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European GraIn and Shipping, a Company Vs. Morvi Vegetable Products Ltd. - Court Judgment

LegalCrystal Citation
SubjectArbitration
CourtGujarat High Court
Decided On
Judge
Reported in(1979)1GLR159
AppellantEuropean GraIn and Shipping, a Company
RespondentMorvi Vegetable Products Ltd.
Cases ReferredScott v. Averry
Excerpt:
- - 1. a short but interesting question as to what is the effect of arbitration clause by way of condition precedent, which is otherwise known as scott v. on the other hand, the stand of the foreign purchasers was that their surveyors had rejected a large portion of the goods offered to them for survey, testing and sampling and had asked the suppliers to replace the rejected goods, but since the suppliers had failed to do so, they were at fault. in the english act of 1924 the words used were identical with the words to be found in section 3 of the act, namely, a submission made in pursuance of an agreement'.the only change which has been effected in the english arbitration act of 1950 in section 4(2) is that the words 'to arbitration' have been inserted within the words 'submission'.....b.k. mehta, j.1. a short but interesting question as to what is the effect of arbitration clause by way of condition precedent, which is otherwise known as scott v. averry clause, contained in a contract between an indian suppliers and a foreign buyer for a foreign arbitral machinery for resolving disputes under the said contract on a suit filed in indian court without complying with the condition precedent, arises in these revision applications. the question arises in the following circumstances:2. the plaintiff-company which is respondent before me (hereinafter referred to as 'the suppliers') entered into a contract of june 19, 1972 with the defendant-company, which is the petitioner before me (hereinafter referred to as '(he foreign purchasers') for sale and supply of 1000 metric tons.....
Judgment:

B.K. Mehta, J.

1. A short but interesting question as to what is the effect of arbitration clause by way of condition precedent, which is otherwise known as Scott v. Averry clause, contained in a contract between an Indian suppliers and a foreign buyer for a foreign arbitral machinery for resolving disputes under the said contract on a suit filed in Indian Court without complying with the condition precedent, arises in these revision applications. The question arises in the following circumstances:

2. The plaintiff-Company which is respondent before me (hereinafter referred to as 'the suppliers') entered into a contract of June 19, 1972 with the defendant-company, which is the petitioner before me (hereinafter referred to as '(he foreign purchasers') for sale and supply of 1000 metric tons of Indian groundnut extraction in bulk to be shipped in December, 1972 on board the ship to be named by the foreign purchasers at a price of 33-15 per metric ton FOS Bedi Port on Saurashtra coast in the State of Gujarat on the terms and conditions detailed in the said contract, executed between the suppliers and M/s Marshall Produce Brokers Company of Bombay for and on behalf of the foreign purchasers. The said contract, inter alia provided that it was subject to the terms and conditions of the Grain & Feed Trade Association Ltd., London, which are particularly described in the contract Nos. 6-15-119 of the said foreign purchasers. In other words, the particular terms and conditions of the said contracts Nos. 6, 15 and 119 of the Grain & Feed Trade Association Ltd., London were incorporated in the suit contracts by reference. In December 1972, the Suppliers supplied about 370 metric tons of Indian groundnut extractions to the agents of the foreign purchasers at Port Bedi, and it is a common ground that by mutual consent of the parties, it was agreed that on the suppliers making an allowance of Re. 1/ - per metric ton in favour of the foreign purchasers for the balanced quantity, the period of delivery for the balanced quantity was extended upto January, 1973. It appears that on January 12, 1973, the aforesaid agents M/s Marshall Produce Brokers Company of Bombay, on behalf of the foreign purchasers, intimated the suppliers that the ship to lift the balanced quantity of 630 metric tons of Indian groundnut extraction was expected to arrive at the Port Bedi around 3rd week of January, 1973 and, therefore, requested the suppliers to arrange to keep the cargo ready for putting it on the board. It is the case of the suppliers that accordingly they made all preparations for delivery of the balanced quantity of the goods in question. However, the aforesaid agents M/s Marshall Produce Brokers Company of Bombay, on behalf of the foreign purchasers, informed the suppliers on or about January 23, 1973 that the arrival of the ship was slightly delayed and would be due at the Port Bedi on or about 1st February, 1973 and, therefore, requested for extension of time under Clause 8 of the Contract No. 119 of the Grain & Feed Trade Association of London. The Suppliers were not willing to grant extension of time as claimed by the foreign purchasers with the result that a number of disputes arose between the parties with which I am not concerned in these revision applications. However, the suppliers intimated the aforesaid agents M/s Marshall that the foreign purchasers had no right to claim any extension since they have committed a breach of the contract by not providing steamer during January 1973 and, therefore, the contract stood terminated. On the other hand, the stand of the foreign purchasers was that their surveyors had rejected a large portion of the goods offered to them for survey, testing and sampling and had asked the suppliers to replace the rejected goods, but since the suppliers had failed to do so, they were at fault. The foreign purchasers also denied that their agents had received any communication from the suppliers refusing to extend the time as requested under Clause 8 of Contract No. 119. The foreign purchasers, therefore, in accordance with Clause No. 26 of Contract No. 119, appointed their arbitrator and called upon the suppliers to nominate their arbitrator immediately for resolving the disputes under the suit contracts as agreed by and between the parties to resolve any difference arising under the contract through arbitration of the Grain & Feed Trade Association Limited of London, as it was a condition precedent before taking any legal action. The foreign suppliers, therefore, filed the suit being Civil Suit No. 60 of 1973 in the Court of Civil Judge (S.D.) at Morvi for a declaration, inter alia, that the suit contract stood discharged, or, in the alternative, it validly stood terminated or was put an end to by the suppliers and that there did not exist any arbitration agreement between the parties hereto and in any case the arbitration agreement, if any, in forms Nos. 6, 15 and 119 of the Grains & Feed Trade Association Ltd., London, did not apply to the suit contract and also for an injunction restraining the foreign purchasers and their servants and agents from enforcing the arbitration agreement.

