Societe De Traction Et D'Electricite Societe Anonyme v. Kamani Engineering Company Ltd

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

Court: supreme-court

Case Number: Civil Appeal No. 196 of 1963

Decision Date: 18 April 1963

Coram: J.C. Shah, K.N. Wanchoo, K.C. Das Gupta, N. Rajagopala Ayyangar, J.C. Bhagwati, P.N. (CJ)

In the matter titled Societe De Traction Et D'Electricite Societe Anonyme versus Kamani Engineering Company Ltd, the Supreme Court of India delivered its judgment on 18 April 1963. The opinion was written by Justice J.C. Shah, who was joined on the bench by Justices K.N. Wanchoo, K.C. Das Gupta and N. Rajagopala Ayyangar. The record also listed the Chief Justice, P.N. Bhagwati, and identified the respondent as Kamani Engineering Company Ltd and the petitioner as Societe De Traction Et D'Electricite Societe Anonyme. The case was reported in the 1964 volume of the All India Reporter at page 558 and also cited in the 1964 Supreme Court Reports (Third Series) at page 116.

The factual background disclosed that the petitioner was a corporation incorporated under the laws of Belgium and operated its business from Brussels, while the respondent was a company registered under the Indian Companies Act, 1913. On 22 April 1959 the respondent entered into a contract with the petitioner under which the petitioner agreed to furnish technical assistance for certain construction projects. The contract contained an arbitration clause stipulating that all disputes arising in connection with the agreement would be referred to arbitration conducted according to the Rules of Conciliation and Arbitration of the International Chamber of Commerce.

In 1961 the respondent instituted a civil suit before the original side of the High Court of Bombay, seeking various reliefs against the petitioner. In response, the petitioner filed a notice of motion requesting an order to stay the proceedings. The petition for stay was made on the basis of section 3 of the Arbitration (Protocol and Convention) Act, 1937, and alternatively on the grounds of section 34 of the Arbitration Act, 1940, as well as section 151 of the Code of Civil Procedure, 1908. The High Court rejected the petition for stay, holding that the arbitration clause in the contract was invalid because it compelled the petitioner to arbitrate in a manner contrary to section 389 of the Companies Act, 1956, which required arbitration to be conducted in accordance with the Arbitration Act of 1940.

The present appeal arose by way of a certificate granted by the High Court. Before the Supreme Court, counsel for the petitioner argued that section 389 of the Companies Act was an enabling provision rather than a mandatory one, and therefore did not obligate an Indian company to agree that all differences be submitted to arbitration solely under the Indian Arbitration Act. The argument further asserted that if the company wished to refer a dispute to arbitration, it could do so under the Arbitration Act, but that the power to submit to arbitration was an incident of the broader contractual power to conduct business and was not circumscribed by the Companies Act. Consequently, the petitioner maintained that the arbitration clause, which referred disputes to the International Chamber of Commerce rules, should be regarded as valid and enforceable despite the provisions of the Companies Act, 1956.

In this case the Court held that sub‑section (3) of section 389 of the Companies Act, 1956 applied only to statutory arbitration undertaken under the Companies Act, namely arbitration under section 494(b) of that Act, and did not extend to consensual arbitration. The Court explained that section 389 was intended to require that every arbitration in which a company participated be conducted in accordance with the provisions of the Indian Arbitration Act of 1940. Accordingly, section 389(1) governed the power of a company to agree to refer disputes to arbitration, and by virtue of sub‑section (3) the Arbitration Act was made applicable to all arbitrations involving a company. The Court further noted that section 47 of the Arbitration Act, 1940 formed an integral part of that Act and mandated that its provisions apply to all arbitrations and related proceedings, subject to section 46 and to any other law then in force. By using the expression “save in so far as is otherwise provided by any law for the time being in force,” the Legislature clearly intended that the Arbitration (Protocol and Convention) Act, 1937 would also apply to consensual arbitrations governed by the 1940 Arbitration Act whenever the conditions for its operation were satisfied, even if the arbitration scheme recognized under the 1937 Act conflicted with sections 3 to 38 of the 1940 Act. Because arbitration under the 1937 Act was recognised by the 1940 Act, an agreement to refer disputes to arbitration pursuant to the rules of the International Chamber of Commerce was not inconsistent with section 389 of the Companies Act, 1956. The Court then referred to several authorities, including Societe Italians per Lavori Merittimi v. Hind Constructions Ltd., Bombay High Court Appeal No. 63/59 dated 22‑9‑60; Balmukand v. Punjab National Bank Ltd., Ambala City (1936) I.L.R. 17 Lah. 722; Jhirighat Native Tea Company Ltd. v. Bipul Chand Gupta, I.L.R. (1940) 1 Cal. 358; East Bengal 118 Bank Ltd. v. Jogesh Chandra Banerji, I.L.R. (1940) 2 Gal. 237; and The Catholic Bank Ltd., Mangalore v. F.P.S. Albuquerque, I.L.R. (1944) Mad. 385. The judgment was issued in Civil Appeal No. 196 of 1963, an appeal from the Bombay High Court’s decree dated 15‑16 November 1962 in Appeal No. 32 of 1962. Counsel for the appellant included M.C. Setalvad, M.R. Parpia, J.P. Thacker, O.C. Mathur, J.B. Dadachanji and Ravinder Narain, while counsel for the respondent comprised S.T. Desai, Tanubhai D. Desai and I.N. Shroff. The judgment was delivered on 18 April 1963 by Justice Shah, who identified the question for determination as whether an agreement to refer a future dispute to arbitration under the International Chamber of Commerce rules, between a company incorporated under the Companies Act and a foreign entity, was binding on the Indian company.

