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PETITIONER: ANDERSON WRIGHT LTD.

       Vs.

RESPONDENT: MORAN AND COMPANY.

DATE OF JUDGMENT: 01/11/1951

BENCH: MUKHERJEA, B.K. BENCH: MUKHERJEA, B.K. BOSE, VIVIAN JAGANNADHADAS, B.

CITATION:  1955 AIR   53            1955 SCR  (1) 862  CITATOR INFO :  E          1973 SC2071  (5)  R          1975 SC 469  (6)  D          1985 SC1156  (59)  R          1989 SC 839  (18,25)

ACT: Arbitration Act, 1940 (X of 1940), s. 34 -Application  under the   section  for  stay  of   legal   proceedings-Necessary conditions-Fulfilment  of-First essential pre-requisite  for an  order of stay-Binding arbitration agreement between  the parties-Incumbent upon the Court to decide this-point.

HEADNOTE: Held,  that in order that a stay may be granted under s.  34 of  the Indian Arbitration Act, 1940, it is  necessary  that the following conditions should be fulfilled:- (1)  The  proceeding must have been commenced by a party  to an  arbitration  agreement against any other  party  to  the agreement; (2)  the legal proceeding which is sought to be stayed  must be in respect of a matter agreed to be referred ; (3)  the  applicant  for stay must be a party to  the  legal proceeding and he must have taken no step in the  proceeding after  appearance.   It  is also necessary  that  he  should satisfy  the court not only that he is, but also was at  the commencement  of  the proceedings, ready and willing  to  do everything   necessary  for  the  proper  conduct   of   the arbitration ; and (4)  the Court must be satisfied that there is no sufficient reason  why  the  matter  should  not  be  referred  to   an arbitration in accordance with the arbitration agreement. The first and essential pre-requisite to making an order  of stay  under a. 34 of the Arbitration Act is that there is  a binding  arbitration  agreement between the parties  to  the suit which is sought to be stayed.  The question whether the dispute  in  the suit falls within  the  arbitration  clause really  pre-supposes  that  there  is  such  agreement   and involves consideration of two matters, viz., (1) what is the dispute  in the suit and (2) what disputes  the  arbitration clause covers. It is incumbent upon the Court, when invited to stay a  suit

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under  s. 34 of the Indian Arbitration Act, to decide  first of all whether there is a binding agreement for  arbitration between the parties. If,  in  the present case, it is held that  the  arbitration agreement  and the contract containing it were  between  the parties  to the suit, the dispute in the present suit  would be one relating to the rights and liabilities of the parties on  the basis of the contract itself and would  come  within the purview of the arbitration clause 863 worded  as it is in the widest of terms.  If, on  the  other hand,  it is held that the plaintiff was not a party to  the agreement,  the  application for stay  must  necessarily  be dismissed. Case sent back for the decision of the question whether  the respondent  was  or  was  not a  party  to  the  arbitration agreement. Heyman  v. Darwins ([1942] A.C. 356), Khusiram  v.  Hanutmal ((1948)  53  C.  W.N.  505), A.  M.  Mair  and  Companay  v. Gordhandas  ([1960]  S.C.R.  792) and  Patiram  Y.  Kankarah Company ((1915) I.L.R. 42 Cal. 1050) referred to.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 205 of 1953. Appeal from the Judgment and Order dated the 24th  February, 1953, of the High Court of Judicature at Calcutta in  Appeal from Original Order No. 19 of 1952, arising out of the Order dated  the  23rd day of August, 1951, of the High  Court  of Calcutta in its Ordinary Original Civil Jurisdiction  Matter No. 157 of 1951. K.   P. Khaitan, (S.  N. Mukherjea and Rajinder Narain, with him) for the appellant. M.   C. Setalvad, Attorney- General for India, (A.  N.  Sen, V.   S.  Sawhney  and  S.  P.  Varma,  with  him)  for   the respondents. 1954.   November 1. The Judgment of the Court was  delivered by MUKHERJEA  J.-This appeal is directed against a judgment  of an  appellate  bench of the Calcutta High Court,  dated  the 24th February, 1953, reversing, on appeal, the judgment  and order of a single Judge sitting on the Original Side of that Court,  passed  on an application under section  34  of  the Arbitration Act.  The material facts are not in  controversy and may be shortly stated as follows: On the 7th of July, 1950, the respondent, Moran and  Company Limited,  passed two Bought Notes to the appellant  company, couched  in  identical  terms,  under  which  the  appellant purchased  12,00,000 yards of hessian cloth, 6,00,000  yards under each contract, on certain terms and conditions  stated therein.   The  delivery  was to be made  every  month  from January, 1951, at the rate of 1,00,000 yards per month under 864 each of these notes and payments were to be made in cash ’on delivery,  each  delivery being treated as  a  separate  and distinct contract.  The Bought Notes commenced thus: Dear Sirs, We  have this day Bought by your order and on  your  account from our Principals." The  particulars  of  the  goods, the  price,  the  time  of delivery  and other terms of the contract are then  set  out and  amongst  the terms is an arbitration clause  worded  as follows: "  All  matters, questions, disputes,  differences  and/  or

