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Godhu Mal Vs. Sm. Ganga Hasso Mal Idnani - Court Judgment

LegalCrystal Citation
SubjectArbitration
CourtAllahabad High Court
Decided On
Case NumberF.A.F.O. No. 220 of 1951
Judge
Reported inAIR1958All26
ActsContract Act, 1872 - Sections 28 and 62; Code of Civil Procedure (CPC) , 1908 - Sections 9; Arbitration Act, 1940 - Sections 20 and 34
AppellantGodhu Mal
RespondentSm. Ganga Hasso Mal Idnani
Appellant AdvocateSurendranath Verma, Adv.
Respondent AdvocateIshaq Ahmed and ;Ramlal Anand, Advs.
Disposition Appeal allowed
Excerpt:
.....disputes regarding partnership, as well as those relating to the partnership agreement were to be decided by arbitration, but the point raised by the appellant in the court below was that the entire partnership egreement had come to an end and was substituted by another oral agreement in november, 1947, and what is to be decided under this issue is the question of the existence of the subsequent agreement and not any matter relating to the partnership agreement of 1947. the law is clear on the point that a defence to the effect that an agreement was never entered into or that it was void for some reason is a matter exclusively for the determination of the court and not of the arbitrator, because if the existence or validity of the entire agreement itself is denied, and if this denial is..........disputes regarding partnership, as well as those relating to the partnership agreement were to be decided by arbitration, but the point raised by the appellant in the court below was that the entire partnership egreement had come to an end and was substituted by another oral agreement in november, 1947, and what is to be decided under this issue is the question of the existence of the subsequent agreement and not any matter relating to the partnership agreement of 1947.the law is clear on the point that a defence to the effect that an agreement was never entered into or that it was void for some reason is a matter exclusively for the determination of the court and not of the arbitrator, because if the existence or validity of the entire agreement itself is denied, and if this denial is.....
Judgment:

M.L. Chaturvedi, J.

1. This is an appeal against an order of the learned First Civil Judge of Kanpur referring a dispute to arbitration.

2. On the 20th April, 1947, the parties entered into a partnership and a deed was drawn up whereby the respondent, Smt. Ganga Hasso Mal Indnani, agreed to finance the venture and the appellant was to be the working partner of the concern. The partnership business was to be carried on at Matli, District Hyderabad (Sind), The respondent was to get Rs. 100/- per month for a period of eight months or six annas in a rupee in the profits, whichever was the larger sum, though she was not to be liable for any losses incurred in the business. It appears that the deed of partnership also contained an arbitration clause. The respondent advanced a sum of Rs. 5000/- to the appellant.

After a few months, communal trouble started in Pakistan and the respondent shifted first to Kanpur in India, and the appellant followed her sometime later. In 1950 she filed an application under Section 20(4) of the Arbitration Act, for filing an agreement of reference and for the appointment of an arbitrator. The appellant took a number of objections to the application and one of the objections taken was, that due to communal trouble the respondent left everything she had in Pakistan and entrusted the entire business to the appellant revoking the agreement of partnership entered into on 20th April, 1947.

3. The learned Civil Judge over-ruled all the objections taken by the appellant and passed an order directing the agreement to be filed. The first issue was whether the agreement In question came to an end as alleged by the appellant. The learned Judge did not decide this issue but has considered the matter while discussing issue No. 4, which was to the effect whether the objection that the partnership agreement had come to an end could be entertained in the proceedings before the learned Civil Judge. He referred to the decision of a Division Bench of this Court in the case of Lachmi Narain Anand Swaroop v. Raja Ram Tamesh Chand, 1949 All WR 509 (A), and held that the issue No. 1 was to be decided by the arbitrator and not by the court.

4. The only point urged by the learned counsel for the appellant before us is, that this decision of the learned Civil Judge is incorrect and it was for the learned Civil Judge to decide whether by the subsequent agreement, said to have been entered into in November, 1947, the previous agreement of partnership had come to an end and with it the arbitration clause. His argument is that the previous agreement having been substituted by the latter one of November, 1947, the arbitration clause contained in the previous agreement is no longer enforceable, and the subsequent agreement contained no such arbitration clause. I think that there is force in this contention.