In this dispute the Court examined whether an arbitration agreement, formulated under the Rules of Conciliation and Arbitration of the International Chamber of Commerce, could bind a company that was incorporated under the Indian Companies Act. The parties to the controversy were Societe De Traction Et D’Electricite Societe Anonyme, referred to for brevity as “Traction”, a corporation organized under Belgian law and engaged in consulting and construction engineering in Brussels, and Kamani Engineering Corporation Ltd, referred to as “Kamani”, a company incorporated under the Indian Companies Act of 1913 and operating as an engineering concern in India. On 22 April 1959 Kamani entered into a Collaboration Agreement with Traction. Under that agreement Traction agreed to furnish Kamani with technical assistance for the construction of overhead railway electrification, tramway systems and trolley‑bus projects in India, Burma, Ceylon and/or Nepal. Article X of the agreement contained an arbitration clause stating that all disputes arising in connection with the agreement, whether during its life or thereafter, would be finally settled under the Rules of Conciliation and Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with those Rules. Subsequently, on 1 September 1961 Kamani instituted suit No. 296 of 1961 in the High Court of Judicature at Bombay, pleading a composite cause of action. The suit sought (1) a declaration that Traction had committed various breaches of the Collaboration Agreement and that, as a result, the agreement was terminated by Traction, thereby releasing Kamani from its obligations; (2) a decree for accounts of the items listed in paragraphs 24 and 25 of the plaint and for determination of the amount owed in light of the parties’ contentions; (3) a decree directing Traction to pay Rs 9,00,000 together with interest at six per cent per annum from the date of filing; and (4) an order directing that all inquiries be made, directions given, orders passed and that Traction hand over to Kamani all documents, files, reports, correspondence and other material removed by Traction’s representatives. On 22 January 1962 Traction filed a notice of motion requesting an order staying the suit pursuant to section 3 of the Arbitration (Protocol and Convention) Act, 1937, and/or section 34 of the Arbitration Act, 1940, and/or section 151 of the Code of Civil Procedure, 1908, and alternatively invoking the inherent powers of the High Court. Traction also asked that Kamani, its servants and agents be restrained by injunction from proceeding further in the suit. Justice Kantawalla denied the motion, and his order was upheld on appeal by the High Court. The appellate court held that the arbitration clause in the Collaboration Agreement was invalid because it compelled Kamani, contrary to section 389 of the Indian Companies Act, 1956, to submit to arbitration in a manner not prescribed by the Arbitration Act of 1940.

The Court explained that the International Chamber of Commerce had adopted a set of rules that governed the conduct of arbitrations, and that those rules were relevant to the dispute. Article 7 of those rules stated that, except where the parties expressly provided otherwise, the Court of Arbitration would not itself resolve the dispute. Instead, the Court was responsible for appointing or confirming arbitrators in accordance with the procedure laid down in the rules. When the parties agreed to have a single arbitrator, they could jointly nominate that arbitrator and the Court of Arbitration would confirm the appointment. If the parties could not reach an agreement on the sole arbitrator, the Court of Arbitration would make the appointment on its own. In cases where the parties chose a panel of three arbitrators, each side would nominate one arbitrator for confirmation by the Court, and the Court would then appoint the third arbitrator. When the parties failed to decide how many arbitrators should sit on the panel, the Court of Arbitration would assign a sole arbitrator, who in turn would select one or more national committees from which it would request nominations. The rules further required that both the sole arbitrator and any third arbitrator be nationals of countries other than those of the parties. If a party challenged the appointment of an arbitrator, the Court of Arbitration acted as the sole judge on the merits of the challenge, and its decision was final. Should an appointed arbitrator die, refuse to act, or resign, the Court of Arbitration, provided it had made the original appointment, would nominate a replacement arbitrator.