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claims arising out of and/or concerning and/or in connection with and/or in consequence of or relating to this  contract, whether  or  not the obligations of either or  both  parties under  this  contract  be subsisting at  the  time  of  such dispute   and,  whether  or  not  this  contract  has   been terminated or purported to be terminated or completed, shall be  referred  to the arbitration of the  Bengal  Chamber  of Commerce -under the rules of its Tribunal of Arbitration for the  time  being in force and according to  such  rules  the arbitration shall be conducted."  The notes were signed by the respondent, Moran and Company, describing themselves as brokers. It  is admitted that the goods covered by the  Bought  Notes were  delivered  to  the appellant in all  the  months  from January  to June, 1951, with the exception of the goods  due to be delivered for the month of March, 1951.  The appellant required from the respondent delivery of goods in respect of the  month of March but the latter informed -the  appellant, by a letter dated the 27th March, 1951, that its  principals disowned a liability in this respect as there was default on the   part   of  the  appellant  in  not   giving   shipping instructions for the said goods within the time mentioned in the contracts.  The appellant denied any default on its part and did not also accept the position that the respondent had any  principal, and on the 27th of April, 1951, it sent  its bills to the respondent claiming Rs. 1,13,042-3-0 as damages for non-delivery of the 865 goods.   As the respondent did not comply with this  demand, the  appellant contemplated referring the matter in  dispute to  the  arbitration of the Bengal Chamber  of  Commerce  as provided in the contracts and while it was preparing to take steps  in  that direction, the respondent, on  the  11th  of June,  1951,  filed  a suit against  the  appellant  in  the Original  Side  of the Calcutta High Court (being  Suit  No. 2516  of 1951,) and it is in respect of this suit  that  the application under section 34 of the Arbitration Act has been made.  It was alleged in the plaint that the plaintiff acted merely as broker and in that capacity brought about the  two contracts  of sale and purchase evidenced by the two  Bought Notes mentioned above, that the real seller was a firm known as  Gowarchand Danchand, and that the plaintiff not being  a party  to the contract could not incur any  liability  under its  terms.   There  were  prayers  in  the  plaint  for   a declaration that the plaint. off was not a party to the said contracts  and,  that it had no liability  under  the  same. There was a further prayer for an injunction restraining the respondent from, claiming any damages in respect of the said contracts The writ of summons was served on the appellant on the  23rd of  June,  1951.   On  the 19th  July,  1951,  it  filed  an application under section 34 of the Arbitration Act  praying that the proceedings in the suit may be stayed in order that the matter in dispute between the parties may be dealt  with under  the  arbitration clause contained in  the  contracts. The  application was heard by Das Gupta J. who  allowed  the prayer  of the applicant and stayed further  proceedings  in the  suit.  In the opinion of the learned Judge the  dispute in this case was not whether there was any contract  entered into  by and between the appellant and the  respondent:  but whether the respondent, who admittedly passed the two Bought Notes  to  the  appellant, could be made  liable  under  the contract  by reason of the fact that it described itself  as broker.   The answer to this question depended according  to the  learned Judge upon the interpretation of  the  contract

