argued that the High Court had improperly interfered with an order that lay within the trial judge’s discretion and therefore the order should be set aside. The High Court responded by pointing out that Justice Ray had not given full, proper, and adequate consideration to all the relevant circumstances. The High Court observed that Justice Ray failed to apply his mind to the affidavits that demonstrated all dispute‑related evidence was situated in India. Moreover, Justice Ray did not express his views on the diverse contentions raised and merely noted that he was not in a position to decide the questions presented. Accordingly, Justice Ray granted a stay because he did not find any compelling reason to exercise discretion against the appellants. The High Court held that this criticism of Justice Ray’s approach was not unjustified. Consequently, the High Court found itself competent to intervene in the exercise of discretion and affirmed its earlier interference. The two courts below thus arrived at differing positions on the applicability of the law to the contract, a matter that will be addressed separately.
The two courts below had reached opposite conclusions regarding which law should govern the contract in dispute. The trial judge, Ray, J., had held that the contract was subject to American law. In the appeal, counsel for the appellants, Mr. S. Choudhry, reiterated that position. However, the Advocate‑General of Bengal, who had appeared on behalf of the State and who followed the counsel for the appellants, was recorded by the High Court as having conceded that “the entire matter would be governed by the Indian law, the matter of arbitration by the Indian Arbitration Act, and the other matters under the aforesaid contract by the Indian Contract Act, x x x x x so far as the rights and obligations under the disputed contract are concerned, the parties must now be taken to have accepted the Indian Contract Act as the relevant law for their determination.” Counsel for the appellants disputed this claim, asserting that no such concession was ever made by the Advocate‑General before the High Court and that the observations appearing in the judgment resulted from a misunderstanding. To support this submission, the counsel relied on an affidavit sworn by one Surhid Mohan Sanyal, who was identified as an attorney for the appellants and filed in this Court on the same day that special leave to appeal was granted. The affidavit, however, was phrased in vague terms and the denial was not based on the deponent’s personal knowledge. Moreover, it was unusual that Sanyal, who had sworn the affidavit relied upon, had not made any similar assertion when he previously swore an affidavit in support of the petition for a certificate under Article 133 of the Constitution before the High Court. In view of the material on record, the Court considered it unnecessary to express any opinion on which law should apply to the contract. The Court held that the question of applicable law was for the trial court to determine in the course of deciding the suit itself. Consequently, the appeal was dismissed with costs, and the order of dismissal was affirmed.