Article 8 dealt with the commencement of arbitration proceedings, while Article 13 provided that when the parties agreed to submit their disputes to arbitration under the International Chamber of Commerce, they were deemed to have accepted the Chamber’s Rules. If a party contested the existence or validity of the arbitration clause, the Court of Arbitration could, upon being satisfied that the clause appeared to exist on its face, order that the arbitration continue, without deciding on the admissibility or merits of the challenge at that stage. Article 16 prescribed the procedural framework for the arbitration. The Chamber’s Rules would govern the arbitration, but if a particular matter was not covered by those Rules, the parties could choose a procedural law to apply; failing such a choice, the law of the country where the arbitration was to be conducted would govern. Article 18 stipulated that the arbitration would take place in the country designated by the Court of Arbitration, unless the parties had previously agreed on a different venue. Article 19 required the arbitrator, before hearing began, to prepare a statement in the presence of the parties that defined the terms of reference. This statement had to include the names and addresses of the parties, a brief description of the claims, the issues to be decided, the place of the arbitration, and any other matters that the Court of Arbitration or the arbitrator considered necessary to ensure that any award rendered could be enforced under law.

The arbitrator was required to prepare a comprehensive statement before the hearing began, which had to contain the names and addresses of the parties, a concise description of the claims, the terms of reference, a summary of the case, an identification of the specific issues to be decided, the location where the arbitration would be conducted, and any other matters that the Court of Arbitration or the arbitrator considered necessary to ensure that the eventual award could be enforced by law. Article 9.0 governed how the arbitrator should conduct the hearing, while Article 21 set out the arbitrator’s powers. The arbitrator held authority to resolve the dispute based on the relevant documentary evidence, unless a party expressly requested a hearing. The arbitrator could, on his own initiative or upon request, summon the parties to appear at a designated place and time; if a duly summoned party failed to appear after proper service, the arbitrator was entitled to continue the arbitration ex parte.

According to Article 23, the arbitrator was obliged to render the award within sixty days from the date the signed statements required by Article 19 were filed, although the Court of Arbitration could extend this period when necessary. Article 25 dealt with the determination of arbitration costs, including the arbitrator’s fee and administrative expenses. Before finalising the award, Article 26 mandated that the arbitrator submit the draft award to the Court of Arbitration, which could prescribe modifications to its form and, if needed, draw the arbitrator’s attention to substantive points of the case. No award could be issued until the Court of Arbitration approved its form.

Articles 27 and 28 regulated the pronouncement and notification of the award. Under Article 28, the award became final, and the parties undertook to implement it promptly, having waived any right of appeal to the extent such a waiver was legally valid. Article 30 required the award to be deposited with the Secretariat of the Court of Arbitration. A general principle stated that in situations not expressly covered by the Rules, the Court of Arbitration and the arbitrator should act according to the Rules and strive to make the award legally enforceable.

The arbitration scheme outlined in these Rules differed markedly from the scheme provided under sections 3 to 38 of the Arbitration Act. Notable features of the Rules included the Court of Arbitration’s power to appoint arbitrators or umpires, the finality of the award without any provision for referral to a civil court for remittance or setting aside even in cases of arbitrator misconduct or obvious errors, and the Court of Arbitration’s authority to modify the award and issue directions during the arbitration proceedings.

The Court observed that the Rules gave the arbitrators authority to modify the award and to issue directions at any stage of the arbitration proceedings, and that similar provisions existed elsewhere in the Rules. It then turned to the legal status of Kamani Engineering Company Ltd. The company was incorporated under the Indian Companies Act of 1913 and, by virtue of section 3(1) of the Indian Companies Act of 1956, qualified as a “Company” for the purposes of that later Act. The Court set out the then‑applicable section 389 of the Companies Act, 1956, which read: “(1) A company may, by written agreement, refer to arbitration, in accordance with the Arbitration Act, 1940 (X of 1940), an existing or future difference between itself and any other company or person. (2) A company which is a party to an arbitration may delegate to the arbitrator power to settle any terms or to determine any matter capable of being lawfully settled or determined by the company itself, or by its Board of Directors, managing director, managing agent, secretaries and treasurers, or manager. (3) The provisions of the Arbitration Act, 1940 (X of 1940), shall apply to all arbitrations pursued under this Act to which a company is a party.” The High Court had previously held that, because of section 389, an Indian company could refer a present or future dispute to arbitration only pursuant to the Arbitration Act, 1940, and not under any alternative scheme. Accordingly, any arbitration agreement that forced the company to submit to a system other than that prescribed by the 1940 Act would be ineffective, and the Court would lack authority to enforce such an invalid covenant or to stay a suit brought by the Indian company in breach of it. In reaching that conclusion the High Court relied on its earlier decision in Societe Italians per Lavori Marittimi v. Hind Constructions Ltd., which affirmed that a company incorporated under the Indian Companies Act could not refer disputes to arbitration except in accordance with the Arbitration Act, 1940. On appeal, counsel for the petitioner argued that section 389 was merely an enabling provision and did not obligate a company to confine all referrals to arbitration to the 1940 Act. He contended that the power to submit disputes to arbitration derived from the company’s general contractual capacity, which was unrestricted, and that sub‑section (3) applied only to statutory arbitrations undertaken under the Companies Act—such as those under section 494(3)(b)—and not to consensual arbitrations. The counsel further maintained that the word “may” in the statute was not decisive; its meaning varied with context, sometimes indicating permission and at other times conferring a mandatory power upon the person empowered to act.

