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Dabur (Dr. S.K. Burman) Pvt. Ltd. Vs. the State Trading Corporation of India Ltd. and anr. - Court Judgment

LegalCrystal Citation
SubjectArbitration
CourtDelhi High Court
Decided On
Case NumberSuit No. 418 of 1979
Judge
Reported inILR1982Delhi92
ActsCode of Civil Procedure (CPC), 1908 - Order 39, Rule 1; Arbitration Act, 1940 - Sections 34
AppellantDabur (Dr. S.K. Burman) Pvt. Ltd.
RespondentThe State Trading Corporation of India Ltd. and anr.
Advocates: B. Mohan,; S.L. Watel and; R.K. Watel, Advs
Cases ReferredUnion of India v. Kishorilal Gupta and Bros.
Excerpt:
(i) civil procedure code - order 39 rules 1 and 2 read with section 151--injunction when can be granted. (ii) arbitration act (1940) - section 34--'taking steps' means doing something in or for the progress of the suit or submitting oneself to the jurisdiction of the court--rights of parties cannot be prejudice by court orders. ; the plaintiff entered into a contract with the defendant for the supply of tapioca chips and furnished a bank guarantee drawn on defendant no. 2 to the extent of 5 per cent of the value of the contract in favor of defendant no. 1. defendant no. 1 in term had entered into a contract with a foreign buyer for supply those goods. the foreign buyers were to draw in irrevocable letter of credit in favor of the defendant no. 1 through their bankers in india for 100.....g.c. jain, j. (1) messrs dabur (dr. s. k. burman) private limited (for short 'the plaintiffs') entered into a contract with the state trading corporation of india, (defendant no. 1) for supplying 5.000 metric tonnes of tapioca chips. defendant no. 1. in its turn, had admittedly entered into a contract for supplying these goods to messrs alfred c. toepfer, hamburg, west germany (for short 'the foreign buyer'). the terms of the contract between the plaintiffs, and defendant no. 1 are contained in the letter dated november 24. 1978 (exhibit d-26) which reads as under: 'the state trading corporation of india ltd. chanderlok, 36, janpath, new delhi-110001. division : foods stc/fd/tc(l)/7s-79 november 24, 197s m/s. dabul (dr. s. k. burman) pvt. l.td... 813, asaf ali road, new delhi-110002,.....
Judgment:

G.C. Jain, J.