3. It appears that the learned Civil Judge granted ad-interim rule of injunction in terms as prayed for by the suppliers in their plaint in the suit. The foreign purchasers objected to the ad-interim injunction and since Clause 26 of the Contract No. 119 provided for arbitration for resolving disputes arising under the contract as a condition precedent before taking any legal action, prayed for the stay of the suit under Section 3 of the Arbitration (Protocol and Convention) Act of 1937 and/or Section 34 of the Indian Arbitration Act, 1950 and/or Section 151 of the Civil Procedure Code. The learned Civil Judge held that all the terms and conditions of Contracts Nos. 6, 15 and 119 of Grain & Feed Trade Association Ltd., London were incorporated by reference in the suit contract between the parties hereto, but since there was no actual submission by the parties to the arbitration agreement as required by the said Section 3, the suit could not be stayed. He was of the opinion that on consideration of all the relevant circumstances, he could not exercise his, discretion to stay the suit under Section 34 since it would virtually deprive the suppliers to represent their cause before the arbitrator in London on account of foreign exchange restrictions and the arbitration proceedings would result in miscarriage of justice, inasmuch as it would b, for all intents and purposes, ex parts so far as the suppliers were concerned. The learned trial Judge, therefore, rejected the application of the foreign purchasers to stay the suit and made the ad-interim relief of injunction absolute as if it was a matter of consequencs net with standing the objection of the foreign purchasers tint the suit was not competent since the arbitration Clause 23 of the Contract No. 119 provided for arbitration as a condition precedent to any legal action and, therefore, the suit was premature and the Court had no jurisdiction to make the rule absolute.

4. The foreign purchasers, therefore, carried the matter in appeal before the District Court at Rajkot by their Civil Appeals Nos. 8 and 9 of 1974 none of which found favour with the learned District Judge who dismissed both the appeals on' the same lines as done by the learned trial Judge. It is this judgment and order of the learned District Judge in the two appeals which is the subject matter of these revisions before me.

5. At the time of hearing of these revision applications, the learned Counsel appearing on behalf of the foreign purchasers who are the petitioners before me, raised broadly the following three contentions, though a number of intermediate submissions have been made by him.

1. The learned District Judge has, in confirming the order of the trial Court, mis read and misinterpreted the provisions of Section 3 of the Arbitration (Protocol & Convention) Act, 1937 in holding that the said section did require separate sub mission to arbitrator for its attraction by placing reliance on the decisions of the Supreme Court in V/O Tractoroexports, Moscow v. Tarapore & Company : [1970]3SCR53 in preference to the earlier decision of the Supreme Court in Societe De Traction et D'Electricite Socicte Anonyme v. Kamani Engineering Co. Ltd. : [1964]3SCR116 and, therefore, acted in excess of jurisdiction by refusing to stay the suit.

2. The learned District Judge, in so far as he confirmed the order of the trial Court, exercised his discretion by refusing to stay the suit under Section 34 of the Indian Arbitration Act on the principles which are neither correct nor legal and on the extraneous grounds and on unwarranted conjectures and presumptions.

3. In any case, both the Courts below have committed a material irregularity and illegality in making the rule of injunction absolute, as if it was a matter of consequence to the order of refusal of staying the suit inspite of their finding that Clause 26 provided for arbitration for resolving disputes under the contract as condition precedent to filing of any legal action in the Court of law.

6. In my opinion, the first contention is devoid of any substance in view of the decision of the Supreme Court in V/O Tractoroexports case (supra). It was no doubt a decision under the Foreign Awards (Recognition and Enforcement) Act, 1961 and not under the Arbitration (Protocol & Convention) Act, 1937. Nonetheless the Supreme Court was concerned in that case with the construction of Section 3 of the 1961 Act which is ih' part materia with Section 3 of the 1937 Act. The claim in the suit, out of which the appeal was carried to the Supreme Court in V/O Tractoroexports case (supra) was initially for a permanent injunction restraining the Russian firm from realizing the proceeds of a Letter of Credit opened on June 9, 1965 with the Bank of India Ltd., Madras. The plaint in that suit was amended by restricting the relief to recovery of damages. The Russian firm had agreed to supply earth-moving machinery for a value of Rs. 66 lacs and odd. The machinery was required by the Indian firm for executing the work of excavation of a feeder canal as part of the Farraka Barrage Project. A Letter of Credit was opened by the Indian firm with the Bank of India Ltd. Madras for the entire value of the machinery in favour of the Russian firm. The machinery started arriving in India -when in February, 1966 the Indian firm raised objections as regards the design and working of the motorised scrapers which were one of the items of machinery covered by the contract. On June 6, 1966, the Indian currency was devalued by 57.48 per cent with the result that the contract price went up approximately by Rs. 25 lacs. The Russian firm demanded accordingly an increase in the Letter of Credit but the Indian firm served a notice complaining about the breach of contract by the Russian firm and called upon it to remedy the breaches and pay compensation. The Indian firm also made it clear that until the demand of the Indian firm was complied with, the Russian firm would not be entitled to encash the Letter of Credit. The Indian firm filed the suit in 1966 in the Madras High Court and obtained an ex parte order of injunction in respect of operation of the Letters of Credit. On August 14, 1966, the parties arrived at a settlement. In pursuance of this, the suit was withdrawn by the Indian firm but since no amicable settlement could be arrived at in pursuance of the agreement, the Indian firm again filed a suit in the High Court of Madras in August, 1967. It also prayed for an ad-interim relief restraining the Russian firm from operating the Letter of Credit and also from encashing the devaluation drafts. In November, 1967 the Russian firm instituted proceedings in terms of the arbitral clause in the main contract before the Foreign Trade Arbitration Commission of the USSR Chamber of Commerce, Moscow. In November, 1967, the Russian firm entered appearance under protest before the Madras High Court in the suit filed by the Indian firm and simultaneously made an application under Section 3 of the Foreign Awards (Recognition and Enforcement) Act, 1961 and also prayed for the stay of the suit. The Indian firm on the other hand in January, 1968 applied for further interim relief restraining the Russian firm from taking any further part in the arbitration proceedings at Moscow. The application of the Russian firm for the stay of the suit was dismissed by the learned Single Judge of the Madras High Court while the application of the Indian firm for interim injunction restraining the Russian firm from proceeding with the arbitral proceedings at Moscow was allowed and an injunction was granted. The Russian firm preferred appeals against both the orders before a Division Bench of the said High Court, which confirmed the orders of the Single Judge. The Russian firm, therefore, carried the matter in the Supreme Court by preferring appeal against both the orders. On behalf of the Russian firm it was contended before the Supreme Court that the words, 'submission made in pursuance of an agreement' is Section 3 of the Foreign Awards (Recognition and Enforcement) Act, 1961 do not mean an actual or completed reference made pursuant to an arbitration agreement and they man only an arbitration agreement that has come into existence as a result of a commercial contract. On behalf of the Indian firm this contention was sought to be repelled by urging that the important words 'submission' and 'agreement' should be given their natural and grammatical meaning and the word 'submission' made in pursuance of an agreement can only mean an actual submission of the disputes to the arbitral Tribunal. The second contention urged on behalf of the Russian firm related to the jurisdiction of the Indian Courts to grant an injunction restraining a foreign suppliers from proceeding with the conduct of arbitration before a foreign arbitral Tribunal. The Supreme Court after considering the scope of the Act and the history of protocol and convention set out the two relevant Section viz. Sections 2 and 3. The Supreme Court also referred to the Arbitration (Protocol and Convention) Act, 1937, the Arbitration Clauses (Protocol) Act, 1924 of England and the Indian Arbitration Act, 1934. Mr. Justice Grover (as he then was) speaking for the majority court observed as under in paragraph 13:

