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Union of India Vs. Bharat Engineering Corporation - Court Judgment

LegalCrystal Citation
SubjectArbitration
CourtDelhi High Court
Decided On
Case NumberFirst Appeal No. 51 of 1975
Judge
Reported inILR1977Delhi57; 1977RLR499
ActsArbitration Act, 1940 - Sections 2
AppellantUnion of India
RespondentBharat Engineering Corporation
Advocates: S.L. Bhatia,; Y.K. Sabharwal and; Daljit Singh, Advs
Cases ReferredRonaasen & Son v. Metsanomistajain Metsakeskus
Excerpt:
arbitration act (1940) - sections 2(a) and 20--abritration agreement--construction of--whether there can be an arbitration agreement reserving right of reference to one party only.; an agreement between the railway administration and the contractor contained an arbitration clause as under:--; 'in the event of any dispute of difference between the parties hereto as to the contruction or operation of his contract, or the respective rights and liabilities of the parties, on any matter in question, dispute or difference on any account, or so to the withholding by the railway of any certificate to which the contractor may claim to be entitled to, or if the railway fails to make a decision within a reasonable time, then and in any such case, but except in any of the excepted matters referred.....t.p.s. chawla, j.(1) a very fundamental question is raised in i his appeal. it has proved to be more difficult than i had originally imagined. the question is : can there be an 'arbitration agreement' which reserves the right of reference to only one party or, in other words, which only one party can involve the point has arisen in a somewhat curious way. (2) on 12th july 1972, a contract was signed between the president of india acting through the northern railway administration (the 'railway') and a firm known as m/s. bharat engineering corporation (the 'contractor'). the contractor was to execute certain 'earthwork' connected with the construction of bridges over a portion of the railway line between pathankot and joginder nagar. payment was to be made at the agreed rates. disputes.....
Judgment:

T.P.S. Chawla, J.

(1) A very fundamental question is raised in I his appeal. It has proved to be more difficult than I had originally imagined. The question is : Can there be an 'arbitration agreement' which reserves the right of reference to only one party Or, in other words, which only one party can involve The point has arisen in a somewhat curious way.

(2) On 12th July 1972, a contract was signed between the President of India acting through the Northern Railway Administration (the 'Railway') and a firm known as M/s. Bharat Engineering Corporation (the 'contractor'). The contractor was to execute certain 'Earthwork' connected with the construction of bridges over a portion of the railway line between Pathankot and Joginder Nagar. Payment was to be made at the agreed rates. Disputes arose whilst the work was in progress. The Railway was not satisfied with the speed at which the work was being done. Ultimately, after issuing various notices, the Railway rescinded the contract on 11th September 1974. The remainder of the work was awarded to other firm at the 'risk and cost' of the contractor.

(3) As there was an arbitration clause in the contract, a petition under section 20 of the Arbitration Act 1940 was moved by the contractor on 5th November 1974. The disputes, of which reference to arbitration was sought, were enumerated in an annexure to this petition. They comprised only the claims made by the contractor. Though, in its reply, the Railway mentioned that it. had 'suffered huge loss' due to the failure of the contractor to complete the work, there was no prayer that counter-claims of the Railway be also referred to arbitration. On 10th February 1975, the contractor's petition was allowed and the disputes mentioned in the annexure were referred to an arbitrator to be appointed by the General Manager, Northern Railway, within two months.

(4) thereforee, on 8th April 1975, the Railway moved an application under section 151 of the Code of Civil procedure. It was prayed that the counter-claims of the Railway, amounting to Rs. 5,80,550 be also decided by the same arbitrator. This application was dismissed as withdrawn' on 15th May 1975 without prejudice to the right of the Railway to 'move an appropriate application under some other provisions of law'.

(5) Promptly, on 27th May 1975, the Railway moved a petition under section 20 of the Arbitration Act seeking the same relief. Simultaneously, an application was moved under section 151 of the Code of Civil Procedure. In this it was stated that if the counterclaims of the Railway were also referred to arbitration, the number of arbitrators and the mode of their appointment would be altered under the terms of the arbitration clause, as the amount of the claims would then be more than Rs. 3,00,000. The court was requested to pass such orders 'as be deemed just and proper in this matter'.

(6) Both the petition and the application were dismissed with costs on 31st July 1975 by a single judge of this court. The present appeal is against that order. The reasons for dismissal given in the order under appeal are not altogether clear. However, it is not necessary to dwell on them because no attempt was made to support the order on any of these reasons. In appeal the sole argument on behalf of the contractor was that the arbitration clause could not be 'involved' by the Railway. The entire debate has centered on this point. A like submission was made before the single judge, as is noticed in his order, but he did not deal with it, possibly because it was not developed as the matter, seems to have gone on other grounds. So we have to consider the question more or less at first instance.

(7) The arbitration agreement is contained in clause 64 of the General Conditions of Contract. It comes under the section entitled 'Settlement of Disputes'. The arbitration clause itself is entitled 'Demand for arbitration'. It has many sub-clauses, but for the present purpose only sub-clause (1) is relevant, and it reads as follows : In the event of any dispute or difference between the parties hereto as to the construction of operation of this contract or the respective rights and liabilities of the parties, on any matter in question, dispute or difference on any account, or as to the withholding by the Railway of any certificate 'to which the contractor may claim to be entitled to, or if the Railway fails to make a decision within a reasonable time, then and in any such case, but except in any of the excepted matters referred to in clause 63 of these conditions, the Contractor, after 90 days of his presenting his final claim on disputed matters, may demand in writing that the dispute or difference be referred to arbitration, such demand for arbitration shall specify the matters which are in question dispute or difference, and only such dispute or difference of which the demand has been made and no other, shall be referred to arbitration'.

(8) On the face of it, this ill-drafted clause exhibits signs of ambivalence. By its express words, only the contractor is given the right to 'demand.......... that the dispute or difference be referred to arbitration'. It further enjoins that 'only such dispute or difference of which the demand has been made and no other, shall be referred' No similar right is expressly given to the Railway, and the tenor of the last part of the clause is certainly against such as implication. Yet, earlier, while defining its scope, the clause speaks of 'any dispute or difference between the parties hereto as to the construction or operation of this contract, or the respective rights and liabilities of the parties, on any matter in question, dispute or different on any account, ........'. These words distinctly suggest that 'rights' claimed by the Railway or liabilities' sought to be imposed by it on the contractor may be the subject of arbitration. The word 'parties' is used in the plural, and is preceded by 'respective' denoting 'each'. To be consistent with the idea that only the contractor may 'demand' a reference, very different phraseology ought to have been employed.