(1) Messrs Dabur (Dr. S. K. Burman) Private Limited (for short 'the plaintiffs') entered into a contract with the State Trading Corporation of India, (defendant No. 1) for supplying 5.000 metric tonnes of Tapioca Chips. Defendant No. 1. in its turn, had admittedly entered into a contract for supplying these goods to Messrs Alfred C. Toepfer, Hamburg, West Germany (for short 'the foreign buyer'). The terms of the contract between the plaintiffs, and defendant No. 1 are contained in the letter dated November 24. 1978 (Exhibit D-26) which reads as under: 'THE State Trading Corporation Of India LTD. Chanderlok, 36, Janpath, New Delhi-110001. Division : Foods STC/FD/TC(l)/7S-79 November 24, 197S M/s. Dabul (Dr. S. K. Burman) Pvt. l.td... 813, Asaf Ali Road, New DELHI-110002, Tapioca Chips Dear Sirs, Reference your two letters dated 22nd November offering 5,000 Mt of Tapioca Chips, we are pleased to inform you that we have accepted your offer and give below for your ready reference detailed terms and conditions concerning the subject sale for export to M/s. Alfred C. Toepfer, Hamburg. West Germany. For the subject export, you will act as conditions as detailed hereunder and any either terms that may be stipulated in the foreign buyer's export order : 1. QUANTITY: 5.000 Mt (Five thousand MT) of 1,000 each in bulk, 5 per cent more or less at STC's option at the price mentioned in para (4) below. 2. Quality ; Indian Tapioca Chips (New Crop) fully/semi pealed, dried pieces of size max. 2' with starch min. 70 per cent, moisture max. 13 per cent. sand silica max. 2 per cent, fibre max. 5 per cent, with allowance for any deficiency in starch or excess in fiber/moisture and/or sand/silica if any at the rate of 1 per cent (one percent) for each 1 per cent, fractions pro-rata, with cargo to be fumigated immediately prior to shipment. 3. Shipment : During February|March, 1979 at STC's option. 4. Price : Us $ 99 (US Dollars Ninety-nine only) per 1,000 kg. in bulk: Fob stowed and trimmed Kakinada or Mangalore, which includes I per cent commission for STC. The commission for Stc will be paid directly by the negotiating bank at the time of negotiation of documents. 5. Port Of Shipment : Single port of loading for full quantity either from Kakinada or Mangalore at seller's option. However, port of shipment must be declared by you to Stc latest one month before shipment is intended. 6. Freight : Freight to be on foreign buyers account. Stc to give you minimum of seven days' pre-advice of vessel's readiness to load. 7. Insurance : Insurance on foreign buyer's account and you arc required to cable full details of shipment to Stc and foreign buyers immediately after the goods arc loaded in the vessel for enabling foreign buyers to cover insurance. 8. CERTIFICATION|SHIPPING Conditions : Shipped weight and quality at the port of loading as certified by General Superintendence Co. (India) Pvt. Ltd., to be final. Pre-shipment inspection shall actually be carried out by G.S. Co., itself. Other documents to be: (i) Four copies of commercial invoice ; (ii) Bills of lading 3|3 blank endorsed to order and marked 'Clean on Board' and freight payable at destination and I or as per charter party agreement ; (iii) Four copies of Certificate of Origin: (iv) Original quality and weight certificate issued by General Superintendence Co. (India) Pvt. Ltd.; (v) Photo-stationary certificate in original indicating fumigation of cargo. Should buyer desire to have the Phyto-sanitary certificate from a specific agency, you will have to arrange the same from that agency; (vi) Any other documents to be indicated in foreign buyer's L|C. 9. Payment : Foreign buyers to establish confirmed. without recourse to drawer, assignable, irrevocable letter of credit in favor of the State Trading Corporation of India Ltd., New Delhi through their banners State Bank of India, Parliament Street, New Delhi for 100 per cent of the value of the goods, payable against first presentation of complete set of documents to foreign buyers. We will transfer the foreign L/C to you. 10. Load Rate : You will guarantee a loading; rate of minimum 600 Mt per weather working day, provided vessel supplies' four hooks. 11. DEMURRAGE|dispatch : As per Charter Parly terms (back to back). 12. All export duties and taxes and levies from origin, present or future, to be to your account. All import duties and|or taxes at destination, present or future, to be for foreign buyer's account. 13. The above is subject to the terms and conditions effective at date of the Grain and Feed Trade Association Limited, London Contract Gafta 119 which is hereby made a part of terms and conditions stated above except so far as modified above. You hereby acknowledge familiarity with the text of said Gafta 119 Contract and agree to be bound to its terms and conditions. 14. Foreign BUYER'S Address : M/s. Altred C. Toepfer, Ballindamm 2-3. P.O. Box 106120, 2000 Hamburg-I West Germany. (Cable : ELBHANDEL) 15. You will indemnify the Stc and shall keep Stc indemnified against all claims, demands, actions, losses, costs, expenses, etc. arising on Stc due to the negligence or default of whatsoever nature on your part. You will before 29th November, 78 (close of office hours) furnish to Stc a Bank guarantee of 5 per cent of the order value as per proforma enclosed valid for six months of a first class bank. Stc shall have the right to invoke the bank guarantee for any breach or default made by you without any reference to you. Stc shall have the right to ask for extension of bank guarantee for a similar period and amount if it so desired. A formal contract shall be entered into on the one hand between Stc and the foreign buyers and on the other hand, between Stc and you as the associate supplier. Please sign and return to us two copies of this letter in token of the acceptance of the terms and conditions mentioned above. Thanking you, Yours faithfully, for the Stc of India Limited. sd/- (R. VISWANATHAN) Marketing Manager We accept Signature Of Associate Supplier sd/- 24-11-78 Dabur (DR. S- K. BURMAN) Pvt. Ltd., K. Narayana Swami Export MANAGER.'