In certain situations the word “may” functions only as a permission, while in other situations it creates a power that becomes mandatory for the person who holds that power to use it as the statute directs. A corporation formed under the Indian Companies Act possessed a legal personality and, within the limits set by its memorandum and articles of association, could contract for any purpose that fell within its constitutional competence. The Companies Act, particularly section 46, required that such contracts be executed in accordance with the company’s business objectives. An arbitration agreement—being a contract that directs existing or future disagreements between the parties away from ordinary courts and toward a tribunal selected by the parties—therefore fell within the scope of the company’s contractual authority. If a company could lawfully enter into contracts, that authority necessarily included the ability to agree that a dispute be resolved by arbitration rather than by court proceedings. Section 28 of the Indian Contract Act declared agreements that restrained legal proceedings to be void, yet it expressly exempted agreements in which two or more persons agreed that any present or future dispute concerning any subject or class of subjects would be referred to arbitration; such agreements were not considered illegal.

Section 389 of the Companies Act 1956 did not create a new entitlement for companies to refer disputes to arbitration; rather, it recognized an existing right of a company to refer a current dispute to arbitration and imposed a regulatory restriction on the manner of exercising that right. The Arbitration Act 1940 functioned as a comprehensive code governing arbitration and applied to all arbitrations involving natural or legal persons. Consequently, the power of a company to enter into an arbitration agreement was not originated by the Companies Act; it was simply subject to regulation under section 389. In effect, a company defined by the Indian Companies Act 1956 already possessed the ability to submit present or future disputes to arbitration, but the statutory framework required that such arbitration be conducted in accordance with the Arbitration Act 1940. Sub‑section (3) of section 389 extended the provisions of the Arbitration Act to every arbitration in which a company was a party, provided the arbitration arose under the Companies Act. There was no justification for treating sub‑section (3) as independent of sub‑section (1). Sub‑section (1) affirmed the company’s power to refer differences between itself and another company or person and also set conditions on that power, while sub‑section (3) applied the Arbitration Act’s rules to all arbitrations involving a company, not limiting them merely to statutory arbitrations that the company was compelled to pursue.

In the present discussion the Court observed that subsection (3) of section 389 of the Companies Act would become meaningless if it were given a limited interpretation, because the only provision in the Companies Act that obliges a company to submit a dispute to arbitration is section 494(3)(b). Under that provision, a member of a transferor company that is in voluntary liquidation, who dissents from an arrangement concerning the acceptance of shares, policies, any other interest, or participation in profits of the transferee company in consideration of the transferor’s business, may require the liquidator to purchase his interest. The price for such purchase is to be fixed either by agreement between the parties or by arbitration in the manner prescribed by section 494, and subsection (6) of the same section explicitly makes the provisions of the Arbitration Act applicable to that arbitration. The Court further noted that the phrase “other than those restricting the application of that Act” appearing in subsection (6) has no operative meaning; it was simply a residual wording copied from section 208C of the Companies Act of 1913, which survived inadvertently even after the Arbitration Act of 1899 had been repealed. The Court added that no other provision of the Indian Companies Act has been identified that imposes a compulsory arbitration duty between a company and another company or person without expressly providing for the applicability of the Arbitration Act. Earlier provisions relating to arbitration in the preceding Companies Acts confirm this view.

The Court indicated that a historical review of legislation dealing with arbitration in the corporate context would help clarify why the High Courts have arrived at differing conclusions. While a detailed examination of all statutes and regulations predating 1882 was unnecessary, it was sufficient to recognise that the Presidency towns of Calcutta, Madras and Bombay each operated distinct regulations that established mechanisms for the amicable settlement of civil disputes through arbitration. For the first time, Act 8 of 1859, incorporated into the Code of Civil Procedure, introduced a provision permitting parties to a suit to refer their dispute to arbitration by applying to the Court where the suit was pending. Subsequently, the Indian Contract Act 9 of 1879 recognised the validity of contracts that required parties to refer present or future disputes to arbitration. In 1882, the Indian Companies Act 6 of 1882 was enacted; sections 96 to 123 of that Act made comprehensive provisions for out‑of‑court arbitration of disputes involving companies. Under those sections a company could, by a written notice under its common seal, refer any matter in dispute with another company or person to arbitration, and the procedure laid down in the statutes would then govern the arbitration process. This body of sections dealt exhaustively with all arbitrations to which a company was a party.

