The legal proceeding which is sought to be stayed must be in respect of a matter which the parties have agreed to refer and which comes within the ambit of the arbitration agreement. Where however, a suit is commenced as to a matter which lies outside the submission, the Court ids bound to refuse a stay (see Gaya Electric Supply Co. v. State of Bihar, ). It is well settled that the court cannot go into the validity of the claim in the proceedings under S. 34.
9. The conditions which should be fulfilled before an order of stay under Section n34 could be made are stated by Mukherjee, J. (as he then was) in Anderson Wright Ltd. v. Moran and Co., and they are; (1) the proceedings must have been commenced by a party to an arbitration agreement against any other party to the agreement; (2) the legal proceedings 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 proceedings and the must have been taken no step in the proceeding after appearance. It is also necessary that he should satisfy that court not only that he is but also 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 agreement.
Andhra High Court
Rai And Son (P) Ltd. vs Poysha Industries Co. Ltd. on 4 February, 1971
Equivalent citations: AIR 1972 AP 302
Bench: O Reddi, V Rao.
1. In these two Civil Miscellaneous Appeals, one preferred by the plaintiff in O. S. No. 57/69 and the other by the defendant in O. S. No. 57/69 the scope of Section 34 of the Arbitration Act is involved.
2. According to the plaintiff, it is a case where the defendant is seeking to raise a dispute de hors the terms of the contract between the parties; and according to the defendant, the agreement provides for any sort of dispute between the parties being submitted to arbitration by the body specified in the contract.
3. The defendant made an application under Section 34 of the Arbitration Act in the court of the Chief Judge, City Civil Court, Hyderabad, praying that the suit filled by the plaintiff may be stayed pending disposal of the application made by the defendant in the High Court of Delhi for reference of the dispute under Section 20 of the Act. After laying the action in the lower Court, the plaintiff also made an application under Order 39, Rule 5, Civil Procedure Code, for attachment before judgment and alternative under Order 39, Rules 1 and 2, Civil Procedure Code, for an injunction restraining the defendant from alienating is properties pending disposal of the suit. The learned Chief Judge, on the application made by the plaintiff, granted an interim injunction and directed notice to the defendant under Section 34, the learned Chief Judge felt that the agreement is sufficiently comprehensive enough to refer the dispute that has arisen between the parties to arbitration and, therefore, ordered stay of the suit brought by the plaintiff.
4. Mr. Venkatachar, the learned counsel for the plaintiff contended that there was absolutely no dispute at all between the parties under any of the terms of the agreement, the defendant having accepted the liability in every one of its letter; that it is only after the plaintiff issued a registered notice that it would be constrained to lay an action in the Civil Court, that it would be constrained to lay an action in the Civil Court, that the defendant, without notice to the plaintiff, filed an application under Section 20 of the Act before the Delhi High Court in order to defeat and delay the interests of justice; and that there is absolutely nothing to bear out from the correspondence between the parties that the defendant had raised any kind of dispute or any kind of dispute had arisen under the terms of the contract before the plaintiff filed the suit in the court below. Mr. Madhukar Rao Ganu appearing for the defendant, contended that the terms of the contract are clear enough to entitle any one of the reference to arbitration; that by reason of the dispute relating to the supply of goods which did conform to the specifications and also the dispute relating to the payment of interest, the defendant sought reference to arbitration; and that there is absolutely no grounds to interfere with the order of the learned Chief Judge who had thoroughly exam, opened the material placed before him by both sides and given his findings thereon. It was next contended by Mr. Ganu that the scope of Sec. 34, Arbitration Act, is of wide amplitude so as to entitle the court to stay not only the trail of the suit but also other proceedings initiated by the plaintiff in that suit and that the order of the lower court, to the extent that it refused to stay the further proceedings in I. A. No. 984 of 1969 filed by plaintiff for an injunction cannot therefore be sustained.
5. To appreciate the questions raised by the learned counsel appearing for both sides, it is necessary to state the relevant acts. The plaintiff is a limited company with its Head Office at Bombay engaged in the manufacture of options and cans. It entered into several contracts with the defendant, a private limited company, which has its Head Office at New Delhi and its factory at Hyderabad to supply tin cans from its factories at Bombay, Cochin and Ghasiabad, to the defendant's factory at Hyderabad. The terms and conditions of sale and supply are all lincorporated in the various contracts entered into between the parties from time to time since 1965. All the orders placed by the purchaser, viz., the defendant were accepted by the plaintiff and it supplied cans and containers by delivering the goods to the defendant at Hyderabad. The defendant purchased the cans and containers as per the orders placed by its from time to time till August, 1968. The plaintiff claimed a total sum of Rs. 1,96,174-09 Ps., as the amount due from the defendant on the account of its failure and negligence to pay that amount under the various contracts in spite of numerous demands made by it from time to time.