The phraseology which has been employed in the English statute and the Indian enactment for giving effect to the Protocol and the Conventions relating to arbitration is practically the same. In the English Act of 1924 the words used were identical with the words to be found in Section 3 of the Act, namely, 'a submission made in pursuance of an agreement'. The only change which has been effected in the English Arbitration Act of 1950 in Section 4(2) is that the words 'to arbitration' have been inserted within the words 'submission' and 'made'. Among the authoritative text book writers there has been a good book of divergence of opinion on the meaning of the above phraseology. In the 8th Edn. of the Conflict of Laws by Dicey and Morris, Rule 182 has been formulated which is based on Section 4(2) of the English Arbitration Act, 1950. Referring to Section 4(2) and the meaning of the words 'a submission to arbitration made in pursuance of an agreement to which the protocol applies', the authors are of the view that this condition is satisfied if the parties have agreed to submit present or future disputes to arbitration. The Court is according to them, under a duty to stay proceedings although no arbitrators have been appointed. The word 'submission' must be regarded as synonymous with the term 'arbitration agreement' in the Protocol and the term 'agreement to which the Protocol applies' is used 'to identify the commercial or business contract between the parties'. This statement is based on the judgment of Scarmen J. In Owners of Cargo on Board the Merak v. The Merak (Owners) (1965) 2 W.L.F. 250. Even before the pronouncement of this judgment preference for the view which later on came to be expressed by Scarman J bad been indicated in the 7th Edn. of the same book (see pages 1075 to 1076). According to the well-known work of Russell on Arbitration, 17th Edn. the English translation of the protocol is most obscure. This is what has been stated at p. 79:

The words of the section, however, would seem to limit its operation to cases where some sort of 'agreement to submit' is followed by an actual 'submission' made 'pursuant to' it. (Presumably, the word 'submission' here bears its natural meaning of 'a submission (written or not) of an actual dispute to the authority of an arbitral tribunal,' rather than the statutory meaning which it bore under the phrase 'arbitration agreement')- Thus the common case, of an agreement to refer which is never followed by a submission because the claimant prefers to sue instead is apparently outside the section, although the Protocol clearly meant it to be covered; see the French text of Article 4.The English translation of the French text in the 1950 Act has been stated to be a mistranslation. It has been suggested that the Parliament may have enacted not the true text of the Protocol but a very limited interpretation of the false translation. In Halsbury's Laws of England, Third Edn. Cumulative Supplement 1968 Vol. II, Arbitration, page 2, reference has been made to the decision of Scarman J in The Merak which was affirmed on appeal and which has been followed in Unipat A.G. v. Dowry Hydraulic Units 1967 R.P.C. 401 the statement in the text being that this provision of law applies although no actual submission to arbitration has been made.

The majority Court, speaking through Graver J. thereafter proceeded to state as under in paragraph 18:

The approach in 'The Merak' appears to have been dominated by the Protocol of 1923 and the question to be examined is whether the language of Section 4(2) of the English Act of 1950 and Section 3 of the Act contains any such ambiguity or suffers from any such lack of clarity as would justify the use of the Protocol to the extent made in the English case. The term 'submission' as defined in the English Act of 1889 and the Indian Act of 1899, was meant to cover both an arbitration clause by which the parties agreed that if disputes arose they would be referred to arbitration and also an actual submission of a particular dispute or disputes to the authority of a particular arbitrator. For the sake of convenience a distinction could be made by calling the first 'an agreement to refer' and the second 'a submission'. The term 'arbitration agreement' as defined by the English Act of 1950 and the Indian Act of 1940 also covers both 'an agreement to refer' and 'an actual submission.' Turning to the words used in Section 3 of the Act 'submission made in pursuance of an agreement to which the convention set forth in the schedule applies', the first critical expression 'submission' can have both the meanings in view of the historical background of the legislation which was enacted to give effect to the Protocol and the Conventions. If this term is to be given the larger meaning of including of 'an agreement to refer' as also 'an actual submission' of a particular dispute, it has to be determined which meaning would be appropriate in the context in which the term 'submission' has been used in Section 3 of the Act. If 'submission' means 'agreement to refer' or an 'arbitral clause' in a commercial contract, it makes the entire set of words unintelligible and completely ambiguous. It is difficult to comprehend in that case why the Legislature should have used the words which follow the term 'submission', namely, 'made in pursuance of an agreement'. This brings us to the true import of the expression 'agreement'. If by 'agreement' is meant a commercial contract of the nature mentioned in the 'Merak' the words 'made in pursuance of convey no sense. Another anomaly which militates against the established rule of interpretation would arise if by the word 'agreement' is meant a commercial contract. It cannot even by stretching the language, bear that meaning in the second part of Section 3 which reads:.The court unless satisfied that the agreement is null and void, inoperative or incapable of being performed or that there is not in fact any dispute between the parties with regard to the matter agreed to be referred shall make an order staying the proceedings.Here 'agreement' can have reference to and mean not the commercial contract to which the convention set forth in the Schedule applies but only the agreement to refer or the arbitral clause. Unless the context so compels or requires, the same meaning must ordinarily be attributed or given to the same words used in the section. The above difficulties completely disappear if 'submission' is given the second meaning of an actual submission of a particular dispute or disputes to the authority of a particular arbitrator. The words which we are construing then have a clear, consistent and intelligible meaning, namely an actual submission made in pursuance of an arbitration agreement or arbitral clause to which the convention set forth in the Schedule applies. The words 'in pursuance of are also thus saved and not rendered otiose. The Courts have to be guided by the words of the statute in which the legislature of the country has expressed its intention. If Section 3 cannot be so read as to permit the meaning of the word 'submission' to be taken as an arbitral clause or an agreement to refer, the courts would not be justified in so straining the language of the section as to ascribe the meaning which cannot be warranted by the words employed by the legislature. We are aware of no rule of interpretation by which rank ambiguity can be first introduced by giving certain expressions a particular meaning and then an attempt can be made to emerge out of semantic confusion and obscurity by having resort to the presumed intention of the legislature to give effect to international obligations.