(9) Other clauses in the contract also leave the general impression that arbitration is contemplated at the instance of either party. In particular, a sentence in clause 52 reserves to the Railway the right to make recoveries and adjustments 'notwithstanding the fact that the amount of the final bill may be included by one of the parties as an item of dispute before any Arbitrator appointed under the arbitration clause ............'. This is remarkably near to a direct acknowledgement that eirther party may refer disputes to arbitration.

(10) Practical considerations and to these doubts. It is difficult to understand why the right to involve the arbitration clause should have been confined to the contractor. In Government contracts, the arbitrator is almost always a Government Officer or his nominee. He is a person whom the Government trusts enough to let him adjudicate on claims made by the contractor, the opposite party. Then why would Government not trust him with claims of its own Like any prudent individual. Government would surely prefer to have its claims determined by its own appointed arbitrator than seek redress in court. But, in the present case, if the construction of the arbitration clause contend- ed for by the contractor is to be accepted, the only remedy of the Railway for recovering its claims is by way of a suit. It cannot resort to arbitration by an arbitrator appointed by its own General Manager. Of its own volition it has foregone that right.

(11) Counsel for the contractor argued that for its claims the Railway could effect recoveries from the contractor's bills and have recourse to the security deposit. Thus, he said, it would not need to litigate at all. This assumes that there are moneys owing to the contractor more than are claimed by the Railway. It provides no answer when, as often happens, that that supposition is not valid. Besides, if recoveries are made from the contractor's bills or security deposit, and the dispute is taken by the contractor to arbitration, the subject of the dispute will actually be the claim of the Railway. So, by this circuitous method, the Railway's claim will, none the less, have reached arbitration, and the promise that it cannot be referred stands refuted.

(12) Finding the various parts of the arbitration clause incompatible, and being unable to ascertain its true meaning, I was quite prepared, at one stage, to hold that it was void for uncertainty. But neither party had so pleaded or was willing to accept such a result : the contractor had already secured his reference and did not wish to endanger it, and the Railway, at all events, desired that the clause be uphold. Confronted with this impasse, one was compelled to search afresh for the meaning of the clause. That entailed a careful review of some primary concepts. Gradually, the solution appeared, and I will work towards it in the manner in which it was reached.

(13) The ambiguity in clause 64 makes two interpretations possible : either the clause means, as the contractor says, that only he can demand a reference; or, as is contended by the Railway, that both parties can invoke it. The question which at once arises is whether, .in law, -there can be an arbitration agreement reserving the right of reference to only one party. For, if there cannot be an arbitration agreement of that kind, the only way of sustaining the clause is by consturning it as conferring bilateral rights. This is how the question, which I posed at the beginning of this judgment, has arisen.

(14) There are some authorities bearing on the point. The views expressed in them are divergent. None of them contains a completely satisfying discussion. I will turn to them later. First, I want to set down the conclusions I reached by analysis on principle in the light of the relevant statutory provisions.

(15) An 'arbitration agreement' is defined in section 2(a) of the Arbitration Act. It means - 'a written agreement to submit present or future differences to arbitration, whether an arbitrator is named therein or not. The essential nature and characteristic of such an agreement is that the parties agree to 'submit' 'differences' to 'arbitration'. This must mean a present existing agreement. No doubt the difference may be, 'present or future' and the arbitrator may be 'named therein or not'. But the agreement to 'submit' must be presently subsisting, or else there is no arbitration agreement. The definition does not contemplate a contingent agreement or an agreement to agree in the future. As to the latter, it is well settled that 'a contract to enter into a contract, is not a contract known to the law': See Courtney and Fairbairn Ltd. v. Tolaini Brothers (Hotels) Ltd. and another (1975)1 A.E.R. 716 and Von Hatzfeldt-Wildenburg v. Alexander, (1911) All E.R 148

(16) I will illustrate my meaning from Jyoti Brothers v. Shree Durga Mining Co., : AIR1956Cal280 . It provides almost an ideal example. The arbitration clause in that case said that In the event of any dispute arising out of this contract the same can be settled by arbitration.......... P. B. Mukherji J., held that this did not mean that the 'dispute shall be settled by arbitration' because 'can' signfied 'that after the dispute has arisen the parties will have to come to a further agreement that they shall go to arbitration'. He said it was 'a contract to enter into a contract' and hence was not 'a valid contract in law at all. After quoting the definition in the Arbitration Act, he observed: It is quite true that it may be a present or future difference that is intended to be the subject of arbitration. But nevertheless it is essential in my opinion for an arbitration agreement to be a present agreement to submit present or future differences. The agreement must be a present agreement and a concluded agreement according to the test of an ordinary contract. If it fails in that test, then there is no submission and no arbitration agreement at all.' He concluded that 'the arbitration clause as it stands is not an arbitration agreement and is not a present contract to submit disputes to arbitration'. Two cases cited to him were distinguished on the ground that in them there 'was a present contract to submit future differences'. The result was that the application for stay of proceeding, in the suit was dismissed.

(17) Elucidating the 'true nature and function' of an arbitration clause in Heyman and another v. Darwins Ltd. (1942) 1 A.E.R. 337 Lord MacMillan said : It is quite distinct from the other clauses. The other clauses set out the obligations which the parties undertake towards each other hine Inde; but the arbitration clause does not impose on one of the parties an obligation in favor of the other. It embodies the agreement of both parties that, if any dispute arises with regard to the obligation which the one party 'has undertaken to the other) such dispute shall be settled by a tribunal of their own constitution.'

(18) A 'contingent contract' is defined by section 31 of the Contract Act 1872 as 'a contract to do or not to do something if some event. collateral to such contract, does or does not happen.' Contracts which are centingent on the happening of a future uncertain event 'cannot be enforced by law unless and until that event has happened, and 'if the event becomes impossible, such contracts become void' : section 32. These contracts of which the condition is that 'an uncertain future event does not happen can be enforced when the happening of that event becomes impossible, and not before' : section 33. The upshot of all these provisions is that a contingent contract is unenforceable until the condition on which it depends is fulfillled. Till them it is strictly not even a 'contract' which is defined by section 2(h) as 'an agreement enforceable by law'. It ought to be claused as an 'imperfect contract' : see 9 Halsbury's Laws (4th ed) 83, para 207. Whether it will become enforceable remains uncertain. The very word 'contingent' means according to the Concise Oxford Dictionary 'of uncertain occurrence ; accidental'. A 'contingent' arbitration agreement would not, thereforee, be a 'present' contract. But this, as I have already tried to show, is the sine qua non of an arbitration agreement. It follows that a 'contingent' agreement cannot be an 'arbitration agreement' in law.