5. Clause 16 of the agreement of 20th April, 1947, provided that any dispute arising out of the partnership whether regarding the partnership accounts or payment of share, or any other point relating to the agreement, should be referred to the sole arbitration of one arbitrator if the parties agreed upon one name, otherwise the question or questions were to be decided by two arbitrators jointly.

6. The wording of this clause is quite wide and all disputes regarding partnership, as well as those relating to the partnership agreement were to be decided by arbitration, but the point raised by the appellant in the court below was that the entire partnership egreement had come to an end and was substituted by another oral agreement in November, 1947, and what is to be decided under this issue is the question of the existence of the subsequent agreement and not any matter relating to the partnership agreement of 1947.

The law is clear on the point that a defence to the effect that an agreement was never entered into or that it was void for some reason is a matter exclusively for the determination of the court and not of the arbitrator, because if the existence or validity of the entire agreement itself is denied, and if this denial is found to be correct, the arbitration clause goes along with the other parts of the agreement. I think that the same would be the position where the defence is that the parties agreed to put an end to the previous contract. The defence was not clearly stated in the original objections but under orders of a Bench of this Court a clear and fuller statement of the defence has been filed which we have accepted.

If this defence is found to be true, the arbitration clause would BO along with the agreement and the arbitrator then would have no jurisdiction to deal with the matter. The position may be different where it is pleaded that the original con-tract had become impossible of performance, cr that it had been repudiated by one party and the other party then cancelled the contract. These would be questions relating to the original contract itself and should, therefore, be decided by the arbitrator. The above would be the position if the arbitration clause is of the nature of the arbitration clause in the instant case; but if the wording of the clause is different, different conclusions will naturally follow.

7. In the case of Hirji Mulji v. Cheong Yue Steamship Co., 1926 AC 497 (B), the Privy Council held that in the case before them there had been a 'frustration' of the entire contract with the result that the contract was brought to an end including the submission to arbitration, and the arbitrator had no jurisdiction left to decide the matter. This part of the decision of the Privy Council was subsequently criticised in the decision of the House of Lords in the case of Heyman v. Darwins Ltd., 1942 AC 356 (C). That was also a case of frustration of contract, but the House of Lords held that this question also was to be decided by the arbitrator, because the frustration or repudiation was said to be of the very contract which contained the arbitration clause.

We are not concerned in this case with determining the full connotation of the word 'frustration', but what we have to see is that if the original contract containing the arbitration clause is said to have been superseded by a subsequent one whether this question of its supersession is a question which falls for determination by the arbitrator or the Court. On this point there is a clear pronouncement of Lord Macmillan at page 371 of the report where he says:

It is clear, too, that the parties to a contract may agree to bring it to an end to all intents and 'purposes and to treat it as it had never existed. In such a case, if there be an arbitration clause in the contract, it perishes with the contract. If the parties substitute a new contract for a contract which they have abrogated, the arbitration clause in the abrogated contract cannot be invoked for the determination of questions under the new agreement. All this is more or less elementary.' There was no difference of opinion on this point and the position appears to be somewhat obvious.

8. In the ease cited by the court below, namely. 1949 All WR 509 (A) the learned Judges referred to the above two cases and came to the conclusion that the question whether at the time when the delivery fell due both the parties to the agreement had agreed to such delivery, was a question which should have been left to the arbitrators and should not have been decided by the Court. I respectfully agree with the decision so far, but I am not sure whether the observations which follow are not somewhat inconsistent with the principles laid down by the House of Lords in the case of Heyman cited above.

9. The other case cited before us is the case of Chsndan Mull Jhaleria v. Clive Mills Co., Ltd. : AIR1948Cal257 . The learned Judges in this case held that the expression 'disputes relating to the contract' were sufficiently wide to cover disputes as to whether the contract had or had mot been frustrated and the dispute, therefore, should be referred to arbitration. As I have stated above, this question does not arise for decision in the case before us.