The Court explained that the procedural rules for arbitration at that time expressly stated that an arbitrator’s award could not be set aside on the basis of any irregularity or informality. It further noted that any interested party could cause the arbitration agreement to be filed in the appropriate High Court, and the court could then issue an order of reference to the arbitrator. Shortly after the Companies Act of 1882 was enacted, the Code of Civil Procedure (Act 14 of 1882) introduced Chapter XXXVII, which laid down the general law on arbitration. Sections 506 to 522 of that chapter dealt specifically with arbitration that arose in a suit that was already pending. The Court observed that where all parties to a suit wished to refer a disputed point to arbitration, they were entitled to apply to the court for an order of reference at any time before the judgment was pronounced. Section 523 provided that parties could file their arbitration agreement in court; if the court was satisfied that a valid arbitration agreement existed, it could refer the matter to an arbitrator either appointed by the parties themselves or nominated by the court, and the provisions of the earlier sections would apply insofar as they were consistent with the agreement. Under Section 525, any person with an interest in an award rendered in a matter referred to arbitration without judicial intervention could file the award in court, and if no ground for setting aside the award was established, the court could order that the award be filed. Consequently, Chapter XXXVII covered arbitration in general, including arbitration in pending proceedings, arbitrations ordered by the court under an agreement filed in court, and the filing of awards made by arbitrators appointed under valid out‑of‑court agreements. The Court further observed that the combined effect of the Indian Companies Act sections 96 to 123 and the Code of Civil Procedure sections 506 to 526 was that when a company was a party to an out‑of‑court arbitration, the arbitration had to be conducted according to the Companies Act and could be enforced as provided therein. While the filing of an arbitration agreement in court for reference remained governed by the Companies Act, arbitration of a dispute that was part of a pending suit involving a company was governed by the Code of Civil Procedure. Finally, the Court noted that in 1899 the legislature enacted the Indian Arbitration Act 9 of 1899, which operated on a limited basis. Section 2 limited its application to cases where, if the subject matter of the arbitration were the subject of a suit, that suit could be instituted in a Presidency‑town, either with or without leave. The proviso allowed a local government to declare the Act applicable in other local areas as if they were Presidency‑towns. Section 3, proviso (2), stipulated that nothing in the 1899 Act would affect the provisions of the Indian Companies Act concerning arbitration.

The Court observed that the provisions of the Indian Companies Act of 1882 contained in sections ninety‑six to one‑hundred‑twenty‑three continued to operate and to apply to companies even after the Indian Arbitration Act of 1899 was enacted. The Civil Procedure Code of 1882 was later repealed by Act 5 of 1908; however, the arbitration provisions that had been set out in the 1882 Code were substantially retained and were incorporated into a separate schedule of the new Code. Within that schedule, clauses one through sixteen dealt with references to arbitration of differences between parties to a suit, provided that such references were made in writing. Clauses seventeen to nineteen governed orders that referred disputes to arbitration on the basis of agreements, while clauses twenty and twenty‑one addressed the filing and enforcement of arbitral awards. Section eighty‑nine of the Code was specially enacted and provided in its first sub‑section that, “Save in so far as is otherwise provided by the Indian Arbitration Act, 1899, or by any other law for the time being in force, all references to arbitration whether by an order in a suit or otherwise, and all proceedings thereunder, shall be governed by the provisions contained in the Second Schedule.” The effect of section eighty‑nine was to make the Second Schedule applicable to all arbitrations except those governed by the Indian Arbitration Act of 1899 or by any other law then in force. Consequently, from the time the Code of Civil Procedure 1908 came into force, arbitrations that were conducted out of court where a company was a party had to follow the procedure laid down in the Companies Act of 1882, whereas arbitrations that arose during the pendency of a suit or that were initiated by filing an arbitration agreement could be conducted under the appropriate clauses of the Code of Civil Procedure.

The Court further noted that the Indian Companies Act of 1882 was repealed by the Companies Act 7 of 1913. By section two‑ninety of that Act, read with Schedule IV, the Indian Companies Act of 1882 and the second proviso to section three of the Indian Arbitration Act of 1899 were both repealed. The Companies Act 1913 introduced a new section one‑fifty‑two, which in its first clause authorized a company, by written agreement, to refer any existing or future difference with another company or person to arbitration in accordance with the Indian Arbitration Act of 1899. The third subsection of that same section declared that the provisions of the Indian Arbitration Act of 1899, except for those that restricted the application of the Act with respect to the subject‑matter of the arbitration, would apply to all arbitrations between companies and persons under the Companies Act. Accordingly, arbitrations to which a company was a party were required to be conducted notwithstanding the restrictions contained in section two of the Arbitration Act of 1899, and they had to follow the provisions of the Arbitration Act itself. The Court also pointed out that section two‑hundred‑fourteen of the Companies Act 1913 (later renumbered as section two‑hundred‑eight C by Act XXII of 1936) provided for compulsory arbitration in the context of purchasing, and clause six of that provision expressly stated that the provisions of the Arbitration Act of 1899, other than those limiting its application to the subject‑matter, would apply to all arbitrations undertaken pursuant to that section.