(19) The conclusions which I have drawn really issue directly from the contractual content of an arbitration agreement. This becomes clear if such an agreement is constructed, step by step, in accordance with the sequence of the definitions in section 2 of I he contract Act. Negotiations start with A saying to B : I am willing to submit the differences (present or future, as the case may be) to arbitration provided you also agree to do the same'. This is the 'proposal' : section 2(a). If B signifies his account, the proposal is accepted and becomes a 'promise': section 2(b). A is the 'promiser' and B the 'promisee' : section 2(c). But in accepting the proposal. B has himself promised to submit the differences to arbitration. That was the condition on which the proposal was made. B's promise forms the 'consideration' for that of A and vice versa: section 2(d). They are 'reciprocal promises' section 2(f). As such they constitute an 'agreement' : section 2(c)- Since it in enforceable by law, it becomes a 'contract' : section 2(h).

(20) It will be noticed that, in this rudimentery negotiation, A's proposal incorporates a significant proviso 'provided you also agree to do the same'. The proviso is vital. Without it, A would simply says : 1 am willing to submit the differences to arbitration'. Acceptance of such a proposal cannot form an arbitration agreement. The promise would lack consideration, for it cannot be said that B 'has done or abstained from doing, or does or abstains from doing or promises to do or abstain from doing something' at the 'desire' of A: section 2(d). In an arbitration agreement the consideration for the promise of each party is the reciprocal promise of the other.

(21) Moreover, if only A makes the promise to submit difference? to arbitration, he alone will be bound by the award. B could always repudiate the award on the ground that he had not promised to submit the disputes to arbitration. An arbitration agreement which produces an award binding only on one party and not the other makes no sense. The whole purpose of such an agreement is to resolve the differences between the parties in a manner that will bind them all.

(22) Thus, for an arbitration agreement to be born, both parties must promise to submit differences to arbitration. As there is a like promise on each side, the contract is called 'bilateral', see 9 Halsbury's Laws (4th ed.) 82, para 206. The promises become binding by mutual acceptance and create an immediate agreement. It exists as an enforceable arbitration agreement forthwith. That is what is meant by saying it must be a 'present' agreement.

(23) Also, unless the acceptance is 'absolute and unqualified' the 'proposal' will not get 'converted' into a 'promise': see section 7 of the Contract Act. If in response to A's proposal, B says: I will accept your proposal 'If some event...... does or does not happen',' there is no acceptance and no agreement. Hence, acceptance of a proposal cannot be contingnent. What can be contingent is some right or obligation arising under a concluded contract. The term 'contingent' contract is peculiar to Indian law. Both 'in the English and American systems of law such contracts are treated as conditional contracts', see Sanjiva Row's commentaries on the Indian Contract Act (1965 ) Ii 838 and Law of Contract in India by V. C. Ramachandran (1971 ) Ii 939 In the discussion on 'Conditional promises' in Halsbury's Law of England (4th ed.) Vol. 9, page 353 para 511, it is said : A conditional promise ...... should be distinguished from a condition precedent to the formation of contract. In the case of the latter no contract comes into existence until the contingency occurs; in the case of the former there is a contract but the obligations of one or both of the parties are suspended.'

(24) Under a concluded arbitration agreement the only right and the only obligation is to submit differences to arbitration. This, as I have tried to show, was already the subject matter of the negotiation proceeding the contract. In the course thereof, firm promises were exchanged to submit differences to arbitration, for otherwise no arbitration agreement could have resulted. Each promise proves that there was an unconditional acceptance of a proposal: see sections 2(b) and 7. How can the agreement now provide that the acceptance is conditional That would negate the arbitration agreement itself. So, an 'arbitration agreement' in which a promise to submit differences to arbitration is 'contingent' or 'conditional' is a contradiction in terms.

(25) Having deduced that an arbitration agreement must be a present agreement, and the reciprocal promises it comprises must not be contingent, it is now necessary to consider a slightly different situation which, if not segregated, is capable of causing much confusion.

(26) A condition to which a promise is subject may be 'an event which is dependent upon the will of one or both of the parties to the contract or of a third person': see 9 Halsbury's Laws (4th ed.) 354 para 512. This is the position in the case of a 'contract of option'. In this type of contract 'the grantor of the option offers to enter into what may be called a 'major' contract with a second person and makes a separate contract to keep his offer open': see 9 Halsbury's Laws (4th ed.) 106 para 235. 'With regard to the envisaged major contract, the effect of the contract of option is to create an irrevocable offer and a power of acceptance' : see ibid. Though rarely met with in practice, there may be a 'contract of option' the 'major' contract envisaged by which is an arbitration agreement. In other words, there is an irrevocable open offer by the grator of the option to submit differences to arbitration and 'a power of acceptance' vests in the option-holder. When the option is exercised and the offer accepted, an arbitration agreement, the envisaged 'major' contract, ensues. But, until that happens, no arbitration agreement exists.

(27) Here, two propositions require great emphasis. First, that the contract of option, though it has the potential of producing an arbitration agreement, is not itself an arbitration agreement. It is analogous to an offer, except that it is irrevocable.

(28) Second, the arbitration agreement arising from the exercise of the option conforms in all respects with the requirements of such an agreement- After the exercise of-the option it exists in the present. It incorporates mutual promises to submit differences to arbitration. One promise was contained in the irrevocable offer of the grantor of the option, and the other is conveyed by the acceptance of the option-holder. These promises are not contingent or conditional. They do not reserve any further option that the reference to arbitration shall be only at the will of one party. thereforee, (and this is an important point), even if an arbitration agreement is created by the exercise of an option, it is not itself a contract of option. Either party has the right to ask for a reference. Of course, whether a given agreement is a contract of option or an arbitration agreement, or, whether it has passed from one to the other, depends on its true construction and the facts of the case.