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itself  and  the  dispute  arising as.  it  did  out  of  or concerning or relating to the 866 contracts  would come within the purview of the  arbitration clause. Against  this judgment the respondent took an appeal to  the Appellate  Division  of the High Court and  the  appeal  was heard by a bench consisting of Chakravartti C.J. and  Sarkar J. By two separate judgments which concurred in the  result, the  Chief Justice and the other learned Judge  allowed  the appeal  and vacated the order for stay.  It is against  this judgment  that the appellant has come to this Court  on  the strength  of  a certificate under article 133(1)(a)  of  the Constitution.   The  short point for our  consideration  is, whether on the facts of this case, the appellant is entitled to an order under section 34 of the Arbitration Act, staying the proceedings of the suit commenced by the respondent. Section 34 of the Arbitration Act is in these terms: " Where any party to an arbitration agreement or any  person claiming  under him commences any legal proceedings  against any  other  party to the agreement or  any  person  claiming under  him in respect of any matter agreed to  be  referred, any party to such legal proceedings may, at any time  before filing a written statement or taking any other steps in  the proceedings,  apply to the judicial authority  before  which the proceedings are pending to stay the proceedings; and  if satisfied that there is no sufficient reason why the  matter should  not be referred in accordance with  the  arbitration agreement  and that the applicant was, at the time when  the proceedings  were  commenced, and still remains,  ready  and willing to do all things necessary to the proper conduct  of the  arbitration, such authority may make an  order  staying the proceedings." Thus in order that a stay may be granted under this section, it  is  necessary that the following  conditions  should  be fulfilled:- (1)The proceeding must have been commenced by a party to  an arbitration  agreement  against  any  other  party  to   the agreement; (2)the  legal proceeding which is sought to be. stayed  must be in respect of a matter agreed to be referred 867 (3)the  applicant  for  stay must be a party  to  the  legal proceeding and he must have taken no step in the  proceeding after  appearance.   It  is also necessary  that  he  should satisfy  the Court not only that he is but also was  at  the commencement  of  the proceedings ready and  willing  to  do everything   necessary  for  the  proper  conduct   of   the arbitration; and (4)the  Court must be satisfied that there is no  sufficient reason  why  the  matter  should  not  be  referred  to   an arbitration in accordance with the arbitration agreement. The  third condition can be taken to have been fulfilled  on the  facts of the present case, and the fourth is one  which is  exclusively  for the determination of  the  Court.   The controversy between the parties centres round the other  two conditions, namely, conditions (1) and (2) ; and unless  the applicant  for  stay  succeeds  in  establishing  that   the respondent  is a party to an arbitration agreement and  that the subject-matter of dispute in the suit is a matter coming within  the scope of such agreement, it cannot possibly  ask the Court to order a stay of the proceedings, under  section 34  of  the  Arbitration Act.  The  learned  Judges  of  the appellate  bench of the High Court have taken the view  that the  only matter in dispute between the parties to the  suit