In this matter the Court examined a situation where a member of a company that was being voluntarily liquidated claimed an interest in the liquidation because the company’s business was to be transferred to another company during the liquidation, and the liquidator and the member could not agree on the price payable for that interest. Clause (6) of section 214 expressly stated that the provisions of the Arbitration Act, 1899, except those that limited the application of that Act in respect of the subject‑matter of the arbitration, were to apply to every arbitration conducted under section 214. The Government of India was a signatory to the Protocol on Arbitration Clauses and to the Convention on the Execution of Foreign Arbitral Awards. To give effect to the Protocol, the Indian Legislature enacted the Arbitration (Protocol and Convention) Act, 1937, which provided for the enforcement in India of foreign awards arising out of differences that were treated as commercial under the law then in force in British India, where such differences were covered by an arbitration agreement set out in the First Schedule of the Protocol and involved persons within the jurisdiction of the powers notified by the Governor‑General as parties to the Convention. Section 3 of that Act declared that, notwithstanding anything in the Indian Arbitration Act, 1899, or in the Code of Civil Procedure, 1908, if any party to a submission made under an agreement covered by the Protocol – as modified by the reservation applicable to India – or any person claiming under that party commenced legal proceedings in any Court against another party to the submission or a related claimant, that party could, after appearance and before filing a written statement or taking any further steps, apply to the Court for a stay of the proceedings. The Court, unless it was satisfied that the arbitration agreement had become inoperative, could not proceed, or that there was no genuine dispute concerning the matter referred to arbitration, was required to issue an order staying the proceedings. By this enactment an obligation was placed on the Court, under the conditions set out in section 3, to stay any suit filed in an Indian Court against another party to the submission unless the Court was convinced that the arbitration agreement was no longer operative or could not continue. This requirement applied to all arbitration agreements, irrespective of whether a company was a party to them. The 1937 Act was subsequently followed by the Arbitration Act, 1940, which was enacted as a complete code governing the law of arbitration in India. Under that code, all consensual arbitrations were regulated by the Arbitration Act, and section 46 specified that the provisions of the Act, except where expressly excluded, would apply.

Section 6, sub‑section (1), together with sections 7, 12, 36 and 37, were declared to be applicable to every arbitration that was conducted under any other statute then in force. The effect of this provision was that such arbitrations were to be treated as if they were based on an arbitration agreement, and the other statute was to be considered as if it itself were an arbitration agreement, except to the extent that the Arbitration Act was consistent with that other statute or with any rules made under it. Section 47 then provided that, subject to the provisions of section 46 and except where any other law then in force expressly provided otherwise, the provisions of the Arbitration Act would apply to all arbitrations and to all proceedings arising from them. It further allowed that, with the consent of all interested parties, an arbitration award that had been obtained by other means could be taken by a court, in a suit already pending before that court, as a compromise or adjustment of the suit.

Section 49, read in conjunction with the Fourth Schedule, substituted the year “1940” for “1899” in sections 152(1) and 152(3) of the Companies Act, 1913, and deleted the words in sub‑section (3) that read “other than those restricting the application of the Act in respect of the subject‑matter of the arbitration”. In the same amendment, section 89 of the Code of Civil Procedure was also deleted. The consequence of these changes was to bring the Arbitration Act within the scope of all arbitrations that were conducted under the Companies Act, 1913, whenever a company was a party to the arbitration. No amendment was made to the Arbitration (Protocol and Convention) Act, 1937, and none was required because, by virtue of the saving clause in section 47, the provisions of the 1937 Act continued to operate. The Indian Companies Act, 1913, was later repealed by the Companies Act 1956, with section 389 replacing the former section 152, albeit with a slight modification. Under the Arbitration Act, 1899, as read with the Companies Act, 1913, the authority of a company to refer disputes to arbitration was to be determined in certain cases that arose before the High Courts of Lahore, Calcutta and Madras. In the decision of Sita Ram Balmukand v. The Punjab National Bank Ltd., Ambala City (1956) I.L.R., 17 Lah. 722, a private arbitration was held between the Punjab National Bank Ltd. and a debtor of the bank. The arbitrator issued an award in favour of the bank, and that award was filed in the Court of the Senior Subordinate Judge, Ambala, under Schedule I of the Code of Civil Procedure, 1908. A decree was then obtained in accordance with the provisions of that schedule, execution proceedings were issued and the debtor’s property was attached. The debtor argued that both the arbitration award and the subsequent court decree were invalid because, in his view, an arbitration in which a company was a party, under the provisions of section 152 of the Companies Act, should have been conducted in accordance with the Arbitration Act, 1899, and therefore the award could have been filed only in the Court of the District Judge, not in the Court of the Senior Subordinate Judge, rendering the execution proceedings ultra vires.