The majority Court thereafter expressed its anxiety about the efforts of those who desired to respect the terms of international Protocol and Conventions in letter and spirit, but found itself bound by the mandate of the legislature. Sine; this legislative intent was clearly expressed in sec 3, the majority Court quoted with approval a decision of Calcutta High Court under Section 3 of the 1937 Act in W. Wood & Son Ltd. v. Bengal Corporation : AIR1959Cal8 and observed as under:

The consistent view of the Indian Courts on the interpretation of the critical words in Section 3 of the Act of 1937- has not been in favour of what prevailed in the 'Merak'. In the leading case in W. Wood & Son Ltd. v. Bengal Corporation : AIR1959Cal8 . Chakravarti C.J. while delivering the judgment of the court, examined the various aspects of the question including the terms of the Protocol of 1923 and the Convention of 1927 and said:If the agreement to which the Protocol applies is an agreement for arbitration, there cannot possibly be an agreement in pursuance of that agreement. Section 3 must, therefore, be construed as contemplating a case where not only is there an arbitration agreement in force between the parties but there has also been an actual reference to arbitration.

The majority court summed up its opinion in the following terms:

Whatever way Section 3 of the Act is looked at, it is difficult to reach the conclusion that 'submission' means an agreement to refer or an arbitral clause and does not mean an actual submission, or completed reference, and that the word 'agreement' means a commercial contract and not an agreement to refer or an arbitral clause.

In view of this settled legal position, I do not think that I can permit the learned Counsel for the foreign purchasers to reiterate this question afresh. The first contention, therefore, should clearly be rejected.

7. The learned Counsel for the foreign purchasers therefore, made an attempt to persuade me that the discretion exercised by the learned, District Judge in refusing to stay the suit under Section 34 of the Indian Arbitration Act was not according to the correct legal principles and was wholly for extraneous considerations and unwarranted conjectures and presumptions. It was urged in support of this contention that in view of the finding of the Trial Court which is not disturbed by the first Appellate Court that the contract in question contained an arbitral clause which made the award a condition precedent to any right of action or a suit, which clause is commonly known as Scott v. Averry clause, the absence of obtaining such an award bars any action or suit if commenced for the determination of disputes within the terms of the arbitration clause. In this connection, a great reliance was placed on the decision of the Supreme Court in The Vulcan Insurance Co. Ltd. v. Maharaj Singh and Anr. : [1976]2SCR62 which ruled that if Scott v. Averry clauses in a commercial contract are couched in a comprehensive language taking within its ambit any kind of dispute arising under the contract then obtaining of an award by arbitration is a condition precedent to the starting of any other legal proceeding, and the clause bars any action or suit if commenced for determination of disputes covered by the said clause. It was, therefore, urged that in view of this finding that there is a Scott v. Averry clause in the commercial contract in question, the suit by the suppliers was not competent as Section 32 of the Arbitration Act, 1940 provides that no suit would li; on any ground whatsoever for a decision upon the existence, effect or validity of an arbitration agreement or an award nor shall such an agreement or award be set aside, amended, modified or in any way affected otherwise then as provided by the Act. It was urged that the only course open to the suppliers was to proceed under the Arbitration Act by making appropriate application under Sections 12, 16, 19 or 30 praying the Court to declare that the arbitration agreement had ceased to have any effect. If, contrary to the provision contained in Section 32, a party to the arbitration agreement, which is in the nature of Scott v. Averry clause, commences a legal action in a Court by filing a suit, it would be without the complete cause of action and would be for all intents and purposes premature. It was, therefore, contended by the learned Counsel for the foreign purchasers that in case of such a suit, contrary to the arbitration agreement in nature of Scott v. Averry clause, the defendant is always entitled to pray for the stay of the suit under Section 34 of the Indian Arbitration Act. It was further contended by the learned Counsel for the foreign purchasers that under Section 36 of the Arbitration Act, the Court has always the power to declare that arbitration agreement, which provides for obtaining of an award as a condition precedent to the bringing of an action with respect to any of the matters mentioned in the said agreement, as ceased to have any effect as regards any particular difference. Since no such order has been made by any Court in respect of the suit contract providing arbitration as a condition precedent to any legal action, the suit by the suppliers was incompetent. A number of authorities was relied upon in support of both the above contentions. I do not, however, think it necessary to deal with these contentions as Section 47 of the Arbitration Act, 1940 provides that subject to the provision of Section 46 and save in so far as is provided by any law for the time being in force, the provisions of this Act shall apply to all arbitrations and to all proceedings thereunder. Section 46 provides for application of the Act to statutory arbitrations. In other words, Section 47 makes it clear that subject to the provisions of Section 46, and save in so far as is otherwise provided by any law for the time being in force, the provisions of this Act shall apply to all arbitrations and to all proceedings thereunder. By the use of words 'save in so far as is otherwise provided by any law for the time being in force' the Parliament has made it clear that the provisions of the relevant law governing a particular arbitration agreement would apply even though the said provisions may be inconsistent with the provisions contained in Sections. 3 to 38 of the Arbitration Act, 1940.

