1. In this case the plaintiff alleges that by an agreement in writing dated 14th December 1940, executed by the plaintiff and the defendant, the defendant agreed to give the plaintiff the exclusive right to sell, wholesale or retail, certain toilet articles in the markets of Bengal, that the plaintiff agreed thereby to purchase from the defendant a minimum quantity of the goods, and that the defendant agreed to sell such goods on a sixty days credit basis, provided the bills of the defendant covering the delivery challans as accepted by the plaintiff were accepted and payments thereof on the due dates were guaranteed by the plaintiff's bankers who must be a scheduled bank of Bengal. The defendant agreed to pay the plaintiff a consolidated commission on goods sold, and the agreement was for a term of five years with an option to renew. Thereupon the plaintiff acted as sole distributor for a short period, and goods were supplied by the defendant, but on 3rd January 1941 the defendant gave notice purporting to treat the agreement as cancelled. On 7th January, however, the defendant withdrew the cancellation, and it was agreed that the parties would continue to act in accordance with the agreement. Thereafter, further goods were supplied on the plaintiff's orders. But after 16th January the defendant refused to accept any further orders and supplied other dealers without the plaintiff's consent in breach of the agreement. On 3rd February 1941, the defendant determined the agreement. Clause 15 of the agreement provides that any violation of the aforesaid terms and conditions will entitle either party to determine this agreement, and if there be any dispute the same will have to be referred to an arbitrator approved by both parties, and the award of the arbitrator will be finally binding on both.
2. The present application is on behalf of the defendant under Section 19, Arbitration Act, to restrain the plaintiff from proceeding with the suit and for an order appointing an arbitrator. In his affidavit, the defendant states that on 2lst December 1940, he sent the plaintiff three bills for acceptance and payment to be guaranteed by the plaintiff's bankers in accordance with the terms of the agreement. On 23rd December 1940, he received a letter from the plaintiff saying that he was worried about money matters and would be able to clear his position with his bankers either on 23rd or 26th December when the bank would reopen. On 27th December 1940, he received another letter from the plaintiff informing him that the bills could not be passed through the bank before 2nd January 1941. Consequently, on 3rd January the defendant wrote to the plaintiff intimating that as he had failed to comply with the provisions of Clause (4) of the agreement, that is, the clause providing for the sixty days' credit, etc., the agreement stood cancelled under the provisions of Clause (15). On 6th January the plaintiff wrote saying that he had no banking account but was arranging with the Bengal Central Bank to get his bills accepted. Thereafter, the defendant received a letter from the Bengal Central Bank Ltd., intimating that he was to present his bills and further orders were placed by the plaintiff which the defendant refused to deliver. On 18th January the plaintiff begged him to deliver certain goods as a special favour, and he did so on the understanding that they had nothing to do with the agreement dated 14th December 1940, which had already been cancelled, and he denied that the notice of cancellation was ever withdrawn. It has been contended on behalf of the plaintiff that as according to the defendant, the contract was no longer in existence, it follows that there was no arbitration clause in existence, and therefore the suit ought not to be stayed. The principles to be applied in such cases as this have been frequently stated both by the English and the Indian Courts. Thus, in India Electric Co. Ltd. v. General Electric Trading Co. ('29) 16 AIR 1929 Bom. 242, the headnote is as follows:
Where a contract contains an arbitration clause, and one of the parties seeks to avoid the contract, the dispute is referable to arbitration if the avoidance of the contract arises out of the terms of the contract itself. Where, however, a party seeks to avoid the contract for reasons dehors it, the arbitration clause cannot be resorted to as it, together with the other terms of the contract, is set aside. In other words, a party cannot rely on a term of the contract to repudiate it and still say the arbitration clause should not apply. If he relies on a contract he must rely on it for all purposes.
3. In his judgment Kemp J. having stated the position in the terms described in the headnote, referred to the case in Jureidini v. National British and Irish Millers Insurance Co. Ltd (1915) 1915 AC 499 as a case in which the contract was repudiated and with it the arbitration clause. In that case an insurance company repudiated the claim in toto on the ground of fraud, and it was held that the repudiation of the claim on a going to the root of the contract precluded the company from pleading the arbitration clause as a bar to an action to enforce the claim. But, in the later case in Stebbing v. Liverpool and London and Globe Insurance Co., Ltd (1917) 2 KB 433, the company relied on a term in the contract to avoid liability, and it was held that the dispute was referable to arbitration. This also was an insurance case in which the policy recited that the assured had made a proposal and declaration which were agreed to be the basis of the contract, and that they were conditions precedent to any liability on the part of the insurers. In the case of any false declaration all benefit under the policy was to be forfeited. The company alleged that the proposal and declaration were false, and it was held that the truth or untruth of the statements was a matter to be referred to arbitration. In that case Lord Reading C.J. said that the phrase 'avoiding the policy' was loosely used, and that in truth the company relied upon a term of the policy which prevented the claimant recovering and if the company were seeking to avoid the contract in the true sense they would have to rely upon some matter outside the contract, such as a misrepresentation of some material fact inducing the contract of which the force and effect are not declared by the contract itself, and that in resisting the claim the company were not avoiding the policy but relying on its terms. Therefore, the question whether or not the statements were true was a question arising out of the policy.