The defendant it is alleged, accepted every statement of account dispatched by the plaintiff and also issued cheques with a request that they should be presented for encashment as per the time schedule given by it. The plaintiff at the request of the defendant, also extended time for payment by cheques; and ultimately when the defendant was making further request to postpone the presentation of the cheques for encashment, the plaintiff gave a notice to the defendant that if it made any further request for postponement of presentation of the cheques, the plaintiff would have no alternative but to recover the amount due to it by laying an action in a court of law. It is the case of the plaintiff that even the registered notice issued by it to the defendant had no effect and that it had not even cared to give any reply and that apprehending that the plaintiff may seek relief in a court of law and to thwart any legal proceedings that it may take, the defendant has moved the Delhi High Court without even notice to the plaintiff, for reference of a dispute which did not exist under the terms of the contract.
It is also the case of the plaintiff that as it apprehended that the defendant was likely to alienate its properties in order to safeguard its own interest, it had to file the application praying for agreement before judgment or in the alternative, for an injunction restraining the defendant from alienating its properties.
6. The defendant's case is that it is true that the plaintiff was supplying tins and containers as stipulated in the various contracts from 1965 onwards but the goods supplied did not conform to the specifications agreed upon by the parties and therefore a dispute had arisen, which in the nature of or was a matter for reference to arbitration under the terms of the agreement. In the application filed by the defendant, it is also stated that there was a further dispute relating to the interest payable by the defendant , to the plaintiff and therefore it was strictly a case within the scope of Section 34 of the Arbitration Act and as such the Court below was justified in directing the stay of further proceedings in the suit pending the dispute being referred to arbitration by one nor the other of the parties to the contract. The interlocutory application filed by the plaintiff was resisted on the ground that Section 34 applies to collateral proceedings also.
7. Therefore, the only point which the court, while exercising its jurisdiction under Section n34, has to consider is whether the claim brought in the suit in respect of which the application has been made comes within the submission of arbitration.
8. The legal proceeding which is sought to be stayed must be in respect of a matter which the parties have agreed to refer and which comes within the ambit of the arbitration agreement. Where however, a suit is commenced as to a matter which lies outside the submission, the Court ids bound to refuse a stay (see Gaya Electric Supply Co. v. State of Bihar, ). It is well settled that the court cannot go into the validity of the claim in the proceedings under S. 34.
9. The conditions which should be fulfilled before an order of stay under Section n34 could be made are stated by Mukherjee, J. (as he then was) in Anderson Wright Ltd. v. Moran and Co., and they are; (1) the proceedings must have been commenced by a party to an arbitration agreement against any other party to the agreement; (2) the legal proceedings 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 proceedings and the must have been taken no step in the proceeding after appearance. It is also necessary that he should satisfy that court not only that he is but also 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 agreement.
10. Conditions 1 and 2 and the first part of condition No. 3 it is not in dispute, are satisfied in this case. So far as the second part of condition No. 3 is concerned, while the learned counsel for the defendant contends that the defendant was ready and willing to do everything necessary for the proper conduct of the arbitration the learned counsel for the plaintiff disputes this assertion and contends that there is nothing no record to suggest that, before proceedings were started in the lower court, the defendant was ready and willing to do everything necessary for the proper conduct of the arbitration. The other requirement, which is now to be examined is whether there is sufficient cause for not referring the matter to arbitration in accordance with the agreement.
11. To arrive at a decision whether there is sufficient reason for not referring the dispute to arbitration, it is necessary to refer to the correspondence between the parties. The correspondence will also reveal whether, in fact the defendant was ready and willing to do everything necessary for the proper conduct of the arbitration. The first of the letters addressed by the defendant to the plaintiff is no 30th July, 1963. In this letter, the defendant thanks the plaintiff for the telegraphic call with regard to the two cheques one for Rs. 40,000 and another for Rs, 41,152-55 Ps. issued earlier by the defendant. The defendant, by this letter requested the plaintiff to present one of the cheques on 7th August and the second on 15th August. The plaintiff, by its letter dated 5h August, 1963 of the 30th July, 1963 requesting the plaintiff to withhold the encashment of the two cheques. The relevant portion of this letter may be extracted to ascertain whether, in fact there was any dispute between the parties at any stage before the plaintiff initialed proceedings in the lower court;
"It is surpassing that you have been constantly asking us to withhold the encashment of these cheques even though about two months have elapsed in the case of 1st cheque and a month in the case of the 2nd one.