8. In Society De Traction et Electricity Society Anonyme v. Katnani Engineering Co. Ltd. : [1964]3SCR116 a question arose whether or not an agreement to refer a future dispute to arbitration according to the Rules of the International Chamber of Commerce Rules between a Company registered under the Indian Companies Act and a foreigner is binding upon the Indian Company. The Respondent Company being a company registered under the Indian Companies Act, 1913, entered into a collaboration agreement with one Belgium company whereby the latter Company undertook to provide to the Indian company technical assistance for construction of overhead railway electrification, tramway systems and trolley buses in India and other countries. The collaboration agreement contained an arbitration clause. The Indian company instituted a suit in the High Court of Bombay for declaration that the foreign company committed diverse breaches of the Collaboration agreement which amounted to termination of the said contract and discharge of the Indian company from all its obligations thereunder and also for accounts and for recovery of Rs. 9 lacs with interest. The foreign company took out a notice of motion for an order staying the proceedings of the suit pursuant to Section 3 of he Arbitration (Protocol and Convention) Act, 1937 and/or Section 34 of the Indian Arbitration Act, 1940 and/or Section 151 of the Civil Procedure Code 1908 and/or the inherent powers of the High Court. The foreign company in the alternative prayed that the Indian Company and its servants and agents be restrained by an order of injunction from proceeding with the suit. The learned Single Judge of the Bombay High Court refused the motion and the order passed by him was confirmed in appeal by a Division Bench since it was found that the clause of the arbitration agreement was invalid, inasmuch as it obliged the Indian Company contrary to Section 389 of the Indian Companies Act, 1956 to go to arbitration otherwise than in accordance with the Arbitration Act of 1940. The Belgium Company took the matter in appeal before the Supreme Court. It was contended on behalf of the Belgium Company before the Supreme Court that the High Court was wrong in holding that the arbitration clause of the Collaboration agreement was invalid since it infringed the provisions of Section 389 of the Indian Companies Act, 1956, because, it was merely an enabling provision and the power to submit a dispute to arbitration being incidental to power to enter into a contract for purposes of carrying on business is unrestricted. The Supreme Court considered the provision with reference to the Companies Act, 1956 and thereafter the Court, speaking through Shah, J., held as under:

18. On a review of the statutory provisions and the authorities we are of the view that Section 152 of the Indian Companies Act, 1913 and Section 389 of the Indian Companies Act 1 of 1956, were intended to provide that all arbitrations to which a company is a party shall be conducted in accordance with the provisions of the Indian Arbitration Act X of 1940. For reasons which we have already stated Section 389(1) of the Companies Act, 1956 regulated the power of Indian Companies to agree to submit differences to arbitration and by Sub-section (3) the provisions of the Arbitration Act, 1940 applied to all arbitrations to which an Indian Company was a party.

19. That however is not a decisive of the question which falls to be determined between us; Section 47 of the Arbitration Act, 1940, is as much a part of the Indian Arbitration Act as any other provision and that section makes the provisions of the Arbitration Act applicable to all arbitrations and to all proceedings thereunder but subject to the provisions of Section 46 and save in so far as is otherwise provided by any law for the time being in force. We are not concerned in the present case with a statutory arbitration. But by the use of the words 'save in so far as is otherwise provided by any law for the time being in force, 'the Legislature has clearly made the provisions of the Arbitration (Protocol and Convention) Act, 1937, applicable to consensual arbitrations prescribed for the application of that Act are attracted, even if the scheme of arbitration recognised thereby is inconsistent with Sections 3 to 38 of the Arbitration Act, 1940. The Arbitration (Protocol and Convention) Act 6 of 1937 was enacted for giving effect to the protocol on arbitration clauses set forth in the First Schedule and of the conventions on the execution of foreign arbitral awards set forth in the Second Schedule and for enabling the conventions to become operative in India.

20. It is not disputed that the proposed arbitration between Traction and Kamani under the Rules of the International Chamber of Commerce is governed by the Protocol on Arbitration Clauses agreed to at Geneva on September 24, 1923, and the protocol in the First Schedule applies. The Arbitration (Protocol and Convention) Act 6 of 1937 being a law otherwise providing for arbitration, the provisions thereof would by virtue of Section 47 be applicable to arbitrations under Section 389 of the Indian Companies Act, 1956, if the conditions regarding their applicability are fulfilled. That Act applies to arbitrations whether parties to the submission are individuals or companies. By virtue of Section 389, Sub-sections (1) and (3) of the Indian Companies Act I of 1956, (before that section was repealed in 1960) an Indian Company may agree to refer differences, between itself and any other company or person by written agreement in accordance with the Arbitration Act, 1940 and the provisions of the Arbitration Act, 1940 apply to all arbitrations in pursuance of the Companies Act to which a company is a party. Arbitration according to the provisions of the Arbitration (Protocol and Convention) Act 6 of 1937 being recognised by the Arbitration Act an agreement to refer disputes in accordance with the rules of the International Chamber of Commerce is not inconsistent with Section 389 of the Companies Act, 1956. In Society Italians per Lavori Maritimes case, Appeal No. 63 of 1959 D/-22-9-1960 (Bom.) the attention of the Court was, it appears, not invited to the provisions of Section 47 of the Arbitration Act, 1940, in its relation to the Arbitration (Protocol and Convention) Act 6 of 1937 and the Court refused to stay the action commenced in contravention of the arbitration agreement on the footing that an arbitration agreement which contemplated reference otherwise than in the manner provided by the Arbitration Act, 1940, Section 1 to 38 was ineffective not being permissible under the provisions of Section 152 of the Companies Act 1913 and 'therefore impossible and completely prohibited'. This view in our judgment cannot be sustained. In the present case, Kantawalla, J. and the High Court proceeded upon the view (as they were bound to do) that the decision in Societe Italian per Lavori Mariltimi's case, Appeal No. 63 of 1959 D/-22-9-1960 (Bom.) was sufficient to justify the contention of Kamani that the suit could not be stayed, the arbitration agreement being ineffective and invalid. For reasons already set out by us, that assumption cannot be supported. Whether having regard to the terms of Section 3 of the Arbitration (Protocol and Convention) Act 6 of 1937 stay may be granted of, the suit commenced by Katnani is a question on which no decision has been recorded by the Trial Judge nor the High Court and we will not be justified in this appear in entering upon questions of fact for the first time without having the benefit of the view of the High Court on those questions.