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is  whether the plaintiff was a party to the  contract.   It was  definitely alleged by the plaintiff that  the  contract was not between it and the appellant but was one between the appellant  and  a  third party  and  since  the  arbitration agreement  is contained in the contract, it is an  agreement between  those parties only, which could not bind or  affect the plaintiff in any way.  The dispute, it is said, which is the  subject-matter  of the suit does not  arise  under  the contract  and  does  not relate to it;  it  is  outside  the contract  altogether and does not come within the  scope  of the  arbitration  agreement.   The decision  in  the  appeal therefore  rests  entirely  on the finding  of  the  learned Judges that the matter in dispute between the parties to the suit  does  not  come within the ambit  of  the  arbitration clause.  In view of this decision the learned Judges did not consider  it  necessary  to go into the first  point  as  to whether in fact 868 there  was  a  binding  arbitration  agreement  between  the parties to the suit.  The learned Chief Justice no doubt did in a manner consider that point also, but he refrained  from pronouncing  any decision upon it, being of opinion  that  a decision  on this question which was the only issue  in  the suit itself might prejudice the parties and create a bar  of res judicata against one or the other. We think that on the facts of this case it was necessary for the  learned  Judges of the appellate bench  to  decide  the question  as  to whether or not the plaintiff  in  the  suit which  the  applicant  wants  to stay was  a  party  to  the arbitration  agreement.  This would have a material  bearing on the decision of the other question upon which the learned Judges rested their judgments. The first and essential pre-requisite to making an order  of stay  under section 34 of the Arbitration Act is that  there is  a binding arbitration agreement between the  parties  to the suit which is sought to be stayed.  The question whether the dispute in the suit falls within the arbitration  clause really  pre-supposes  that  there  is  such  agreement   and involves consideration of two matters, viz., (1) what is the dispute  in the suit and (2) what disputes  the  arbitration clause  covers?(1).  The contention raised by the  plaintiff in the present suit is, that the contract was really between the  appellant and another party and not between it and  the appellant and consequently it was not bound by the  contract and  could  not  be made liable for  any  damages  in  terms thereof.  In substance therefore the controversy between the parties  in the suit is whether the plaintiff did incur  any liability  in  terms of the contracts evidenced by  the  two Bought  Notes  to  which it was a  signatory  no  matter  in whatever capacity.  The question whether the plaintiff was a party  to  the  agreement at all is  undoubtedly  one  which cannot go before the arbitrators and with that question they cannot  possibly  deal.  But as Lord Porter pointed  out  in Heyman  v.  Darwins (2), "this does not mean that  in  every instance (1)  Vide per Viscount Simon in Heyman v. Darwins, [1942]  A C. 356 at 360. (2) [1942] A.C. 356, 393. 869 in  which  it is claimed that the arbitrator has  no  juris- diction  the Court will refuse to stay an action.   If  this were the case such a claim would always defeat an  agreement to  submit  disputes to arbitration, at any rate  until  the question  of  jurisdiction had been decided.  The  Court  to which  an application for stay is made is put in  possession

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of  the facts and arguments and must in such a case make  up its  mind whether the arbitrator has jurisdiction or not  as best  it  can  on  the  evidence  before  it.   Indeed,  the application for stay gives an opportunity for putting  these and  other  considerations  before the  court  that  it  may determine  whether  the  action shall  be  stayed  or  not." Section  34  of the Arbitration Act as is well  known  is  a virtual reproduction of section 4 of the English Arbitration Act of 1889.  The observations quoted above were approved of by Mr. Justice S. R. Das in the case of Khusiram V. Hanutmal (1)  and it was held by the learned Judge that where  on  an application made under section 34 of the Arbitration Act for stay  of  a suit, an issue is raised as  to  the  formation, existence  or  validity  of the con.  tract  containing  the arbitration clause, the Court is not bound to refuse a  stay but  may  in its discretion, on the  application  for  stay, decide  the  issue as to the existence or  validity  of  the arbitration   agreement   even   though   it   may   involve incidentally  a decision as to the validity or existence  of the parent contract. We  are in entire agreement with the view enunciated  above. As we have said already, it is incumbent upon the Court when invited  to stay a suit under section 34 of the  Arbitration Act  to  decide  first of all whether  there  is  a  binding agreement  for arbitration between the parties to the  suit. So  far as the present case is concerned if it is held  that the  arbitration  agreement and the contract  containing  it were  between  the parties to the suit, the dispute  in  the present  suit  would  be  one relating  to  the  rights  and liabilities  of  the parties on the basis  of  the  contract itself and would come within the purview of the  arbitration clause worded as it is in the widest of terms, in accordance with  the principle enunciated by this Court in A.  M.  Nair and (1)  (1948) 53 C.W.N. 505 at 518.                             870 Company v. Gordhandass (1).  If on the other hand it is held that  the  plaintiff was not a party to the  agreement,  the application for stay must necessarily be dismissed. The  appellate Judges of the High Court in our opinion  held rightly  that  the  decision in A. M. Mair  and  Company  v. Gordhandass  (1)  was  not in any sense  conclusive  in  the present  case  on the question of the dispute  in  the  suit being  included  in the arbitration agreement.   The  report shows  that  the  dispute  in  that  case  was  whether  the appellants  had  made  the contract in their  own  right  as principals  or on behalf of the Bengal Jute Mill Company  as agents  of the latter.  The decision -of this  question  was held  to turn upon a true construction of the  contract  and consequently  it  was a dispute under or arising out  of  or concerning  the  contract.   The judgment  proceeds  on  the footing  that  there  was in fact  a  contract  between  the parties  and  the only dispute was in which  character  they were  parties  to it, the respondents  contending  that  the appellants  were  not bound as principals while  the  latter said that they were.  Mr. Justice Fazl Ali in delivering the judgment  pointed out that the error into which the  learned Judges of the appellate bench of the High Court appeared  to have  fallen was their regarding the dispute raised  by  the respondent  in  respect of the position  of  the  appellants under  the  contract  as having the same  consequence  as  a dispute as to the contract never having been entered into. In  this  case  it  is  certainly  not  admitted  that   the respondent was a party to the contract.  In fact that is the subject-matter  of controversy in the suit itself.  But,  as