(29) None of the sections in the Arbitration Act 1940, or, indeed, in any earlier statute dealing with the same subject, seem to visualise an arbitration agreement which only one party can invoke. There is nothing in section 2(a) giving countenance to such an agreement. On the other hand, there are many sections which seem to proceed on the promise that either party can demand arbitration. In particular, section 20(1) says that 'where any persons have entered into an arbitration agreement............ they or any of them' may apply under that section for an order of reference. Likewise, under section 34, where legal proceedings have been commenced by 'any party to an arbitration agreement' an application for stay may be made by ''any other party to the agreement' who is a 'party to such legal proceedings'. Similar phrases occur in sections 7 and 8, (and) others.

(30) Indications from collateral statutes tend to the same conclusion. Section 14(2) of the Specific Relief Act 1963 bars a suit by 'any person' who has contracted to refer present or future differences to arbitration (other than by an arbitration agreement to which the provisions of the Arbitration Act 1940 apply) if the suit is in respect of any subject he has contracted to refer. Presumably, it applies to 'oral' arbitration agreements. Exception I to section 28 of the Contract Act saves from the rule making agreements in restraint of legal proceedings void, 'a contract by which two or more persons agree that any dispute which may arise between them in respect of any subject or class of subjects shall be referred to arbitration..........' The bar in the former provision applies without discremination of parties, and the latter imports that in an arbitration agreement there is no condition or option.

(31) For all these reasons, I would think, that the law does not contemplate an arbitration agreement which is contingent or conditional or confers an option. Nor, I would add, does common understanding.

(32) Let me now turn to the cases. The earliest is Burjor F. R. Joshi v. Ellerman City Lines, Ltd.. A.I.R.1925 Bom 449 It is so instructive that I make no apology for dwelling on it at length. On 20th August 1923, the plaintiff claiming as an endorce of a bill of lading, filed a suit to recover compensation for damage to a consignment of potatoes carried on board the defendants' ship from Neples to Bombay. The defendants entered appearance on. 3rd October 1923, but there were no proceedings in, the suit till January 1925 because the parties were negotiating a settlement. After negotiation broke down, the defendants moved for 'an order that the suit and all proceedings there under be stayed'. The application was founded on. clause 20 of the bill of lading which provided that - 'all claims arising under the said bill-of-lading shall be determined at the port of destination of the goods according to British Law or at the shipowners' option, shall be determined in the United Kingdom and to the exclusion of the jurisdiction of any other country'.

(33) It was conceded, on, the basis of an earlier decision of the Bombay High Court which followed certain English decisions, that 'if the parties agreed to have their disputes decided by a foreign tribunal, it would amount to a submission to such foreign tribunal..........'. There is no doubt that at one time 'A reference to a foreign court (was) treated as an arbitration agreement for the purpose of exercising the jurisdiction to grant stay of proceedings arising out of the same subject matter' : see 2 Halsbury's Laws (4th ed.) 259 para 306. Later cases, however, seem to take the view that a 'reference to a foreign court, rather than a foreign arbitral tribunal is not a reference to arbitration', see ibid. 294 para 568. For the present purpose the later view does not matter, because the case I am considering proceeded on the earlier view.

(34) It will be observed that by clause 20 of the Bill of lading the shipowners' were given an option. They could insist that a claim against them 'shall be determined in the United Kingdom'. Subject to the exercise of that option, the claim could be 'determined at the port of destination'. Since the option had not been exercise before the institution of the suit, or even afterwards until the application for stay was moved, the case proceeded on that footing.

(35) Mr. Justice Taraporewalla stayed proceedings in the suit. He said:

'THE other question for which I took time to consider was a question raised by the plaintiff that as clause 20 gives option to one party only to have the matter determined by a foreign tribunal it does not amount to a submission under the Indian Arbitration Act and that for the purpose of making it a valid agreement to submit, both the parties should be equally bound. I have not been able to find any authority on the point, but on a careful consideration of the matter, I cannot agree with the plaintiff's contention. The parties here agreed to have the matter decided by a foreign tribunal, but at the option, of one of the parties. Immediately that party exercises that option, in my opinion, the parties are bound to have the matter determined by arbitration, and it is no less a submission coming within the definition in, the Indian Arbitration Act because the right is to be exercised at the option of one of the parties. The other party has agreed to abide by that option so that immediately the shipowners exercised that option, there is an agreement to refer the matters to a foreign tribunal, and ordinarily the Court would stay the proceedings and leave the parties to their remedy by arbitration'.

(36) The fallacies in this passage are plain. The learned Judge omitted to notice that in the case before him the option had not been exercised at all. What is more important is that he failed to distinguish between a contract of option and an arbitration agreement. He was right ill saying : Immediately that party exercises that option........ the parties are bound to have the matters determined by arbitration', because by the exercise of the option an arbitration agreement would arise. But in the next half of the sentence he went on to say, 'and it is no less a submission coming within the definition in the Indian Arbitration Act because the right is to be exercised at the option of one of the parties', for which there is no warrant. He merely carried over the notions pertaining to a contract of option into an arbitration agreement without pausing to consider the essential difference between them.

(37) This underlying error is precisely what the Divisional Court rectified in appeal. Macleod, C. J' with whom Coyajee, I., agreed, drew attention to the option and formulated the question for decision as follows: 'We think then that if the clause in the bill-of-lading could be read as stating that all claims arising there under should be determined according to British Law, or should be determined in the United Kingdom, and to the exclusion of the jurisdiction of any other country, it might have been said that there was an, agreement to refer any dispute for the decision of the Courts of the United Kingdom. But that is not what the clause says. Unless the shipowners exercised their option the parties would be able to file proceedings in the Courts of the port of destination. The real question is whether, as a matter of fact, this particular clause was a submission to arbitration within the meaning of the word in clause 4 of the Indian Arbitration Act.' The definition of 'submission' in the Indian Arbitration Act 1899 is verbatim the same as that of an 'arbitration, agreement' in the Arbitration Act, 1940.

(38) After quoting what the single Judge had said, Macleod, C.J.' proceeded: It seems to me that a submission to arbitration, according to S. 4 of the Indian Arbitration Act, is a submission which provides that either party, in case of a disput arising on the contract, is at liberty to take the necessary steps to get the dispute decided by arbitration. Under this agreement the plaintiff had no option. It is true that he could file a suit in the Courts of the United Kingdom subject to any question of jurisdiction. Certainly he could file a suit in Bombay; but he could not insist, if the defendant wished to file a suit, that the suit should be decided in, the Courts of the United Kingdom. thereforee, at the time the suit was filed, there was no submission to arbitration existing so far as the plaintiff was concerned, of which he could take advantage, and it would only be when the defendants took the objection that they had an option to have the suit tried in the Courts of the United Kingdom, that it could be said that the jurisdiction of this Court was in any way interfered with.'