(2) In compliance of term No. 15, the plaintiff furnished a bank guarantee for Rs. 2,07,113 representing 5 per cent of the value of the said contract. The bank guarantee was furnished in favor of defendant No. I by American Express International Banking Corporation (defendant No. 2). According to clause 9 of the terms and conditions contained in letter (Exhibit D-26) which provided for payment, the foreign buyers were 'to establish confirmed, without recourse to drawer, assignable, irrevocable letter of credit in favor of the State Trading Corporation of India Ltd., New Delhi through their bankers State Bank of India, Parliament Street. New Delhi for 100 percent of the value of the goods, payable against first presentation of complete set of documents to foreign buyers'. It was to be assigned by defendant No. 1 in favor of the plaintiffs. The foreign buyers opened a letter of credit dated December 5, 1978 with Messrs Hesse Newman & Co., Bankhaus, Hamburg (West Germany) on State Bank of India, Parliament Street. New Delhi, in favor of defendant No. 1 for U.S. $ 4,95,000. State Bank of India assigned this letter of credit in favor of the plaintiffs at the request of defendant No. 1. It, however, contained an endorsement from State Bank of India reading : 'Sig. book not recorded'. The plaintiffs' under and in accordance with the said contract effected shipment of 204 metric tonnes of Tapioca Chips only. Apprehending that defendant No. 1 will apply to defendant No. 2 Bank for payment of Rs. 2,07,113 under the said bank guarantee on account of the alleged breach of the contract on the part of the plaintiff's for non-supply of the remaining goods, the plaintiffs filed a suit claiming a decree for perpetual injunction restraining defendant No.1 from encashing and/or recovering the sum of Rs. 2,07,113 or any portion thereof under the bank guarantee dated November 29, 1978 issued by defendant No. 2 and restraining defendant No. 2 by a perpetual injunction from giving effect to and/or making any payment under the said bank guarantee. This relief was claimed mainly on the allegations that the payment for the supply of the goods by and under the letter of credit was an essential condition of the said contract. The plaintiffs and defendant No. 1 agreed and understood that a legally valid and enforceable letter of credit would be opened and assigned by defendant No, I in favor of the plaintiffs for due payment as a pre-condition. for the supply of the goods under the said contract. However, when after dispatch of 204 metric tonnes of Tapioca Chips, the plaintiffs approached their bankers, defendant No. 2 with a request to negotiate the document in respect of the aforesaid supply, defendant. No. 2 expressed its inability to do so because Messrs Hessne Newman & Co. were not the correspondents of defendant No. 2, i.e. defendant No. 2 had no banking relations with the said opening bank and secondly the signatures of the said opening bank appearing with said letter of credit were not with defendant No. 2. la the meantime, even the advising bank, State Bank of India, New Delhi, expressed to the plaintiffs their inability to negotiate the documents on the same grounds. The said letter of credit was Jn these circumstances, it was pleaded, not a valid letter of credit and the plaintiffs were not liable to supply the balance goods under the contract and the contract had become void. inoperative and unenforceable. It was further pleaded that the contract being void, an in operative, the said Bank Guarantee furnished by the plaintiffs was also invalid and unenforceable in law.

(3) Along with the Suit, the plaintiffs filed an application (I.A. 1137) under Order 39, rules 1 and 2, read with section 151 of the Code of Civil Procedure claiming temporary injunction restraining defendant No. I from, encashing and/or recovering {he amount of the said bank guarantee and restraining defendant No. 2 from giving effect to and/or making any payment, under the said bank guarantee. On April 4, 1979 notice of I.A. 1137 of 1979 was issued to defendant No. 1 for May 3. 1979. In the meantime, defendant No. I was restrained from enforcing the said bank guarantee. The bank girarantee was, however, ordered to be kept alive by the plaintiffs. On May 3, 1979 defendant No. 1 put appearance through their counsel and filed a reply to the application for grant of temporary injunction. In the reply it was prayed that the application on the plaintiffs for grant of temporary injunction be dismissed and the ex party interim order granted by the Court be discharged. However, in the opening paragraph of the reply it was averred that the contract between the plaintiffs and defendant No. 1 embodied and incorporated therein, as a part thereof, the contract for shipment of the Grain and Feed Trade Association Ltd. London Contract No. 119', which embodied an arbitration clause (clause No. 27); that defendant No. 1 at all relevant times had been ready and willing to refer any dispute and differences that may arise between the parties to arbitration and that the suit was. thereforee. liable to be stayed. It. was prayed that the proceedings in the suit be stayed.