In view of the provision contained in Section 46, therefore, I do hot think that it can be successfully urged that the entire scheme contained in Sections 3 to 38 of the Arbitration Act, 1940 would apply in its entirety and that unless the course open to the parties to arbitration agreement under Sections 12, 16, 19 or 30 of the Arbitration Act, 1940 is pursued and a declaration obtained, that arbitration agreement had ceased to have effect, no suit would lie on any ground whatsoever for a decision upon the existence,, effect or validity of the arbitration agreement as enjoined under Section 32 of the said Act. My attention was invited to a decision of the Supreme-Court in Michael Golodotz and Ors. v. Serajuddin and Co. : [1964]1SCR19 where a Division Bench of the Calcutta High Court in Letters Patent Appeal reversed the order of a learned Single Judge of that Court rejecting the motion of an American exporter company for stay of the suit under Section 34 of the Arbitration Act, 1940 by an Indian Importer for a declaration that the contract between him (Indian Importer) and the American Exporter Company for supply of 25000 tons of manganese ore was void and ineffective and that it stood discharged and for a perpetual injunction restraining the American Exporter Company from taking steps in the purported enforcement of the said contract by referring the dispute to the arbitration of American Arbitration Association in New York pursuant to the arbitration clause. The Division Bench reversed the order having regard partly to the concession made by the Advocate General appearing on behalf of the American Exporter Company that the entire matter was governed by the Indian Laws, the Indian Arbitration Act and the Indian Contract Act. This decision was sought to be relied upon in support of the contention that the provisions contained in the Arbitration Act are applicable to such consensual arbitration and Apriority Section 34 of the Arbitration Act is applicable. I do not think that this submission is well-founded solely on the basis of the decision of the Supreme Court in Michael Golodotz's case (supra), because, the Supreme Court, as observed in paragraph 2 thereof, assumed for the purposes of that appeal, that Section 34 of the Arbitration Act, 1940 invested a Court in India with authority to stay a legal proceeding commenced by a party to an arbitration agreement against any other party thereto in respect of any matter agreed to be referred, even when the agreement is to submit it to a foreign arbitration tribunal. It cannot be said, therefore, that this decision supports the broad proposition sought to be canvassed by the learned Counsel for the foreign purchasers. On the contrary, the decision of the Division Bench of five Judges of the Supreme Court in Societe De Traction et D'Electricite Societe's case (supra) is more applicable in the facts of the present case. In any view of the matter, the decision of the Supreme Court in V/O Tractoroexpon's case (supra) stands in the way of the foreign purchasers before me and inasmuch as that ruling holds the field so far as the Arbitration (Protocol and Convention) Act, 1937 is concerned, I do not think that it will be open for me to take any other view of the matter and interfere with the orders of the Courts below that in absence of a specific submission of the disputes to arbitration. Section 3 of the Arbitration (Protocol and Convention) Act, 1937, cannot be invoked and the suit cannot be stayed. The first and second contentions of the learned Counsel are, therefore, rejected.

9. That takes me to the third contention making a grievance about the rule of injunction being made absolute by both the Courts below in spite of their finding that the arbitration clause in the present commercial contract was in nature of Scott v. Averry clause and was a condition precedent to any legal action being brought by any party thereto. It has been strenuously urged on behalf of the foreign purchasers that a Scott v. Averry clause couched in a comprehensive language taking within its ambit and sweep any kind of dispute arising under the main commercial contract would bar any action or suit if commenced for the determination of a dispute covered by the said clause. It was contended, in other words, that a provision for arbitration by way of condition precedent to commencement of any legal action in a Court of law would be part of the cause of action and till that condition is satisfied, a legal action or a suit would be premature and consequently the Court will not have any jurisdiction to hear, try and determine such a suit. On behalf of the Indian Suppliers this contention was sought to be repelled by urging that the Court cannot ignore the principle embodied in Section 35 of the Indian Arbitration Act, 1940 which provides, inter alia, that when legal proceedings upon the whole of the subject matter of the reference commenced between all the parties to the reference and a notice thereof has been given to the arbitrators or umpire, all further proceedings in a pending reference would, unless a stay of proceedings is granted under Section 34, be invalid. It was further urged that if the arbitration proceedings had been in India and if the provisions of the Arbitration Act, 1940 had been applicable to the suit, the arbitration proceedings could not have been allowed to be proceeded with simultaneously and either the suit would have been required to be stayed under Section 34 or, if it was not stayed, the arbitrators could not have proceeded after the notice of such a suit with the arbitration proceedings otherwise they would have bee invalid as provided under Section 35. It was, therefore, submitted on behalf of the Indian Suppliers that both the Courts below have rightly made the rule of injunction absolute. I am afraid, I cannot agree with the submission made on behalf of the Indian Suppliers, obviously for two reasons: in the first place, both the Courts below have failed to address themselves to this aspect of the question, whether they have a jurisdiction to entertain and hear such a suit which has been commenced by a party to a commercial contract containing an arbitration provision in nature of Scott v. Averry clause. Both the Courts below have made the rule absolute as if it is a necessary equal to their conclusion of refusing to exercise the discretion to stay the suit either under sec. 3 of the Arbitration (Protocol any Convention) Act, 1937 or Section 34 of the Indian Arbitration Act, 1943. The learned counsel for the foreign purchasers was right when he made a grievance that inspite of the finding by both the Courts that arbitration clause in the main commercial contract, with which I am concerned here, was a condition precedent to the commencement of a legal action, both the Courts below proceeded without considering the above aspect of the question, whether in such circumstances the Court can entertain and try such suit or grant any interim relief in the proceedings in such suit, My attention has been invited by the learned counsel appearing on behalf of the Indian Suppliers to the decision of the Supreme Court in Tractoroexport's case (supra) where a similar situation had arisen. The Russian firm, which was appellant before the Supreme Court, also preferred an appeal against the order of the Division Bench of the Madras High Court, confirming the order of the learned Single Judge of that High Court making the rule of injunction absolute. The question which was urged before the Supreme Court in this connection related to the jurisdiction of the Courts in this country to grant an injunction restraining a foreign party from proceeding with the conduct of arbitration before a foreign Tribunal. Grover. J., speaking for the majority Court observed as under in paragraphs 27, 28 and 29 of his judgment:

27. Although it is a moot point whether Section 35 of the Arbitration Act, 1940 will be applicable to the present case Shiva Jute Baling Ltd. v. Mindley and Co. Ltd. : [1960]1SCR569 it was assumed that Section 35 applied to protocol arbitration, the principle embodied in that section cannot be completely ignored while considering the question of injunction. According to that section no reference nor award can be rendered invalid by reason only of the commencement of legal proceedings, upon the subject of the reference, but when legal proceedings upon the whole of the subject matter of the reference have been commenced between all the parties to the reference and a notice thereof has been given to the arbitrators or umpire, all further proceedings in a pending reference shall unless a stay of proceedings is granted under Section 34 be invalid.

28. If the venue of the arbitration proceedings had been in India and if the provisions of the Arbitration Act of 1940 had been applicable, the suit and the arbitration proceedings could not have been allowed to go on simultaneously and either the suit would have been stayed under Section 34 or if it was not stayed, and the arbitrators were notified about the pendency of the suit, they would have had to stay the arbitration proceedings because under Section 35 such proceedings would become invalid if there was identity between the subject matter of the reference and the suit. In the present case, when the suit is not being stayed under sec. 3 of the Act it would be contrary to the principle underlying Section 35 not to grant an injunction restraining the Russian Firm from proceeding with the arbitration at Moscow. The principle essentially is that the arbitrators should not proceed with the arbitration side by side in rivalry or in competition as if it were a Civil Court.

29. 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 reside from it. But in the present case a suit is being tried in the Courts of this country which for the reasons already stated cannot be stayed under Section 3 of the Act in the absence of an actual submission of the disputes to the arbitral tribunal at Moscow prior to the institution of the suit. The only proper course to follow is to restrain the Russian firm which has gone to the Moscow Tribunal for adjudication of the disputes from getting the matter decided by the tribunal so long as the suit here is pending and has not been disposed of.

The learned Counsel for the Indian suppliers has heavily relied on this decision in support of the orders of both the Courts below making the rule of injunction absolute. It is no doubt true that prima facie this decision lends support to the submission made on behalf of the Indian Suppliers but on the close scrutiny I am of the opinion that this decision is not helpful, because, the arbitration clause with which the Supreme Court was concerned in Tracloroexport 's case (supra) was not in the nature of Scott v. Averry clause which prescribes arbitration as a condition precedent to commencement of any legal action. I find that arbitration clause set out in the dissenting judgment of Ramaswami J, as Clause 13 of the Contract which provided as under:

The sellers and the buyers shall take all measures to settle amicably any disputes and differences which may arise out of or in connection with this Contract. In case of the parties being unable to arrive at an amicable settlement, all disputes are to be submitted without application to the ordinary Courts for the settlement by Foreign Trade Arbitration Commission at that U.S.S.R. Chamber of Commerce in Moscow in accordance with the Rules of Procedure of the said Commission. The Arbitration award will be final and binding upon both parties.

10. I do not think, therefore, that the decision of the majority Court of the Supreme Court in Tracloroexport's case (supra) can be of much assistance to the cause of the Indian Suppliers having regard to the nature of the arbitration clause which I have set out hereinabove. It was clearly not in the nature of Scott v. Averry clause, which always operates as a condition precedent to the commencement of any legal action. The clause with which the Supreme Court was concerned in the Tractoro export's case (supra) was an ordinary arbitration clause and, therefore, the considerations which may weigh with the Court in granting injunction when the suit is not stayed either under Section 3 of the Arbitration (Protocol and Convention) Act, 1937 or Section 34 of the Indian Arbitration Act, 1940, would not apply in the present case before me where the question assumes a different complexion because it would affect the very jurisdiction of the Court to try such a suit which has been commenced without satisfying the condition precedent to the commencement of a legal action. In The Vulcan Insurance Co. Ltd. v. Maharaj Singh and Anr. (1976) S.C.C. 943, the Supreme Court was required to consider the validity of Scott v. Averry clause. The question arose in the context of the proceedings commenced by the insured-respondent under Clause 20 of the Arbitration Act, 1940 as he claimed that the appellant-Insurance Company repudiated the claim preferred by him for reimbursement of the various losses which his machinery suffered as a result of fire which took place in his factory between February 1963 and March, 1963 under the Fire Insurance Policy and because the appellant-Insurance Company refused to resolve the difference consequently arising by arbitration proceedings. The appellant-Insurance Company appeared and, inter alia, took an objection to the jurisdiction of the Muzaffarnagar Court to entertain the application with the result that the application was returned for presentation to the proper Court which was so presented on May 19, 1964 in Delhi Court. The trial Court at Delhi dismissed the application as time barred inspite of its view that the dispute arising out of the repudiation of liability was within the scope of arbitration provision contained in Clause 18 of the Insurance Policy. On appeal by the insured-respondent, the High Court of Delhi set aside the order of the trial Court and remanded the case for appointment of arbitrator under Section 20 of the Arbitration Act as in its opinion though the operation of Clause 18 was restricted to differences as to the amount of loss or damage, yet the reference to arbitration was not ousted and the arbitration clause covered the dispute inspite of the repudiation by the Company of the claim in to since the conditions mentioned in Clause 19 of the policy were satisfied. The Insurance Company, therefore, carried the matter in appeal. Clause 18 of the Insurance Policy in that case was in the following terms:

18. If any difference arises as to the amount of any loss or damage such difference shall independently of all other questions be referred to the decision of an Arbitrator, to be appointed in writing by the parties in difference, or if they cannot agree upon a single Arbitrator to the decision of two disinterested persons as Arbitrators.... And it is hereby expressly stipulated and declared that it shall be a condition precedent to any right of action or suit upon this policy that the award by such Arbitrator, -Arbitrators or Umpire of the amount of the loss or damage if disputed shall be first obtained.