The delay in encashment of these cheques has put us into considerable inconvenience which, in our opinion will not be conducive to the good business relations.
... ... ... ... ...
We however, regret that while supplies were made by us in accordance with the schedule, thus fulfilling our part of the agreement there has been a total failure on your part in effecting payments on the basis of schedule given by you.
We hope at least here onwards no such delays would occur in the payment to enable us to supply the balance cans still pending against the contracts.
Meantime, we are instructing our accounts department to forward you our debit notes for the interest charges covering the period of default".
In this letter the plaintiff also asked the defendant to confirm the contents of the letter, so that the encashment of the cheques could be withheld as desired by the defendant.
12. In reply to that letter, the defendant, by its letter dated 6th August 1968, while acknowledging the letter of the plaintiff, confirmed the debit note for the interest charged for the extended period and requested the plaintiff's con-operation for purposes of postponing the encashment of the cheques. The plaintiff wrote the next letter on 9-8-1968. In this, the plaintiff referred to the defendant's previous letter written to it and brought to the notice of the defendant that the method of frequently making requests to postpone the encashment of the cheques was causing considerable financial inconvenience to it and made it clear that they would be depositing the first cheque immediately for encashment. On 17th August, 1968, the defendant wrote to the plaintiff, by way of abundant caution, requesting it "to kindly intimate two days before presenting the cheques on the date specified above". The defendant enclosed four cheques to that letter and it is for that reason that request was make to give it an advance notice before presenting the cheques for encashment. On 10-10-1963, the defendant wrote another letter admitting the liability and it may be necessary to quote the entire letter:
"With reference to the discussion between our Managing Director and Mr. Jaitly as a consequence to which the enclosed statement of account with your was handed over by Mr. Kapuria.
We confirm that the said statement of account is correct and already contains details of supplies as required by you. The uncovered amounts i.e., other than supplies with Bank relate to supplies in 1967-68.
Owing to the unfortunate failure of the second mango crop in the south, as certified by the competent authority, we were enable to fulfill our export commitment to one of the major importers.
Schedule of payment of our outstanding was handed over to Mr. Kapuria and which is also being enclosed.
From the outstanding you are holding cheques to be presented in October and November as per our letter dated 17th August, 1968. It is requested that these cheques should not be presented on these dates as the amounts have been included in the new schedule of payment. We are aware of the fact that we are imposing on your goodness and we do hope that you will accept to our request and let us have an early confirmation". This letter will clearly reveal that the defendant never raised any disputes regarding the bills issued by the plaintiff for the supply of cans nor is there anything to suggest that the cans or containers supplied by the plaintiff did not conform to the requirements specified in the agreement. The earlier letter dated 6th August 1968 would show that there was no dispute as to the rate of interest charged by the plaintiff. The last letter by the defendant is on 18-2-1969 and this may also be quoted:
"Thank you very much for your communication ending with your letter dated 14-2-1969. I have been advised that whatever your dues they are to be cleared by the end of March. We are all hoping that you will not have to complain any further.
Meanwhile your courtesy and accommodation are genuinely appreciated".
Therefore the aforesaid correspondence between the plaintiff and the defendant between the plaintiff and the defendant would reveal that upto 18th February 1969, there was not a whisper of any dispute either with regard to the supply of stocks, which now according to defendant, did not conform to the specifications or with regard to the amount claimed by the plaintiff for the goods supplied or with regard to the rate of interest charged for the failure to pay the amounts in time. In every one of the letters written by the defendant, the common feature noticeable is that it asked for postponement of the encashment of the cheques admitting its liability of the cheques admitting its liability without raising any dispute whatsoever for the goods supplied and expressed its genuine appreciation for the accommodation and courtesy shown by the plaintiff. It is only after the defendant failed to pay any amount notwithstanding its letter dated 18-2-1969, that the plaintiff was compelled to issue a registered notice on 28th April 1969. The opening paragraph of this notice reads:
"We have written to you many times on the subject-matter of our outstanding bills and not having received any satisfactory reply nor settlement we are constrained to send this registered letter to you."