(4) On September 3, 1979 defendant No. 1 filed its written statement and counter-claim. On the same date defendant. No. 1 filed an application (I.A. 2685 of 1979) under section 34 of the Arbitration Act 1940 read with section 151 of the Code of Civil Procedure for staying the proceedings in the suit. Certain other directions were also claimed in this application. It was averred that by clause 13 of the contract between the parties the provisions of the contract were expressly made subject to the terms and conditions of another contract between defendant No. 1 and the foreign buyer in the proform prescribed by Grain and Feed Trade Association Ltd., London, commonly known as 'GAFTA 119 Contract', except to the extent the same was modified by the agreement between the parties. The plaintiffs acknowledged the familiarity with the text of the said Gafta 119 Contract and agreed to be bound by the terms and conditions of the same, which contained an arbitration clause forming an integral part of the contract between the plaintiffs and defendant No. 1 and the present suit was, thereforee, not maintainable and was liable to be stayed under section 34 of the Arbitration Act and, or under section 151 of the Code of Civil Procedure. It was also averred that under clause 26 of the Gafta 119 Contract, courts of England or arbitrators etc. appointed in England were to have exclusive jurisdiction to entertain and decide all disputes covered by the afforesaid arbitration agreement ; the disputes were to be settled according to the laws of England whatever the domicile, residence or place of business of the parties may be or become and in case the plaintiffs were allowed to continue with their suits it may result in findings which may be contrary to the findings which may be given by the arbitrators in the reference made or to be made by the foreign buyers and may cause great injustice.

(5) Plaintiffs resisted this application. It was averred that the plaintiffs neither expressly nor by implication became or agreed to become a party to the terms of the contract between defendant No. 1 and the foreign buyers and were not bound by those terms. They denied living agreed to be bound by the terms and conditions of Gafta 119 Contract. It was next alleged that the dispute, subject-matter of the suit, was not covered by the alleged arbitration agreement and in any case the contract being void the alleged arbitration agreement and/or Gafta 119 Contract provisions ceased to exist. It was also pleaded that the application was incompetent and not maintainable since defendant No. I had already taken steps and participated in the proceedings and submitted to the jurisdiction of this Court and acquiesced by obtaining directions for filing of the written-statement and for further proceedings. It was also averred that to allow defendant No. I to submit for reference to arbitration before the foreign tribunal was neither equitable nor in the interest of justice. It would be impossible for the plaintiffs to produce their evidence before the foreign tribunal in view of the constraints on the availability of foreign exchange. The dispute in respect of the performance/non-performance arose entirely in India and, thereforee, all the material evidence was necessarily available in India.

(6) The following issues have been settled : 1. Is the suit liable to be stayed on the ground that there is an arbitration agreement between the parties 2. What is the effect of the defendant No. 1 having filed its written statement in this suit and also raised counter-claim in the same 3. Relief. Issue No. 2 : The Court has discretion to make an order staying proceedings provided, inter alia, the application is made by the party concerned before the filing of the written-statement or taking any other steps in the proceedings. 'A step in the proceedings' means something in the nature of an application to the court and not mere talk between solicitors and solicitors' clerks nor the writing of letters. 'Taking steps' means doing something in aid of the progress of the suit or subnutting oneself to the jurisdiction of the Court.

(7) In this case, as noticed above, defendant No 1/applicant filed a reply to the application for grant of temporary injunction (LA. 1137179) on May 3, 1979. Filing reply and seeking vacation of ex parte temporary injunction and dismissal of the plaintiff's application for grant of temporary injunction, simpliciter, may amount to taking step in the proceedings. However, defendant No. I in preliminary objection No. 1 of the reply stated in clear terms that the contract between the parties embodied 'the Grain and Feed Trade Association Ltd. London Contract No. 119', which contained an arbitration clause and that the proceedings were liable to be stayed. Not only this, a specific prayer was made that the proceedings be stayed. In such a situation it cannot be said that defendant No. I by filing the reply, which for all purposes was an application for stay-cum-reply, had taken a step in the proceedings. The fact that they subsequently, on September 3, 1979, filed another application (I.A.2685 of 1979), under section 34 of the Arbitration Act would not make much difference. This view finds support from a Division Bench decision, of the Madhya Pradesh High Court in Sansarchand Deshraj v. State of M.P. and others : AIR1961MP322