11. A contention was raised on behalf of the insured-respondent that in view of the last para of Clause 18 which makes the award of an arbitrator a condition precedent to any right of action or suit, it should be held that even when there is a repudiation of liability, the matter has got to go to arbitration first. In support of this contention a number of English and Indian authorities was cited and sought to be relied upon on behalf of the respondent. Untiwalia, J. speaking for the Court while distinguishing those authorities cited having regard to the facts and circumstances of the case, observed as under in paragraphs 14 at page 949 of the report:

14. A clause like the last part of Clause 19 making the award a condition precedent to any right of action or suit first came up for consideration in the case of Scott v. Averry and since then such clauses are commonly called Scott v. Averry clauses. Generally it has been found that if the arbitration clause is couched in a comprehensive language taking within its ambit any kind of dispute arising under the policy, then obtaining of an award by arbitration is a condition precedent to the starting of any other legal proceeding. A clause like Scott v. Averry has repeatedly been held to be a valid one.

Even a clause of this type however is not absolute in effect : where the Court orders that the arbitration agreement cease to have effect in relation to a particular dispute, it has a discretion to order further that the Scott v. Averry clause cease to have effect too (Vide pages 57. 58 of Russel on Arbitration, Eighteenth Edition).

The said statement of the law, however has been made with reference to Section 25(4) of the English Arbitration Act, 1950. The corresponding provision in our Act is contained in Section 36. But that apart when an arbitration clause is not operative on the dispute raised, as in this case, then it is wholly unreasonable, almost impossible to hold that still the parties have to obtain an award before starting any legal proceeding. What dispute will be referred to arbitration? The dispute raised is not within the purview of arbitration. Reading Clauses 13 and 18 together it must be held that on the rejection or repudiation of the claim by the insurer, the insured is under an obligation to start a legal proceeding within three months of such rejection, and hence, obtaining of an award in such a case cannot be a condition precedent.

After referring to the various authorities, Indian as well as English, Untwalia J, proceeded to observe:

The two lines of cases clearly bear out the two distinct situations in law. A clause like the one in Scott v. Averry bars any action or suit if commenced for determination of a dispute covered by the arbitration clause. But if on the other hand a dispute cropped up at the very outset which cannot be referred to arbitration as being not covered by the clause, then the Scott v. Averry clause is rendered inoperative and cannot be pleaded as a bar to the maintainability of the legal action or suit for determination of the dispute which was outside the arbitration clause.

12. The Supreme Court, as it was of the opinion that the arbitration clause was not applicable to the disputes arising between the parties as the Company had repudiated the contract and his liability, allowed the appeal of the Insurance Company and dismissed the application of the insured-respondent. This view of the Supreme Court clearly reaffirms the position about the effect of arbitration provision in the nature of Scott v. Averry clause on the competency of a suit or legal action without satisfying the condition precedent prescribed in that clause. A clause like the one in Scott v. Averry bars any action or suit if it is commenced for the determination of a dispute covered by that clause. The arbitration clause in the present case is contained in Clause 26 of the Contract Form No. 119 of the Grain and Food Trade Association Limited, London and it reads as under: '26. Arbitration-

(a) Any disputes arising out of or under the contract shall be settled by arbitration in London in accordance with the Arbitration Rules No. 126 of the Grain and Feed Trade Association Limited, such Rules forming part of this contract and of which both parties hereto shall be deemed to be cognizant.

(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 here to or of any person claiming under either of them bring any action or other legal proceedings against the other of them in respect of any such dispute.

13. In my opinion this clause is of widest amplitude and takes in its ambit and sweep all and every dispute arising out of or under the contract in question and it prohibits any party thereto or any persons claiming under them from commencing any action or legal proceedings in respect of any such dispute until such dispute is first heard and determined by the arbitrators, umpire or Board of Appeal, as the case may be, in accordance with the Arbitration Rules and it has been expressly agreed and declared between the parties that obtaining of an award from the arbitrators, umpire or Board of Appeal was a condition precedent to the right of either party or any person claiming under him to bring any action or any other legal proceedings against the other in respect of any such dispute. The Appellate Court has found it as an admitted position that the Indian Suppliers had not taken any steps towards the arbitration of the disputes between the parties nor made any reference nor appointed its arbitrator. The trial Court as well as the Appellate Court have found this clause as a condition precedent. Inspite of this finding, having regard to the width and amplitude of the clause, it cannot be gainsaid that till the condition precedent is satisfied no legal action or suit was competent. If this is the correct interpretation of the clause in question, and I am of the opinion that indeed it is, it would operate as a bar to any legal action till the condition prescribed therein is satisfied. The suit of the Indian Suppliers having regard to the nature of arbitration clause contained in the present commercial contract was not competent and as rightly contended by the learned Counsel for the foreign purchasers that in any case it was premature, the Court could not have jurisdiction to hear and try such a suit much less to grant any interim relief. In that view of the matter, therefore, I am of the opinion that the learned District Judge in so far as he confirmed the order of the trial Court exceeded his jurisdiction and, therefore, the order of the learned District Judge confirming the order of the trial Judge making the rule of injunction absolute should be reversed and the rule of injunction should be discharged.

The result is that these revision applications are partially allowed and the orders of the learned District Judge confirming the orders of the learned Trial Judge making the rule of injunction absolute are reversed and it is ordered that the rule of injunction is discharged. The respondents shall pay the costs of these revision applications to the petitioners. Rule is made absolute accordingly.


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