It further reads:-
"Your will appreciate that we cannot allow this state of affairs to continue further xx xx As per our books of account, the total outstanding of Rs. 4,02,035-38 is made up as under:
Supplies made from Bombay Factory Rs. 2, 46, 776-51
Supplies made from Gaziabad Factory Rs. 86, 437-31
Supplies made from Cochin Factory Rs. 68, 821-56
____________
Total Rs. 4, 02, 035-38
____________
xx xx xx xx xx xx
Should this become necessary, please note that the consequences, costs and expenses for the necessary legal action will be at your responsibility and we will have to demand payment of interest at 10 per cent on the bills not settled within the stipulated time all along according to our terms of business with you, the normal business usage and practices.
We do hope that you will not drive us to this extreme step in view of our business relationship with you and we hope that you will kindly see your way to commence payments even in installments."
13. It would appear that subsequently the defendant cleared some consignments after payment to the bank and for the balance due demand was made by the plaintiff by means of another registered letter dated 20th May 1969. No reply has been placed before us by the defendant either to the registered letter dated 28th April, 1969 or to the registered letter dated 20th May 1969 threatening to lay action in a Civil Court for the recovery of the amounts due. The plaintiff pointed out in its last letter that it had waited too long and therefore, there was no alternative left except to take such steps as are immediately open to it for collecting the outstanding from the defendant without any further delay.
14. Mr. Madhukar Rao Ganu tells us, that before the defendant filed an application under Section 20 in the Delhi High Court it had written a letter to the plaintiff on 19-5-1969 raising a dispute and making a counter-claim and requesting the plaintiff to join the defendant in the submission of a reference. This letter, as pointed out by Mr. Venkatachari, was not sent by registered post nor is there any acknowledgment of any kind from the plaintiff. Mr. Madhukar Rao Ganu says that this letter was posted as an enclosure to another letter No. 1143 of the same date i.e., 19-5-1969. Mr. Venkatachari tells us that there is nothing in that letter No. 1143, which was received by the plaintiff, to show that any letter, as now sought to be made out, was concludes. Therefor in the absence of any proof that such a letter was received by the plaintiff, we are unable to say that the defendant ever disputed the claim made by the plaintiff or preferred a counter-claim, before the plaintiff initiated proceedings in the lower court.
15. The relevant terms of the agreement, to which our attention has been invited may now be noticed;
"Clause 17: All claims shall be made to the sellers in writing within 6 days from the date of deliveries to the purchasers. The submission of claims within that period is a condition precedent to their being maintainable and no complaints of claims whatsoever will be entertained by the sellers if such claims are not lodged by the purchasers within the period stipulated for nothing in this condition shall prejudice the sellers' rights as to arbitration in respect of claims as provided for therein.
xx xx xx xx xx xx Clauses 21: - Purchasers shall not be entitled to delay or withhold the payments of the price or any part thereof on account of any claim for allowances or otherwise but shall pay the full amount for the goods and this shall be a condition precedent to any claims being entertained.
xx xx xx xx xx xx Clause 24: - All disputes or claims whatsoever arising on or out of, or in connection with all contracts or orders for the supply of goods by sellers to purchasers shall be referred to arbitration of the Indian Merchant Chamber. Bombay. The award in such arbitration shall be final and binding on both the parties either of whom may make the same rule of court".
No evidence has been placed before us to show that the defendant had complained within six days from the date of delivery of the goods to it that the goods delivered did not conform to the specifications. Any claim that might be made by the defendant after the expiry of the period of six days cannot be said to be a claim arising out of the terms of the agreement to attract clause 24. The correspondence that has-been referred to above would clearly demonstrate that no claim of any sort either under clause 17 or under any other clause was made by the defendant. But on the other hand, the defendant made an admission of its liability throughout and pleaded for accommodation and even expressed its gratitude for the accommodation given to it.