(39) The first sentence of this passage is an unequivocal statement of the proposition that in an arbitration agreement both parties must be given the right of reference. Paraphrased, the last sentence means, using the terminology I have adopted, that under a contract of option an arbitration agreement does not come into existence until the option is exercised.

(40) In the succeeding paragraph it is indicated that the former proposition is universally valid and not restricted to the particular clause before the court. It reads : 'I do not think, thereforee, that the definition of 'Submission' can, be extended so as to include an agreement such as the one appearing in cl. 20 of the bill-of-lading, leaving aside the particular nature of this agreement, if there had been an ordinary agreement to refer any disputes that might arise to the arbitration of named arbitrators at the option, of one of the parties, then I should certainly hesitate before holding that it was a submission within the proper meaning of that term.' From what has gone before, it is apparent, that 'hesitate' is here used, not literally, but as an understatement to enhance the effect, the literary device called meiosis. The appeal was allowed, and the stay refused. I think this case is direct an,d strong authority in support of the conclusions I derived earlier on principle.

(41) Next, there are two decisions of Mr. Aston, Additional Judicial Commissioner of Sind. In Mulchand Sobhraj and another v. Radhakishin Perumal, A.I.R. 1926 Sin 27 he was dialing with an application for stay of proceedings in the suit. Without setting out the arbitration clause on which reliance was placed, in one paragraph of his judgment he said :

'NOR do I think there is any force in the contention that the agreement to refer merely provided for a reference at the option of one of the parties. The agreement was a written agreement to refer subject to a condition i.e., the exercise of the option given to one of the parties. The fact that the agreement was subject to an, option does not in my opinion prevent it from being an agreement within the meaning of section 4 of the Indian Arbitration Act. In Woodall v. Pearl Assurance Co., Ltd., the Court of Appeal held that a company, which had the option of requiring a reference to arbitration could rely on the arbitration clause as a defense to an action. This no doubt was a decision under the English Arbitration Act but the definitions of 'submission' in section 4 of the Indian Act and in section 27 of the English Act are the same.'

Apart from referring to the English case, this is a more ipso dixit. No reason, are given for the opinion expressed, nor is any attempt made to explore the point presented.

(42) But even the reference to Woodall v. Pearl Assurance Co., Ltd., (1918) All E.R 544 was utterly misconceived. That case has no bearing on the point. It is true that the arbitration clause with which the Court of Appeal was concerned gave an option, or, ' rather, a double option. It said:

'IF any question, shall arise touching this policy or the liability of the company there under. .......the assured and all persons claiming through the assured may refer, and shall be bound, if the company so require, to refer, the same to arbitration........ and no person shall be entitled to bring or maintain any action or proceeding on this policy except for the sum awarded under such arbitration.' However, the question the court was required to decide was whether this clause, made the award of the arbitrator a condition precedent to any right of action, in the assured. The unanimous opinion was that this clause was equivalent to the clause in Scott v. Avory (1856) 5. H. L. C 811 and did 'set up a condition precedent to the maintenance of an action'.

(43) Whether the clause was an immediate arbitration agreement was not mooted before the court. Still, there are phrases occurring in the judgments-for example: 'assuming the company claimed arbitration' ; 'in the event of the insurance company requiring arbitration'- which show that their authors were conscious that they were dealing with a contract of option. And, Duke, L. J., made the significant remark;

'...... .......I think it is none the less a condition precedent that making it a condition precedent is at the will of the insuring company. In the event that the insurers shall so decide-that is, in the event that the insurers shall require arbitration as the mode of the decision of the dispute-no action can be brought in respect of the matter involved in that dispute except upon the award of the arbitrator.'

That implies that for an arbitration agreement to come into being and operate as a condition precedent, the insurers would have to exercise their option.

(44) In Chatoomal Billchand and others V. Shankerdas Girdharilal and others, A.I.R. 1929 Si 83 Mr. Aston was presumably disposing of objections to an award, though the way the facts are stated it is not possible to be sure. The arbitration clause was, again, not quoted, though this judgment is comparatively more elaborate than his previous one. It was contended before him that 'there was no valid submission inasmuch as the arbitration clause in the agreement gave one of the parties only an option to have the dispute referred to arbitration and not the other'. Counsel maintained that 'in order to constitute a submission within the meaning of S. 4, Arbitration Act, there must be an unqualified agreement to refer'. For rejecting this argument, Mr. Aston again relied on Woodall's case. This time Burjor F. R. Joshi V. Ellerman City Lines, Ltd. A.I.R. 1925 Bom 449 was also cited before him. He put it aside on the ground that what Macleod, C. J' had said was obiter. I think I have already sufficiently demonstrated that it was not. Even if it was, Mr. Aston does not discuss it so as to prove that it was wrong.

(45) A new aspect canvassed was 'that a one-sided option, is an infringement of the doctrine of 'mutuality'. It was stifled with the retort 'that the doctrine of mutuality which was one of the defenses in English Law to an action for specific performance has been deliberately left out from the Specific Relief Act by the Legislature and........is not applicable to India'. Certainly this is unexceptionable. Indeed, in the Specific Relief Act 1963, section 20(4) now expressly says : 'The court shall not refuse to any party specific performance of a contract merely on the ground that the contract is not enforceable at the instance of the other party'. But it is one thing to say that specific performance may be granted despite want of mutuality in a contract, and quite another to say that the inherent requirement, of a particular category of contracts is 'mutuality'. An arbitration agreement is unthinkable except as comprising utual promises. Its very nature so dictates. The law of specific performance does not touch this question. It may well be that Mr. Aston misapprehended the submission made to him.