(8) Learned counsel for the plaintiffs relied on the State of Uttar Pradesh and another v. M/s. Janki Saran Kailash Chandra and another : [1974]1SCR31 , M/s. Dadri Cement Co. and another v. M/s. Bird and Co. Pvt. Ltd. : AIR1974Delhi223 and Kunta Malla Reddy v. Soma Srinivas Reddy and others : AIR1978AP289 . These authorities, in my considered opinion, do not help the plaintiffs at all. These authorities enunciate the law as to what amounted to taking steps in the proceedings. There is no quarrel so far as the principles laid down in these authorities are concerned. but none of these apply to the facts of the present case, in the peculiar circumstances of this case where defendant No. 1 in the reply, which is stated to be a step in the proceedings, had made a specific prayer for staying the proceedings because of the arbitration clause. In the case of M/s. Dadri Cement Co. and another (supra), this Court considered the decision of the Madhya Pradesh High Court in the case of Sansarchand Deshraj, cited above, and had distinguished the same on the facts of that case. In other words, the decision of the Madhya Pradesh High Court referred to above was not overruled. The facts of the present case are similar to the facts of the case before the Madhya Pradesh High Court. thereforee, in my view filing of the reply which contained a prayer for stay of the proceedings because of arbitration clause would not amount to taking steps in the proceedings.

(9) Learned counsel appearing for the plaintiffs then contended that defendant No. I filed written-statement with the counterclaim on September 3, 1979 and thus ceased to continue to remain ready and willing to do all things necessary for the proper conduct of arbitration and because of this act of filing the written-statement with counter-claim, the suit was not liable to be stayed. Reliance was placed on the Single Bench decision of the Bombay High Court in Kamani Engineering Corporation Ltd. and others v, Societe De Traction Et D'Electricite Societe Anonyme and others : AIR1965Bom114 . The relevant observations appearing at page 119 read as under:

'The question that arises is as to what is the effect of the Defendants' institution of the counter-claim in this Court. Obviously, there is no application for stay of the counter-claim. The scheme of Sec. 34 is that defendant to a suit is not entitled to stay if he filed written statement or takes any other steps in the proceedings before making his application under the section. The scheme also is that the applicant defendant must be continuously ready and willing to do all things necessary to the proper conduct of arbitration. The intent of the above provision of the section, obviously, is that if defendant takes any steps even. subsequent to his application for stay of the suit which may be considered as his own steps in the proceedings and/or his own independent steps to proceed with the matter in Court to that extent, his application must be prejudiced. His steps are evidence that he, having regard to those steps, has not continued to remain ready and willing to do all things necessary for the proper conduct of arbitration. I requested Mr. Parpia to produce any authority where even after filing a written statement the Court has granted stay under Section 34 to the applicant-defendant. For apparent reasons, he was unable to produce any such authority. I find it extremely difficult to hold that in spite of the defendant having filed his counter-claim in this Court, he should be entitled to stay of the suit under Section 34 of the Indian Arbitration Act. In my view, having regard to the intent and purpose of Section 34, it is clear that any party who files written statement, and more so a counter-claim, is not and cannot be entitled to stay of the suit. The agreement made between the parties for filing of the counter-claim without prejudice to the rights and contentions cannot be enforceable and/or binding on the Court. If the Defendants to the counter-claim do not press for stay of the counter-claim, the Defendants to the suit cannot go to arbitration in respect of that counter-claim. The arbitrators would lose jurisdiction to decide the counter-claim when they have notice that the counterclaim is filed in Court.'