10. For the above reasons I think that this appeal should be allowed and the case remanded to the court below.

Chowdhry, J.

11. The facts of the case appear from the Judgment of my learned brother Chaturvedi, J. The court below allowed the respondent's application under Section 20 of the Arbitration Act, 1940, and ordered the arbitration agreement to be filed after deciding preliminary issues as to non-joinder of necessary parties and as to its own territorial jurisdiction, but without deciding whether the matter in dispute between the parties was or was not to be referred to arbitration.

It has left the decision of that point too to the arbitrator on the ground that the determinetion of that question necessitated going into matters of fact and that therefore the jurisdiction of the Court to decide the question was ousted. The court below has taken this view on the authority of 1946 All WR 509 (A).

12. Now it is important to distinguish between the two questions that arise in such cases the Questions, that is, (1) whether the particular dispute between the parties is within the jurisdiction of the arbitrator or the Court, and (2) who is to decide this question of jurisdiction? To put the second question in other words: Is the first Question to be decided by the court to which an application for filing the award and reference to arbitration is made, or is that question also to be referred to the arbitrator? As noticed already, the Court below has held that that question is also for the arbitrator to decide. The short point for determination in this appeal therefore is whether it was right in doing so, or whether, on the contrary, it should have itself decided that issue.

It may be noted that the dispute in this case related inter alia, to whether the contract of partnership between the parties stood discharged, as pleaded by the appellant, by waiver because of a subsequent agreement that the contract was no longer to bind the parties.

13. The clue to the answer to the secord question posed above is to be found in Section 20 of the Arbitration Act itself. Before a person applies under that section that the agreement be filed in court four conditions must be satisfied, namely. (1) that he has entered into an arbitration agreement with some person or persons, (2) that the agreement has been entered into before the institution of any suit with respect to the subject-matter of the agreement or any part of it, (3) that a difference has arisen between the parties to which the agreement applies, and (4) that the Court to which the application is made has jurisdiction in the matter to which the agreement relates. If any of these conditions is absent, the filing of an application under that section and the passing of orders by Court that the agreement be filed in Court and a reference to arbitration be made would be barred. It follows necessarily therefore that all these questions must be decided by the Court to which an application under the section is made before it proceeds to make an order that the agreement be filed and reference to arbitration be made.

14. In the present case the parties are not at issue on the first two conditions, and the finding recorded by the Court below on the fourth is not impugned in this appeal. That Court has however abstained from recording any finding on the issue relating to the third condition and left the decision of that issue to the arbitrator. It may be that according to the terms of the arbitration clause in a particular agreement the question of whether the particular dispute is to be decided by the Court or by the arbitrator may also be left to be determined by the arbitrator. If so, that will also be a matter of 'difference to which the agreement applies', but the Court to which the application is made will have to say so and then refer that point too to arbitration. That is not so in the present case. It is manifest therefore that in refusing to record a finding on the issue relating to the third condition the Court below has shirked performance of a duty which the section expressly enjoined on it, and that the order passed by it that the agreement be filed was for that reason incompetent.

15. It is not necessary to express any opinion on the point as to how the first of the two questions posed above is to be decided. No finding having so far been recorded on that question by the Court below, the question does not arise. But this much may certainly be stated for the guidance of the Court below that, the jurisdiction of the arbitrator being a creature of contract, the determination of the question of whether any particular dispute or difference that has arisen between the parties is referable to arbitration must depend on whether the dispute or difference in question is one 'to which', in the language of Section 20 of the said Act, 'the agreement applies', provided, of course, there is still in existence an agreement legally binding on the parties.