(46) 'MUTUALITY' was expressly recognised as an indispensable ingredient of an arbitration agreement in Harittina Italian Steamship Company v. Burjor Framrose Joshi I.L.R (1930) 54 Bom 278 The facts of 'that case are similar to those of Burjor F. R. Joshi v. Ellerman City Lines, Ltd. A.I.R. 1925 Bom 449 and it seems the plaintiff was the same person. Again, potatoes were carried from Neples to Bombay, and the suit was for damages Clause 27 of the bill of lading provided that failing an amicable settlement 'either the shipper or the consignee, desiring to proceed against the company in Court of law' could do so before the judicial authority in Genoa, Neples, Cagliari or Venice 'in case of a dispute for not more than liras 500' and only in Genoa 'for sums over that amount'. Stay of proceedings in the suit was refused, and against that order there was an appeal, Right at the out set, Kemp, Ag. C.J., speaking for the Division Bench, ruled :

'......IN order to extract the guiding principle from the cases which have been cited to as we may state, shortly, that they lay down that where there is no mutuality in the reference, i.e., where both the parties are not bound to refer the dispute to a particular tribunal, such a clause does not amount to a submission under section 4 of the Indian Arbitration Act.'

(47) Unfortunately, the cases that were cited have not been mentioned. Perhaps, the proposition was regarded as too self-evident to require citation of authority. At any rate, the submission made to the court did not question its validity.The contention was 'that this clause does not provide for mutuality and that the shipowner is not bound to file his suit-if he has one-against the consignor or consignee in Genoa'. Whilst agreeing 'that with reference to other disputes than those which consist of claim by the consignors or consignee, against the company, there is no special tribunal provided, to which those disputes may be referred', the court held : there is mutuality, because with reference to certain disputes, vis., these claims by the shipper and the consignee against the company, both the shipper and consignor (sic) and the shipping company are bound by the terms of that clause to have the dispute determined by the judicial authority in Genoa'; Respecting the company, this conclusion rested on the facts that they had their head office in Genoa, their ship flew the Italian flag, and the bill of lading was in the Italian form, all of which manifested their 'desire that the law applicable to the contract of affreightment should be the Italian Law .............'. The appeal was allowed and the proceedings stayed. If there ever was any doubt as to the need of mutuality in an arbitration agreement, this case completely dispelled it.

(48) Correctly under stood, I think, Brindaban Chandra Datta & Co. v. Bishweshwar Lal I.L.R. (1937) Cal 606 far from being at variance with my view, as was suggested by counsel for the contractor, is actually in accord with it. Clause 6 in a contract of sale of goods stated: If any dispute arises with regard to this indent or to relative goods, it shall be optional to you (seller) to release me/us from the contract and take the goods back or to refer the dispute, .............to the arbitration. ........ .' of specified arbitrators. Pausing here, it is necessary to observe that this was clearly a contract of option. Prior to the institution of the suit by the buyer, the seller had exercised this option by demanding arbitration. When the suit was filed, the seller applied for stay. Opposing the application, the buyer contended 'that clause 6 of the contract does not amount to a 'submission' within the meaning of the Indian Arbitration, Act'. Mitter, J., said : I cannot also accept the first contention of Mr. Chatterjee. The (seller) had under cl. 6 the option of either releasing the (buyer) from the contract or to proceed by way of arbitration if there was any dispute. When he elected not to release the (buyer) from the contract he was bound to refer the matter in dispute to arbitration. The (buyer) had agreed to refer disputes covered by cl. 6 to arbitration. The contract binds him. That clause fulfills the definition of 'submission' as given in the Indian Arbitration Act. The test is, in my opinion, whether both parties are bound by that clause and not whether a right had also been expressly given to the (buyer) to initiate arbitration proceedings. The case cited by Mr. Chatterjee, namely, Marittima. Italiana Steamship Co. v. Burjor Framrose has no application to this case.'

(49) No fault can be found with the first half of this passage up to the words 'The contract binds him'. It merely decides that by the seller exercising his option an arbitration agreement came into force by which the buyer was bound. The next sentence is a little inaccurate due to anticipation of events. As it stands the clause does not fulfill 'the definition of 'submission' '; but after the option is exercised, it would. It is the sentence which follows that causes the difficulty. The words: The test is..............whether both parties are bound by that clause', affirm the principle of mutuality. I can find nothing wrong with them. The problem is, what do the words and not whether a right had also been expressly given to the (buyer) to initiate arbitration proceedings' signify

(50) Obviously the second part of the sentence was not intended to nullify the first, which as I have just pointed out, accepts mutuality. It would be unfair to the Judge to suppose that he was contradicting himself in the same breath. The legitimate inference is that in the second part he was not referring to mutuality at all. Then what was the right he had in mind which need not be given to the buyer? Obviously, the option. In effect he was saying that whereas for an arbitration agreement mutuality was a requisite, in a contract of option it was not necessary that the option be available to both parties-which is perfectly sound and consistent. I know he speaks of the right 'to initiate arbitration proceedings'; but the run of the judgment and the emphasis on the word 'right', which is printed in italics in the report, show that by those words he meant the option. The choice of phraseology is not aogether inexplicable. Generally, the overt indication of opting for arbitration would be to 'initiate arbitration proceedings'. It is an understandable coalescence of ideas.

(51) This construction not only explains the particular sentence, but also the closing one in which the Marittima Italiana Steamship Co.'s case was held to have no application. That case was concerned with mutuality, and the point before the Judge was regarding the option. Read in this way, the judgment is both comprehensible and right. It granted the stay.

(52) Another illustration of the need for mutuality in an arbitration agreement is furnished by Chhabildas Nandlal & Co. v. Damodar Khetsey & Co. : AIR1943Bom199 Here, a condition of the contract provided that disputes arising there from may at the instance of either party' be referred to arbitration. The relevant passage in the judgment of Blackwell, J' is as follows : 'Mr. Desai contends that that merely gives an option to either party to refer to arbitration without involving any obligation upon the other to go arbitration. I do not agree with this contention. The words in question appear to me to amount to an agreement between the parties that if either of them desire that any dispute arising out of the indent should be submitted to arbitration, it will be submitted to arbitration. If this be not the proper construction to put upon the words, the option given to either party appears to me to be absolutely nugatory'. This conforms exactly with what I have said earlier. It is noteworthy that Hoodall's case was cited and held not to support the contention. An order staying the suit was made.