(10) The above decision of the Bombay High Court, prima facie, supports the contention of the plaintiffs' learned counsel but there is one very important distinction, namely, that in that case the written-statement was filed voluntarily which is not the case here. A perusal of the file shows that the court vide its order dated August 2, 1979 directed the defendant to file written-statement within two weeks. In additional pleas (para 21 of the written statement) defendant No. 1 has stated in clear terms that it was filing the written statement in pursuance of the orders of this Court and without prejudice to the contentions of the answering-defendant in its application being separately moved under section 34 of the Arbitration Act, 1940. It is thus clear that the written-statement was filed under the orders of the Court and it was not a voluntary act. In such circumstances I am of the view that it cannot be said that defendant No. I ceased to remain ready and willing to do all things necessary for the proper conduct of arbitration or that it amounted to taking steps in the proceedings justifying dismissal of the stay application. It is settled law that rights of the parties cannot be prejudiced by the acts or orders of the Court. The question to be seen is whether the act committed by defendant No. I displayed an unequivocal intention to proceed with the suit and to give up the right to have the matter disposed of by arbitration. The averments contained in para 21 of the written statement show that defendant No. 1 never intended to proceed with the suit or to give up its right to have the matter disposed of by arbitration. As regards counter-claim, learned counsel for defendant No. I has stated at the Bar that he would have no objection to get the same referred to the arbitrator. In all the circumstances the filing of the written statement with the counter-claim in the peculiar circumstances of this case does not justify the refusal of stay under section 34 of the Arbitration Act. The issue is decided accordingly. Issue No. 1 : On behalf of the plaintiff five contentions have been raised, namely, (i) The Gafta 119 Contract was not incorporated in the contract between the parties and thus there was no arbitration agreement; (ii) The arbitration agreement was without consideration ; (iii) The dispute, subject-matter of the suit, was not covered by the arbitration clause ; (iv) The contract had become void and unenforceable and, thereforee, the arbitration agreement itself ceased to exist; and (v) It would be unjust and inequitable if the suit was stayed and, thereforee, the Court should refuse stay in exercise of its judicial discretion.

(11) The terms and conditions of the contract between the parties are contained in the letter dated November 24, 1978 (Exhibit D-26) which has been reproduced above. Clause 13 thereof clearly lays down that the said contract was 'subject to the terms and conditions effective at the date, of the Grain and Feed Trade Association Limited, London Contract Gafta 119' which was made a part of the terms and conditions except so far as modified by the said contract. A perusal of clause 13 leaves no doubt that the terms and conditions of the Gafta 119 Contract were embodied and incorporated in the contract between the parties. The Gafta 119 Contract admittedly contains an arbitration clause. The only argument advanced by the learned counsel for the plaintiffs was that clause 13 was vague and indefinite because terms and conditions contained in Gafta 119 Contract had not been reproduced. This contention is devoid of any merit. In clause 13 itself parties have acknowledged familiarity with the text of the said Gafta 119 Contract and agreed to be bound by its terms and conditions. The plaintiffs in their letter (Exhibit D-27), dated November 22, 1978, while offering to supply these goods specifically agreed to abide by the terms and conditions of Gafta 119 Contract staling that they were aware of the terms thereof. In such circumstances, reproduction of those terms in the contract itself was not required. Clause 13 was neither vague nor indefinite.

(12) Attention was also drawn to last but one paragraph of the letter Exhibit D-26 which provided that a formal contract shall be entered on the one hand between defendant No. I and the foreign buyers and on the other between plaintiffs and defendant No. 1. No such formal contract at least between plaintiffs and defendant No. 1 was admittedly entered into. That, however, is of no consequence. The terms can be very well spelt out from the correspondence between the parties, mainly, letter Exhibit D-26.

(13) The next contention that the arbitration agreement was without any consideration is fallacious. The consideration in an arbitration agreement is the willingness of the parties to abide by the decision or award of the arbitrator. As a matter of fact, the arbitration agreement consists of reciprocal promises proceeding from both sides.

(14) The learned counsel for the plaintiffs pointed out that in clause 13 of Exhibit D-26 the word 'You' had been used which showed that it was done unilaterally. The last sentence of clause 13 where the word 'You' had been used reads : 'You hereby acknowledge familiarity with the text of the said Gafta 119 Contract and agree to be bound to its' terms and conditions'. By the word 'You' it cannot be said that the agreement was unilateral or was without: consideration. Defendant No. I simply wanted a specific acknowledgment from the plaintiffs that they were familiar with the text of the Gafta 119 Contract, which fact was duly acknowledged. Clause 27 of the Gafta 119 Contract, which contained arbitration clause, reads as under :