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has been said already, the question having been raised ,  in this  application, under section 34 of the Arbitration  Act, the  Court has undoubted jurisdiction to decide it  for  the purpose  of finding as to whether or not there is a  binding arbitration agreement between the, parties to the suit.   It has  been  said  by Chakravartti C.J.  and  in  our  opinion rightly, that if the person whose concern with the agreement is in question is a signatory to,the contract and formally a (1)  [1950] S.C.R. 792. 871 contracting  party,  that will be sufficient to  enable  the Court to hold for purposes of section 34 that he is a  party to  the agreement.  It was the contention of the  respondent in  the Court below that this test was not fulfilled in  the present  case.  The point has been canvassed before us  also by  Mr.  Sen  and it has been argued  on  the  authority  of several decided cases that in cases of this description  the Bought  Note  is a mere intimation to the  buyer,  that  the orders  of  the latter have been carried out  and  purchases have  been made from other persons and not from  them.   The writer  does not thereby become a party to the  contract  of purchase  and  sale  even as an agent.  He  remains  a  mere broker  or intermediary and the provision of section  230(2) of  the  Contract Act ’Cannot be invoked against  him.   Mr. Khaitan on the other hand argues that the English law  being quite different from the Indian law regarding the  liability of  an  agent  contracting  on  behalf  of  an   undisclosed principal,  the  English  authorities  are  no  guide  to  a solution  of  the  problem.  It is said  that  the  case  of Patiram Banerjee v. Kanknarrah Co., Ltd.(1), upon which  the respondent  relies,  was wrongly decided  being  based  upon English authorities which have no application to India.  The respondent  here,  it is pointed out,  signed  an  elaborate document  setting  out  in  full  every  particular  of  the contract  entered into and it is impossible to say  that  he was  not an agent executing a contract on behalf of  another whose   identity  he  did  not  disclose  but  was  a   mere intermediary conveying an information to the buyer.  In  our opinion,  the  point  is not free from  doubt  and  requires careful  consideration  and  as it was not  decided  by  the learned  Judges  of  the  High Court and  we  have  not  the advantage  of having their views upon it, the proper  course for  us  to  follow would be to send the  case  back  for  a hearing of and decision on this point.  We, therefore, allow the  appeal and set aside the judgments of both  the  Courts below.   The matter will go back to the appellate  bench  of the Calcutta High Court which will decide as an issue in the proceeding  under  section  34 of the  Arbitration  Act  the question whether the respondent was or was not a party (1)  (1915) I.L.R. 42 Cal.  I050. 872 to  the arbitration agreement.  If the Court is  of  opinion that  the respondent was in fact a party, the suit shall  be stayed and the appellant would be allowed to, proceed by way of  arbitration in accordance with the  arbitration  clause. If  on  the  other  hand  the  finding  is  adverse  to  the appellant, the application will be dismissed.  The appellant will  have its costs of this appeal.  Further costs  between the parties will abide the result. Appeal allowed.