The debtor argued that the arbitration award should have been filed only in the Court of the District Judge and not in the Court of the Senior Subordinate Judge, contending that the execution proceedings were therefore ultra vires. The High Court rejected this contention, holding that section 152 of the Indian Companies Act 1913 constituted an enabling provision rather than a mandatory requirement that compelled the parties, when one of them was a company, to pursue arbitration strictly in accordance with the Indian Arbitration Act 1899. Consequently, the Court found that the company was entitled to apply for the award to be filed under paragraph 21(1) of Schedule II of the Code of Civil Procedure, and that the decree issued by the Senior Subordinate Judge was not a nullity as alleged by the debtor. Justice Bhide, delivering the judgment of the Court, observed that the legislative intent behind section 152 was not to impose compulsory compliance with the Arbitration Act 1899 outside the Presidency‑towns; instead, the provision merely conferred a power on companies to refer disputes to arbitration under the Arbitration Act 1899 by means of a written agreement when they so chose. This interpretation was not accepted by the Calcutta High Court in the case of Jhirighat Native Tea Company Ltd. v. Bipul Chandra Gupta. In that matter, the question was whether the District Court had jurisdiction to entertain a petition under paragraph 20 of Schedule II of the Code of Civil Procedure for an order to file an out‑of‑court award where one of the parties was a company registered under the Companies Act 1913. The Calcutta High Court held that, by virtue of sections 152(1) and 152(3) of the Companies Act 1913, every arbitration between a company and a person had to be conducted in conformity with sections 3 to 22 of the Indian Arbitration Act 1899, and that, for this purpose, section 2 of the Arbitration Act, which limited its local application, must be treated as non‑existent. The Court further opined that, in view of section 89 of the Code of Civil Procedure 1908, the Second Schedule to the Code did not apply to arbitrations between a company and a person, nor to arbitrations under section 208C of the Companies Act 1913. It was noted that the words “in pursuance of this Act” (i.e., the Companies Act) qualified the phrase “shall apply”, giving section 159 the effect of making the provisions of the Arbitration Act 1899, except for section 2, applicable to all arbitrations between companies and persons by the force and effect of the Companies Act itself. In East

In the case of Bengal Bank Ltd. v. Jogesh Chandra Banerji, Justice Mittal altered a previously broad proposition. He decided that even when one or both parties to a suit are companies registered under the Indian Companies Act, the arbitration proceedings pending between those parties are governed by Schedule II of the Code of Civil Procedure, 1908, rather than by the provisions of section 152 of the Companies Act, 1918. It was highlighted that the Indian Arbitration Act of 1899 applied only to arbitrations based on agreement without court intervention, and that the Act did not apply to arbitrations concerning the subject‑matter of a pending suit by virtue of section 152, as recorded in I.L.R. (1940) 2 Cal. 237. The reasoning expressed in the Jhirighat Native Tea Company’s case was later affirmed by the Madras High Court in The Catholie Bank Ltd., Mangalore v. F.P.S. Albuquerque. In that decision the court observed that after the enactment of the Indian Companies Act, 1913 and before the Indian Arbitration Act, 1940 became effective, a company could refer disputes to arbitration only under the Indian Arbitration Act, 1899, and therefore companies were not, for the purpose of out‑of‑court arbitration, subject to Schedule II of the Code of Civil Procedure. All of these judgments arose under the Indian Arbitration Act, 1899 read with the Indian Companies Act, 1913, and the issue presented was whether the subordinate judge, approached on the assumption that Schedule II applied, possessed the jurisdiction to pass a decree on an award rendered out of court or to entertain a petition for filing such an award. In 1960 the Bombay High Court examined the effect of section 152 of the Indian Companies Act, 1913 in relation to the Arbitration Act of 1940. After referring to the Lahore, Calcutta, and Madras decisions, the court, citing Societe Italienne per Lavori Marittimi v. Hind Constructions Ltd., noted the marginal heading of section 152, which states that a corporation undoubtedly has powers incidental to the performance of its objects. Consequently, it can be correctly said that the power to carry on business includes an incidental power to refer disputes arising from that business to arbitration. The court concluded that it was therefore unnecessary to create specific provisions in the Companies Act, 1913, such as those found in section 159, to enable a corporation to enter into an arbitration agreement, because the very existence of that legislative provision demonstrated the legislature’s intent to recognize such incidental powers.