'27.Arbitration (a) Any dispute arising out of or under this contract shall be settled by arbitration in London in accordance with the Arbitration Rules of the Grain and Feed Trade Association Ltd. No. 125, in force at the date of the contract, such Rules forming part of this contract and of which both parties hereto shall be deemed to be cognisant. (b) Neither party hereto, nor any persons claiming under either of them, shall bring any action or other legal proceedings against the other of them in respect of any such dispute until such dispute shall first have been heard and determined by the arbitrators, umpire or Board of Appeal, as the case may be, in accordance with the Arbitration Rules and it is expressly agreed and declared that the obtaining of an award from the arbitrators, umpire or Board of Appeal, as the case may be, shall be a condition precedent to the right of either party hereto or of any person claiming under either of them to bring any action or legal proceeding against the other of them, in respect of any dispute.'

(15) The dispute in the present case is whether defendant No. 1 had performed its part of the contract regarding the payment. In other words, whether the letter of credit opened by the foreign buyers was a valid letter of credit and had been validly assigned in favor of the plaintiffs. This dispute does arise out of or under the contract and was, thereforee, covered by the arbitration clause.

(16) It was next contended that the payment by assignment of a valid, confirmed, without recourse to the drawer, irrevocable letter of credit was a condition precedent and that this condition was never fulfillled and there was total failure of the consideration and consequently the contract itself was void or in any case has come to an end and thus the arbitration agreement had also ceased to be effective.

(17) According to section 2(g) of the Contract Act, 'void agreement' means 'an agreement not enforceable by law'. A void agreement can give rise to no legal liability and the transaction is a nullity. Learned counsel for the plaintiffs, however, could not show as' to how the contract in question was void ab initio. There was consideration for the contract. As already observed, plaintiffs were to supply the goods and defendant No. 1 was to make payment for the same. The fact that the goods were not supplied afterwards or that the payment as required under the contract was not allegedly made would not make the contract void. The differences which have arisen between the parties are whether there was a breach on the part of defendant No. 1 regarding the term relating to payment which operated to discharge the plaintiffs. Such a dispute arises out of or under the contract and arbitration clause would be fully applicable. In Chitty on Contracts, Twenty-fourth Edition, Volume I, at page 393, Para 873, it was observed as under :

'An unqualified arbitration clause referring to differences arising 'in respect of' or 'with regard to' or 'under' a contract covers a dispute as to whether a breach of contract by one party has operated to discharge the other. For a repudiation by one party, even when accepted by the other, does not entirely abrogate the contract. It survives for the purpose of measuring the claims arising out of the breach. Accordingly, a party declining to perform may still rely on an arbitration clause in the contract. So can a party who has committed a fundamental breach of the contract. The question whether a contract has been frustrated is also within the scope of such a clause, no matter whether the contract is purely executory or has been partly executed-'

To the same effect is the law laid down by the Supreme Court in the Union of India v. Kishorilal Gupta and Bros. : [1960]1SCR493 . The relevant observations at page 1369 read as under:

'IF,however, the parties are at one in asserting that they entered into a binding contract, but a difference has arisen between them as to whether there has been a breach by one side or the other, or as to whether circumstances have arisen which have discharged one or both parties from further performance, such differences should be regarded as differences which have arisen 'in respect of', or 'with regard to', or 'under' the contract, and an arbitration clause which uses these, or similar, expressions, should be construed accordingly. By the law of England (though not, as I understand, by the law of Scotland) such an arbitration clause would also confer authority to assess damages for breach even though it does not confer upon the arbitral body express power to do so. I do not agree that an arbitration clause expressed in such terms as above ceases to have any possible application merely because the contract has 'come to an end', as, for example, by frustration. In such cases it is the performance of the contract that has come to an end.'

(18) The last question which remains for determination is whether the court in its discretion should refuse to stay the proceedings.