4. Kemp J. also referred to the case in Woodall v. Pearl Assurance Co., Ltd (1919) 1 KB 593. That case also concerned a claim against an insurance company, in respect of an accident. The company denied liability on the ground that the assured had misstated his occupation in the proposal. It was held that the company by relying on the terms of the policy which rendered it void in certain events did not thereby repudiate the policy as a binding contract between the parties, and were entitled to rely upon the arbitration clause as a defence to the action. Jureidini v. National British and Irish Millers Insurance Co. Ltd. (1915) 1915 AC 499 was distinguished on the ground that where the insurance company is repudiating a contract in the sense that they are disputing the existence of any binding contract at all, the action was not to be stayed. But where the company is repudiating liability under the contract, but is accepting the existence of the contract as a binding contract, then the suit ought to be stayed, and the case in Stebbing v. Liverpool and London and Globe Insurance Co., Ltd. (1917) 2 KB 433 was cited as an instance of the latter class of eases. The principles to be applied were again stated by Clauson J. in De La Garde v. Worsnop & Co. (1928) 1 Ch. 17. In that case there was an agreement in writing for the sale of a business subject to certain conditions. The plaintiff refused to complete the purchase owing to non-fulfilment of one of the conditions, the effect of which, he con-tended, was that he was no longer bound by the agreement. The defendants insisted that the condition was satisfied and went to arbitration. The plaintiff then issued a writ claiming a declaration that the agreement was determined, and the defendants asked for a stay. It was held that:
If the condition were in fact not fulfilled, the plaintiff's obligation under the contract came to an end in accordance with the terms expressed in the contract itself and not by reason of the occurrence of an event 'dehors' the consideration of the contracting parties, and that, therefore, the agreement to refer the dispute to arbitration was still binding and the action must be stayed.
5. The learned Judge distinguished that case from eases where a contract having been entered into with an arbitration clause comes to an end, not because one of the parties to the contract is, according to its terms as construed with, reference to the events which have happened released from his primary obligation under it, but because the contractual relation between the parties is destroyed, either owing to some fraud or some entirely external circumstance supervening, such a circumstance as supervened in the case in the Privy Council in Hirji Mulji v. Cheong Yue Steamship Co. (1926) 1926 AC 497, where the contract had been frustrated by reason of the interposition of the Government by requisitioning the ship which was the subject-matter of the contract. It has been remarked in several cases that the difficulties which sometimes arise in trying to apply these principles to particular cases are caused really by using the words inaccurately or loosely. This was referred to by Greene L.J. (as he then was) in Toller v. Law Accident Insurance Society Ltd. (1936) 2 All ER 952 at p. 956. The learned Judge said as follows:
Now, the class of case where the defendant insurance company is denying the existence of a contract is totally different from the class of case where the defendant, while admitting the existence of a contract, is relying on some clause in it to escape liability. It is very important in my view that language should be accurately used and there is great danger in the use of such words as 'repudiation;' repudiation of a contract may mean that having admittedly made a contract, you decide to break it and break it in such a way that you intend not to proceed with it. Another use of the word 'repudiation' is where you say 'there never was a contract at all between the parties.' If it turns out there was a contract, the act of one party denying the existence of it is to repudiate it but supposing it turns out he was right and there never was a contract, then 'repudiation' is used in a different sense from that in which it would be used when an existing contract is broken by a refusal to perform.
6. In conclusion I desire to refer to the case in Harinagar Sugar Mills Ltd. v. Skoda (India) Ltd. ('36) 41 CWN 563 tried by Panckridge J., for the headnote only, which, in my belief, accurately states in alternative form the principles to be adopted. It is as follows:
When one party to a contract alleges breach by the other of provisions as to payment, some written and some unwritten, and even claims to have rescinded the contract on that ground, the dispute is one arising out of the agreement.
But when his case is that there was no valid contract, having been entered into on his behalf by a person who had no authority to do so, the dispute is not one arising out of the agreement.
When a suit has been brought by the first party for a declaration that the contract has been rescinded and does not subsist and for an injunction restraining the second party from referring the dispute to arbitration in accordance with an arbitration clause in the contract, the latter is entitled, in the first case, to an order under Section 19, Arbitration Act, staying the suit, but in the second case he is not.
7. In my opinion the present case comes within the first of these categories, and the defendant is entitled to an order under Section 19, Arbitration Act, staying the suit. There will be an order in terms of the notice of motion.