The Court observed that by enacting the provision the legislature had no purpose other than to limit the exercise of that power. Accordingly the Court held that an arbitration agreement under which an Indian company had consented to refer any future dispute arising from a collaboration agreement with an Italian corporation was unenforceable pursuant to section 152 of the Indian Companies Act. The Court further held that the suit filed by the Indian company seeking a declaration that the “dredging agreement” had been validly terminated, together with claims for damages for breach of contract, accounts of profits and losses, could not be ordered to be stayed under section 34 of the Arbitration Act, nor under section 3 of the Arbitration (Protocol and Convention) Act 1937, nor under section 151 of the Code of Civil Procedure. After reviewing the relevant statutory provisions and authorities, the Court expressed the view that section 152 of the Indian Companies Act 1913 and section 389 of the Indian Companies Act 1956 were intended to require that all arbitrations to which a company is a party be conducted in accordance with the provisions of the Indian Arbitration Act 1940. The Court reiterated that, for reasons already stated, section 389(1) of the Companies Act 1956 regulated the power of Indian companies to agree to submit differences to arbitration, and that subsection (3) incorporated the provisions of the Arbitration Act 1940 so that they applied to every arbitration involving an Indian company. However, the Court noted that this point was not decisive of the question before it. The Court explained that section 47 of the Arbitration Act 1940 formed an integral part of the Indian Arbitration Act and that this section made the provisions of the Arbitration Act applicable to all arbitrations and to all proceedings thereunder, subject only to the limitations of section 46 and to the phrase “save in so far as is otherwise provided by any law for the time being in force.” The Court clarified that the present case did not involve a statutory arbitration. Nevertheless, by using the words “save in so far as is otherwise provided by any law for the time being in force,” the Legislature had clearly intended that the provisions of the Arbitration (Protocol and Convention) Act 1937 would apply to consensual arbitrations conducted under the Arbitration Act 1940 whenever the conditions for the application of that Act were met, even if the arbitration scheme recognized by the 1937 Act was inconsistent with sections 3 to 38 of the Arbitration Act 1940.

In this case the parties relied on an arbitration agreement that was governed by the Protocol on Arbitration Clauses signed in Geneva on 24 September 1923 and listed in the First Schedule of the Arbitration (Protocol and Convention) Act of 1937. Because the 1937 Act is a statute that provides for arbitration, its provisions become applicable to any arbitration that falls within the scope of section 47 of the Arbitration Act of 1940. Consequently, if the conditions laid down in section 47 are satisfied, the 1937 Act applies to arbitrations that are also covered by section 389 of the Indian Companies Act of 1956. Section 389, as it stood before its repeal in 1960, extended to arbitrations even where the parties to the submission were either individuals or corporate entities. Under subsection (1) and subsection (3) of that provision, an Indian company was permitted to refer any dispute with another company or person to arbitration by a written agreement that conformed to the Arbitration Act of 1940. The 1940 Act therefore governed all arbitrations undertaken pursuant to the Companies Act in which a company was a party. An agreement to refer disputes to the International Chamber of Commerce rules, when made under the framework of the Arbitration (Protocol and Convention) Act of 1937, was therefore not inconsistent with section 389 of the Companies Act, 1956, because the 1937 Act was recognised by the 1940 Act.

The Court observed that in the earlier decision of Societe Italiani per Lavori Marittimi (1) the bench had not considered the effect of section 47 of the Arbitration Act, 1940 in its relationship to the 1937 Act, and consequently had refused to stay a suit that was filed in violation of the arbitration agreement. The lower court had held that an arbitration clause that contemplated a reference in a manner different from that prescribed by sections 1 to 38 of the 1940 Act was ineffective, a view it based on section 152 of the Companies Act of 1913, describing the agreement as “impossible and completely prohibited.” The present Court stated that this view could not be sustained. It noted that Justice Kantawala and the High Court had proceeded on the premise, compelled by the earlier judgment, that the decision in Societe Italiani per Lavori Marittimi (1) justified Kamani’s contention that the suit could not be stayed because the arbitration agreement was invalid. The Court explained that the assumption was unsupported, particularly because no determination had been made by either the trial judge or the High Court on whether, in light of section 3 of the 1937 Act, a stay of the suit filed by Kamani was appropriate. The Court held that it would be improper to decide factual issues for the first time on appeal without the benefit of the High Court’s view on those questions. Accordingly, the appeal was allowed, the matter was remanded to the court of first instance for a proper hearing and disposal in accordance with law, and costs were awarded in this Court and before the Division Bench.

The Court indicated that the decision rendered by the High Court would be respected with regard to the outcome of the proceeding that was to be conducted in accordance with the present order in the Trial Court. Accordingly, the appeal that had been brought before the Supreme Court was permitted, and the matter was referred back to the lower court for further adjudication. The direction required the Trial Court to proceed with the case, taking into account the observations and instructions contained in the Supreme Court’s order, and to dispose of the suit in accordance with applicable law. By allowing the appeal, the Supreme Court set aside the earlier determination and mandated that the case be reheard by the Court of First Instance. The remand of the case signified that the trial court would have to re‑examine the issues, apply the legal principles clarified by the higher court, and render a fresh judgment consistent with the guidance provided. The order thus ensured that the procedural posture of the litigation would continue in the trial forum, while the higher court’s findings and directives would govern the subsequent conduct and resolution of the dispute.