(19) Whether or not the court should exercise the powers given to it under section 34 of the Arbitration Act for staying the action is entirely a matter of discretion. This discretion, however, must be judicially exercised. The general rule has been laid down by the Supreme Court in Michael Golodetz and others v. Serajuddin and Co. : [1964]1SCR19 . The relevant observations starting from: the bottom of page 1045 read as under:

'The power enuciated by S. 34 of the Arbitration Act is inherent in the Court : the Court insists, unless sufficient reason to the contrary is made out upon compelling the parties to abide by the entire bargain, for not to do so would be to allow a party to the contract to approbate and reprobate, and this consideration may be stronger in cases where there is an agreement to submit the dispute arising under the contract to a foreign arbitral tribunal. A A clause in commercial transaction between merchants residing in different countries to go to arbitration is an integral part of the transaction, on the faith of which the contract is entered into, but that does not preclude the Court having territorial jurisdiction from entertaining a suit at the instance of one of the parties to the contract, even in breach of the covenant for arbitration. The Court may in such a case refuse its assistance in a proper case, when the party seeking it is without sufficient reason resiling from the bargain. When the Court refuses to stay the suit it declines to hold a party to his bargain, because of special reasons which make it inequitable to do so. The Court ordinarily requires the parties to resort for resolving disputes arising under a contract to the tribunal contemplated by them at the time of the contract. That is not because the Court regards itself bound to abdicate its jurisdiction in respect of disputes within its cognizance : it merely seeks to promote the sanctity of contracts, and for that purpose stays the suit.'

(20) Similarly in M/s. V/O. Tractoroexport. Moscow v. M/s. Tarapore and Co., Madras and another : [1970]3SCR53 , it was laid down that 'ordinarily, a party which has entered into a contract of which an arbitral clause forms an integral part should not receive the assistance of the Court when it seeks to resile from if. However, the Court has undisputedly power to refuse stay if sufficient reasons are made out.

(21) In the present case. learned counsel for the plaintiffs has contended that the contract was entered in India, the parties were in India, bank guarantee was given in India, letter of credit was assigned in India, the entire evidence was available in India and in these circumstances it would be unjust and inequitable if the proceedings were stayed and the plaintiffs were forced to go for arbitration to London to be governed by the laws of England. Besides there were difficulties in respect of foreign exchange and it would be impossible for the plaintiffs to take witnesses to England and to attend the proceedings there. On the other hand, it was contended that under Gafta 119 Contract, which was a part of the contract between the parties, the laws of the England were applicable. The letter of credit was opened in West Germany, the position of defendant No. 1 was that of an agent, the foreign buyer had already started arbitration proceedings against defendant No. 1. The plaintiffs had undertaken to indemnify defendant No. I and in, case the proceedings were not stayed, there will be multiplicity of litigation and possibility of contradictory findings, and it would work great injustice on defendant No. 1.

(22) In Michael Golodetz's case (supra), the law applicable to the dispute was Indian law, all evidence was in India and there were difficulties in respect of foreign exchange which practically made it impossible for the Indian Firm to attend or to take their witnesses to New York and in these circumstances the stay was refused. In the case of M/s. V/O. Tractoroexport, Moscow, cited above, the stay was. refused and one of the reasons was that if the arbitration proceedings in foreign countries were allowed to be continued, it will be ex parte and due to restrictions on availability of foreign exchange, put by Government of India of which Courts will take judicial notice, it will be impossible for Indian Firms to take its. witnesses to the foreign country before the arbitral tribunal and to properly conduct the proceedings there.

(23) However, the facts of the present case are somewhat peculiar. In the Gafta 119 Contract, which had been embodied and incorporated in the contract between the parties, the law applicable was to be the law of England. Besides, as. is apparent from the contract (Exhibit D-26), defendant No. I did not purchase these goods for itself. These were to be shipped to the foreign buyer and defendant No. I was only to get one per cent commission. The plaintiffs in the contract have been described as associate-suppliers. Under clause 15, plaintiffs have agreed to indemnify defendant No. I against all claims, amounts, actions, losses, costs, etc. The foreign buyer it was stated at the Bar, had started arbitration proceedings under Gafta 119 Contract against defendant No. 1. In such a situation if the proceedings were not stayed, it would cause hardship and injustice to defendant No. 1. Defendant No. I may be deprived of the benefit of the indemnity clause. There was likelihood of contradictory findings and multiplicity of proceedings. In all these peculiar circumstances, I think it would be proper if the proceedings are stayed. It may be added that learned counsel for defendant No. 1 has given an undertaking at the Bar that his client would make arrangements for reasonable foreign exchange for the plaintiffs for arbitration proceedings to be held in London.

(24) The proceedings in the suit are, thereforee, stayed.


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