(53) After judgment was reserved, I found Kedarnath Atmaram v. Kesoram Cotton Mills. Ltd. I.L.R. (1950) Cal 550 which neither party had cited. Probably, it is the nearest authority to the. present case. In a contract for sale of goods there was a widely worded clause which provided that the disputes covered by it 'shall, at the option of the Mills, be referred to the arbitration of the Indian Chamber of Commerce.................'. Patently, this was a contract of option. Disputes having arisen were referred by the Mills to the Tribunal of Arbitration of the Chamber. Thus, the option was exercised. Later, the buyer instituted a suit, and, relying on the clause, the Mills applied for stay. On behalf of the buyer it was contended that 'there is no mutuality in the arbitration clause and, thereforee, it is void and not binding'. The single Judge granted stay, holding that 'the arbitration agreement remained in an inchoate and executory state till election was made by the Mills and on the election being made both parties are bound by the agreement and can enforce the same'. This is only another way of saying that the contract of option became an arbitration agreement on the exercise of the option.

(54) On appeal this view was upheld. The decision, as such, gives full support to my view. Nevertheless, I find myself constrained to say that many observations in the judgment are susceptible to grave criticism. With respect, I think the reasoning is obscure and the cases that were cited have been totally misunderstood. The cause of the confusion, as always, is the failure to clearly distinguish between a contract of option and an arbitration agreement.

(55) At the end of his judgment, Chatterjee. J., who spoke for the Division Bench, approved of the passage from Brindaban Chandra Datta & Co. v. Bishweshwar Lal, I.L.R. (1937) Cal 606 which I have quoted above. But he seems to have been under the mistaken impression, although he was a counsel in that case, that Mitter, J' had disapproved of Maritlima Italiana Steamship Company v. Burjor Framroze Joshi, I.L.R. (1930) 54 Bom 278 In fact, as I have already explained, Mitter, J., only said, quite rightly, that it did not apply. Then, Chatterjee, J' went on to hold : In this case the arbitration clause fulfills the definition of an 'arbitration agreement' as contained in the Arbitration Act. Both parties are bound by that clause and it does not matter that the right to resort to arbitration has been expressly given to one of the parties who can initiate arbitration proceedings in this case. Once the option is exercised, it is final and binding on both the parties and the arbitration tribunal is the forum to which the parties must be relegated.' And, Harries, C.J., agreed. Subject to like observations as those I have made in connection with the judgment of Mitter, J., of which this is substantially a reproduction, I would be prepared to subscribe to this statement of the law. The second sentence confirms my interpretation of what Mitter, J., said. The right 'to initiate arbitration proceedings' is equated to 'the right to resort to arbitration', by which, as the last sentence reveals, is meant the option.

(56) Considering the conclusion at which he arrived, one would have expected Chatterjee, J., to elign himself with the two cases from Bombay and disagree with the two from Sind. Strangely enough, he did the reverse. He seems to have thought that Burjor F. R. Joshi v. E.Uorman City Lines, Ltd., A.I.R. 1925 Bom 449 was against his view, and regarded what Macleod, C.J., had said as obiter dicta. Had he remembered that in that case the option had not been exercised, he might have seen it in a rather different light. In the case before Chatterjee, J., as I have mentiond already, the option had been exercised. This point of distinction was not noticed.

(57) Similarly, he treated as obiter dicta what Homp, Ag. C.J., said about mutuality in Marittima Italiana Steamsphip Company v. Burier Framroze Joshi, I.L.R. (1930) 54 Bom 278 'because in that case it was held that clause 27 of the bill of lading constituted a valid 'submission' under the Indian Arbitration Act'. It seems not to have been realised that the whole basis of that decision was that the clause established mutuality. Even the headnote takes the principle of mutuality as the ratio decidendi.

(58) On careful examination, it appears to me, that the sole criterion adopted by Chatterjee, J., in accepting or rejecting the authorities was whether the clause in question had been held to be an arbitration agreement or not, without any further sifting. Thus, he differed from Burjor F. R. Joshi v. Ellorman City Lines, Ltd. A.I.R. 1925 Bom 449 because it held the clause not to be a 'submission'. He accepted by implication the opposite decision in Marittima Italiana Steamship Company v. Burjor Framroze Joshi, I.L.R. (1930) 54 Bom 278 for he used it to disregard what was said in it about mutuality. Both of Mr. Astom's judgments in Mulchand Sobhraj and another v. Radhakishin Parumal, A.I.R. 1926 Sind 27(6), and Chetoomal Bulchand and others v. Shankerdas Girdharilal and others, A.I.R. 1929 Sind 83(9), were accepted without demur for the same reason. Hoodall's case was followed simply because the arbitration clause had been enforced, although no question whatsoever was agitated as to its being a 'submission'. Besides, on the facts in that case it had been held that the solicitor for the insurers had demanded arbitration, and so exercised the option. The reference to Sundermall Poreshram v. Tribhuban Birachand & Co., I.L.R. (1924) Cal 657 can be accounted for only on the same approach, as otherwise it is of no relevance. There the option enabled merely a choice of arbitrators, and not whether there should be arbitration or not.

(59) Yet, despite all these misconceptions, Chatterjee, J' sensed the right answer so the drift of the following passage shows :

'THE fact that the agreement provides an option to either the buyer or the seller to refer the matter to arbitration does not affect the validity of the arbitration agreement. Once the option is exercised or the election is made, the position in law is that both the buyers and the sellers are bound to have the matter determined by arbitration and, if after the exercise of the option the seller wants to resile from the arbitration, the buyer can compel him to resort to the arbitration tribunal. It makes no difference that the agreement to submit present or future differences to arbitration is unconditional or is subject to a contingency, e.g., the exercise of an option by one of the parties. The other party has agreed to abide by that option, and immediately the option is exercised there is a binding agreement that both the parties must abide by the award of the arbitration tribunal.'

The second and fourth sentences of this extract are unimpeachable. Lack of recognition that mutuality is the particular characteristic of an arbitration agreement, mars the first. And, the omission to classify such an agreement separately from a contract of option is responsible for the discordance in the third. However, as I said at the beginning, the final conclusion was right.

(60) So much for the Indian cases. In English Law there is an even greater dearth of authority. Only Baron v. Sunderland Corporation (1966) 1 A.E.R 349 has something to say on point. A school master employed by the local education authority brought an action claiming that, on a particular interpretation of the Burnham scale, he was entitled to 135 more in salary than he had been paid. The county court judge stayed the action being of the opinion that a provision in the Remuneration of Teachers (Primary and Secondary Schools) Order, 1963 amounted to an arbitration clause by which.the parties were bound. A strong court of Appeal Davies, Russell and Salmon, L.JJ.) unanimously reversed that decision. With reference to the provision in the statutory order, Davies, L.J., said It seems to me that that is about as unlike an arbitration clause as anything that one could imagine. It is necessary in an arbitration clause that each party shall agree to refer disputes to arbitration; and it is an essential ingredient in that that either party may in the event of a dispute arising refer it in the provided manner to arbitration. In other words, the clause must give bilateral rights of reference, The present clause, as I see it, does nothing of the kind .............. There is complete lack of mutuality in this matter.' I could not have asked for a more lucid and specific statement of the proposition I am maintaining. The case is powerful authority in favor of my view. It is also the most recent.