16. Mr. Madhukar Rao Ganu, however, relied upon the fact that the defendant made an application to the Delhi High Court under Section 20 to contended by the plaintiff, it raised a dispute and therefore, it cannot now be said that a reference of the dispute to arbitration is contended by Mr. Venkatachar that there was no dispute at all as to the liability or to the terms of the agreement and that if there was any such dispute, the defendant would have raised it in its letters to the plaintiff and that the fact that the defendant admitted its liability and had never raised any dispute would go to show that it is only to thwart the proceedings in the court which the plaintiff had threatened to initiate, that the defendant had chose to move the Delhi High Court under S. 20 and not because of any dispute warranting reference to arbitration. Except now to contend that, by reason of the defendant having filed an application in the Delhi High Court a dispute had arisen between the parties, no other material is placed before us to show that a dispute, which is necessary for reference to arbitration, existed between the parties prior to the institution of the suit by the plaintiff in the court of the Chief Judge, City Civil Court. Hyderabad. The mere fact that the defendant moved the Delhi High Court for reference under Section 20 after the advocate of the plaintiff issued a registered notice that a suit will be laid in a competent court for recovery of the moneys due from the defendant is not sufficient to persuade us that it is a proper case for staying the trial of the suit.
17. Rowlatt, J., in London and North Western Railways v. Jones, (1915) 2 KB 35 at p. 38 quoting the decisions in London and North Western Railway Co. v. Donellan, 1898 2 QB 7 and Nidland Railway Co. v. Loseb, 1899 AC 133 (observed as follows?) 'that if there is a difference of any kind arising under the section before action that matter must be decided by arbitration and the courts have no jurisdiction to determine that difference. It does not, however, follow that the courts cannot be resorted to without previous recourse to arbitration to enforce a claim which is not dispute but which the trader merely persists in not paying. This much at any rate is clear from the decision in the House of Lords in London and North Western and Great Western Joint Rly. Cos. v. Billington, 1899 AC 79 where the company did obtain judgment in the courts although there had been no arbitration,"
(See also Russell on 'Arbitration'. Seventeenth Edition by Anthony Walton at page 73). To the same effect is the view expressed in Halsbury's Laws of England, Third Edition, Volume 2, at p. 7:
"Similarly, there is no dispute within the meaning of an agreement to refer in being as when a party admits liability and simply fails to pay."
This is a simple case, where the correspondence between the parties referred to above bears out that the defendant admitted its liability throughout and only asked for postponement of the encashment of cheques by the plaintiff and we are therefore of the view that, in such a case the plaintiff will be perfectly justified in resorting to a court for defendant. it is essential that there must be a dispute with regard to the claim made by the plaintiff and when there was no dispute at all except to admit to say that from the mere fact that the defendant later moved the Delhi High Court under Section 20, that a dispute was in existence so as to entitled it to ask for stay of the proceedings in the suit by invoking the aid of Section 34, we are therefore not prepared to hold that it is a case for staying the trial of the suit.
18. It is no doubt true that an appellate court should be slow in interfering with the discretion exercised by the lower Court but that discretion should be exercised on sound legal principles and judicially. We are unable to say, from the material placed before us, that the discretion has been rightly exercised by the lower court in favour of the defendant. Our finding that no dispute as such existed between the parties before the plaintiff laid action in the lower court is sufficient to demonstrate that the defendant moved the Delhi High Court only to forestall the plaintiff and put off payment of the amounts which were admitted by it in its several letters.
19. So far as the other appeal (C. M. A. 195/70) preferred that appeal must also fall for the reason that it is not a fit case for granting stay under S. 34. Even otherwise, the Supreme Court has ruled in Civil Appeal No. 2321 of 1968, D/- 19-8-1969 (reported in AIR 1969 NSC 160) that the jurisdiction of the court to pass appropriate orders for protecting the subject-matter of the suit is not excluded. That was a case where an application for appointment of a receiver was made notwithstanding the stay of the trial of the suit by the court under Section 34 of the Arbitration Act. The Supreme Court held that the Civil Courts was competent to appoint a Receiver for the properties until the question about the jurisdiction of the Delhi Court under Section 31 (4) to entertain application arising out of the order of reference is finally determined.
20. We, therefore, find no merit in the appeal preferred by the defendant.
21. In the result, the order of the Chief Judge, City Civil Court, Hyderabad, to the extent it relates to the stay of the suit under Section 34, is set aside and C. M. A. No. 320 of 1970 allowed with costs. The appeal preferred by the defendant C. M. A. No. 195 of 1970 is dismissed. No costs.
22. This order will not precluded the defendant from raising such pleas in defence as may be available to it and substantiate the same by placing necessary evidence.
23. Order accordingly.
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