The various English and Indian decisions cited at the bar : AIR1948Cal257 and 1949 All WR 509 (A) merely decide whether the particular dispute arising in each case fell within the ambit of the arbitration clause of the agreement in that case. The determination of this question is sometimes a matter of difficulty, and the principles laid down in the aforesaid decisions may prove helpful in that connection. But none of them lays down that it is not for the Court, but for the arbitrator, to decide whether a particular dispute is one to which the arbitration agreement applies and which may therefore be referred to arbitration. On the contrary, the following observations of Lord Porter in Heyman v. Darwins Ltd.. (C) at page 393 support the view expressed above:

'The question of the arbitrator's jurisdiction must, therefore, ultimately depend on the wording of the arbitration clause. As a rule, however, the arbitrator cannot clothe himself with jurisdiction. As Lord Parker said in Produce Brokers Co., Ltd. v. Olympia Oil and Cake Co., Ltd., (1916) 1 AC 314 at p. 327 (E): 'The arbitrator cannot make his award binding by holding contrary to the true facts that the question which he affects to determine is within the submission........Where, however, the submission is contained in the contract it may be a question of construction whether such expressions as 'all disputes arising under this contract' include questions as to the ambit of the submission itself. Prima facie I do not think that they would'. The principle is repeated by Lord Sumner in (1926) AC 497 (B) and need not be further illustrated, but this does not mean that in every instance in which it is claimed that the arbitrator has no jurisdiction 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 to stay is made is put in possession of the facts and arguments 2nd 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 to 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. The difficulty does not lie as a rule in deciding what tribunal is to determine the arbitrator's jurisdiction--that must generally be the function of the Court, but it lies rather in finding what are the factors to be taken into consideration in deciding whether the arbitral contracts remains in force or not.'

16. The Court below was wrong in holding, on the authority of 1949 All WR 509 (A), that the question of whether the disputes in the present case fell within the ambit of the arbitration clause should be left to the decision of the arbitrator since that question cannot be decided on the admitted facts in the pleadings of the parties and without going into matters of fact. That was a case where an application under Section 20 of the said Act was made for reference to arbitration of disputes arising out of a contract for supply of future goods. The application was contested by the opposite party on the ground that under a notification of the Provincial Government issued under the Defence of India Rules such contracts had become unlawful and therefore stood rescinded, and any dispute with respect to such contracts could not be referred to arbitration as the arbitration clause also ceased to be operative.

The effect of the notification was found to be that, unless either party resiled from the agreement, the contract was to remain in force. The Court below held that the notification did not preclude a reference to arbitration, but it also took some evidence on whether one of the parties had resiled from the agreement. It was held by Wanchoo J. (delivering the judgment in the Division Bench) that the lower Court should have held that the contract had become void, and so also therefore the arbitration clause in the contract, if that could be done on the admitted facts of the case, but that if evidence had to be gone into before it could be said that the contract had come to an end the arbitration clause must be held to stand and the dispute must be referred to arbitration.

In other words, as adverted to already, unless there be no contract subsisting (by reason for instance, of its being void), the dispute should be referred to arbitration, provided, of course, as was also found in the 1949 Allahabad case CA) under consideration, that the dispute fell within the ambit of the arbitration clause. The Court below in the present case was therefore in error in interpreting this case as holding that wherever the disposal of the question of whether a particular dispute fell within the ambit of the arbitration clause depended on matters of fact which had to be gone into it should be referred to arbitration.

It is to be noted that in the reported case the Court below had not refrained from deciding the question whether the particular dispute was to be referred to arbitration or not. It had decided that question in the affirmative and thereupon ordered the arbitration agreement to be filed. And this decision was upheld on appeal by this Court. The only action of the Court below disapproved on appeal was that it entrenched on the jurisdiction of the arbitrator by proceeding to take evidence on a question which was referable, and was in fact referred, to arbitration.

17. With these observations I concur with my learned brother that this appeal should be allowed and the case remanded to the Court below.

BY THE COURT

18. We allow this appeal and set aside the order of the First Civil Judge, Kanpur, dated 31st July, 1951, and remand the case to that Court for determination of issue No. 1 by the Court. If the issue is decided in favour of the appellant there Will be no reference to arbitration, but if it is decided against him, the learned Judge then may refer the case to arbitration.

19. The costs incurred in the Court below so far and in this appeal shall abide the event.


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