(61) In 2 Halsbery's Laws (4th ed.) 260 para 510, while dealing with optional arbitration under statute, the following remark is made : If, however, the right of reference is open to only one of the parties an essential ingredient of arbitration, as the word is usually understood, is lacking.' The footnote cites Baron's case as the authority for that statement. It also refers the reader to para 528, note 1. That paragraph is concerned with the question who are the persons bound by an arbitration agreement. Note 1 reads as follows : A provision of a statute [Baron v. Sunderland Corpn,. (1966) 2 Qb 56(1966) 1 All Br 349 or a contract [Ronaasen & Son v. Metsanomistajain Metsakeskus O/Y (1931) 40 Lii 267 may allow for arbitration at the instance of only one of the parties. There is no direct authority as to whether such provisions give rise to arbitration as the word is usually understood. Opinion of the greatest weight has been given informally that so far an contract is concerned such a provision would give rise to normal arbitration. On of the two judges in Ronaasen's case (Swift J) supports this view. But his observation were obiter since the main line of argument in the decision was that the dispute that arose was not in any case within the terms of the arbitration clause; further, the party claiming to arbitrate was not the party to whom the contract gave that right. In Baron's case (in which case Ronaasen was not cited) the Court of Appeal held generally that 'It is necessary in an arbitration clause that each party shall agree to refer disputes to arbitration; and it is an essential ingredient of an arbitration clause that either party may, in the event of a dispute arising, refer it, in the provided manner, to arbitration'. It was on this basis that they refused to stay an action brought by the party not given the right to arbitrate. On the other hand Baron's case could have been decided entirely on the basis that there was a complete lack of agreement between the parties (an individual teacher and a corporation) to submit any dispute to arbitration at all, and that the statute did not oust the jurisdiction of the courts.'

(62) I think this Note is unsound in many respects. It is incorrect to say, There is no direct authority as to whether such provisions give rise to arbitration as the word is usually understood'. Baron's case is a direct authority in the negative, as the remark I have quoted from para 510 testifies. It does not matter that that case 'could have been decided' on a different basis. Even the Note concedes that it was, in fact, decided on the ground stated by Davies, L.J. Ratio decidendi is the rule of law upon which the decision is founded, not on which it might have been founded.

(63) Furthermore, Ronaasen's case has been quite misunderstood. To properly comprehend what Swift, J' said, it is necessary to recall the facts. The arbitration clause envisaged reference of disputes to arbitration only if the buyer complained about the 'condition and/or quality' of the goods. It was held not to apply when the buyer rejected the whole of the goods, as he had done, on the ground that they did not conform to the contract. Then Swift, J' added : 'There is no suggestion that I can see anywhere for an arbitration at the instance of the seller; any arbitration which is contemplated by this contract is an arbitration at the instance of the buyer to deal with questions as to allowances which are to be made to him for inferior quality and/or condition.' He said this because the seller had referred the dispute to arbitration and obtained an award, though the buyer had throughout insisted that the question of rejection was not covered by the arbitration clause, and had refused to appoint an arbitrator. As I understand Swift,'J., he meant that the seller could not claim that a dispute pertained to 'condition and/or quality' and refer it to arbitration if the buyer rejected the goods on different grounds. In my opinion, he did not mean that if the buyer had complained as to 'condition and/or quality' the seller could not have made the reference. I think this case is akin to the Marittima Italiana Steamship Company's case in which Kemp, Ag. CJ., held that though only 'claims by the shipper and the consignee against the company' could be referred to arbitration, as regards them there was mutuality. No question regarding mutuality was raised in Ronaasen's case.

(64) It is worth observing that in Russel on the Law of Arbitration (18th ed. 1970) one of the requirements of an arbitration agreement mentioned on page 37 is that 'there must be mutuality'. Baron's case serves as the illustration. Ronaasen's case does not find place even in the Table of Cases. The editor of Russell is Mr. Anthony Walton, Q.C. The title 'Arbitration' in volume 2 of Halsbury's Laws (4th ed.), published in 1973, has been contributed by the same gentleman. I think his previous view was right, from which he seems to have been later deflected by a misapprehension of the judgment of Swift, J.

(65) American law is also the same. According to the Corpus Juis Socundum, Vol. 6 at page 161, one of the 'elements necessary' for a valid submission is 'mutuality of obligation'.

(66) Some other cases, which were referred to in the course of agreements, I have found of no assistance. They do not throw any light on the question, and would merely increase the length of this judgment, which has already attained proportions much larger than I had intended. But the state of the case law called for a detailed examination.

(67) Returning to the case in hand, what is the conclusion to which the preceding analysis leads Clause 64 of the General Conditions of Contract is so formulated as to constitute a contract of option. It says, the contractor 'may demand' a reference to arbitration. Nothing is said about a demand by the Railway. Furthermore, the demand by the contractor must 'specify the matters which are in question dispute or difference'. A reference is permissible in respect of them alone 'and no other'.

(68) In accordance with what I have said above it must follow, that the moment the contractor invokes the clause (thereby exercising his option) an arbitration agreement exists in respect of the dispute specified by him. From then onward the principle of mutuality applies. Either party can now make the reference. If, after electing for arbitration, the contractor refrains from making a reference, the Railway may do so. That is the practical consequence of mutuality.

(69) But the arbitration agreement is restricted to the disputes regarding which the contractor made the 'demand'. Here, the contractor sought arbitration only for his own claims. The order of reference that he obtained was restricted to those. At no time did he require or consent to a reference of the counter-claims of the Railway to arbitration. So there exists no arbitration agreement under which they can be referred. The petition of the Railway under section 20 of the Arbitration Act could not, thereforee, have been allowed. Although my reasons are entirely different, I concur with the decision of the single Judge.

(70) Accordingly, I would dismiss this appeal. Having regard to the nicety of the point raised and the diverse opinions expressed in the cases, I would make no order as to costs.


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