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PETITIONER: UTTAR PRADESH CO-OPERATIVE FEDERATION LTD.

       Vs.

RESPONDENT: M/S SUNDER BROTHERS OF DELHI

DATE OF JUDGMENT: 20/04/1966

BENCH: RAMASWAMI, V. BENCH: RAMASWAMI, V. SUBBARAO, K.

CITATION:  1967 AIR  249            1966 SCR  215

ACT: Indian Arbitration Act, s. 34-Arbitration  agreement-Parties how far bound to have dispute decided by agreed  arbitrator- One  of the parties filing suit-Court’s discretion  to  stay such  suit-Appellate Court’s power to interfere  with  trial court’s discretion under 34.

HEADNOTE: The appellant society carried on business as public carriers on  the  Kanpur-Delhi route.  By an agreement in  1954  they appointed  the  respondents as their Managing Agents  for  a period  of  3  years.  But much before the  expiry  of  that period  they  terminated the  agreement.   Disputes  arising between the parties were under the agreement, to be  decided by arbitration as provided in the Co-operative Societies Act II  of  1912.  According to the relevant provisions  of  the said Act disputes were to be decided by the Registrar of Co- operative  Societies  or  by an  arbitrator  or  arbitrators appointed  by  him.  The respondents however  filed  a  suit against  the  Society  asking for  a  declaration  that  the termination of the agreement by the society was illegal  and for  a  mandatory injunction restraining  the  society  from terminating  the agreement.  The Society thereupon filed  an application  under  s.  34 of  the  Indian  Arbitration  Act praying for a stay of the aforesaid suit on the ground  that the respondents had agreed to arbitration as provided in the Co-operative Societies Act.  The trial Court stayed the suit but  the appellate Court set aside the trial  Court’s  order and  dismissed the application under s. 34.  The High  Court upheld  the  appellate Court’s order whereupon,  by  special leave, the society appealed to this Court. HELD:(i)  The High Court rightly refused to stay  the  suit. It  rightly observed that it would be a difficult  task  for the arbitrator to investigate as to which of the rules  made under the Co-operative Societies Act are consistent with and which of those rules are not consistent with the  provisions of  the  Indian Arbitration Act.  The  suit,  moreover,  was filed  as far back as 1954 and its stay would not be in  the interests of its speedy disposal. [219 G-220 B] (ii)It  is, of course, the normal duty of the court to  hold the  parties to the contract and to make them present  their disputes  to  the  forum of their  choice,  but  the  strict

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principle  of  sanctity  of  contract  is  subject  to   the discretion   of  the  Court  under  s.  34  of  the   Indian Arbitration  Act.  A party may be released from the  bargain if  he  can show that the selected arbitrator is  likely  to show  bias or there is sufficient reason to suspect that  he will act unfairly or that he has been guilty of unreasonable conduct. [222 D] In  the  present case the respondent had  alleged  that  the Registrar   Co-operative   Societies   had   approved    the termination  of  the contract of Managing  Agency  with  the plaintiff  and  the  Registrar  was  the  Chairman  of   the Defendant-Society.   In  the circumstances  the  High  Court Trust  be  held to have Properly  exercised  its  discretion under s. 34 of the Indian Arbitration Act in not granting  a stay of the proceedings in the suit. [222 E]. 216 Bristol  Corporation  v. John Aird & Co.  [1913]  A.C.  241, referred to.  (iii)If  it  appears  to  the,  appellate  Court  that   in exercising   its  discretion  the  trial  court  has   acted unreasonably  or capriciously or has ignored relevant  facts then  it would certainly be open to the Appellate  Court  to interfere  with  the trial court’s exercise  of  discretion, [222 H] Charlies  Osenton  &  Co.  v.  Johnston,  [1942]  A.C.  130, referred to.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 426 of 1964. Appeal  by special leave from the judgment and  order  dated February  22, 1962 of the Punjab High Court (Circuit  Bench) at Delhi in Civil Revision No. 311-D of 1958. S.P. Sinha and Inder Sen Sawhney, for the appellant, K.   K. Jain and Bishambar Lal, for the respondent. The Judgment of the Court was delivered by Ramaswami, J. This appeal is brought, by special leave, from the  judgment  of the Punjab High Court dated  February  22, 1962  in Civil Revision No. 331-D of 1958 whereby  the  High Court  upheld  and confirmed the judgment of  the  Appellate Court and set aside the judgment of the trial court  staying proceedings in the suit. The  Uttar Pradesh Co-operative Federation Limited  (herein- after referred to as the ’Society’) was registered under the Cooperative Societies Act No. II of 1912 at Lucknow and  was carrying  on  the  business of  plying  public  carriers  on Kanpur-Delhi route.  The Society had been granted, for  this purpose,  permits by the Uttar Pradesh Government and  Delhi Administration  for  seven vehicles.  In  March,  1954,  the Society  entered into an agreement with  the  plaintiffs-M/s Sunder Brothers-through Bimal Kumar Jain and Dhan Kumar Jain by which they were appointed as Managing Agents for carrying on  the  business  as public carriers.   The  terms  of  the Managing  Agency agreement were embodied in a  letter  dated March  2,  1954  written by the Secretary  of  the  Society. Clause 28 of the agreement reads as follows:-               "That in the event of there being any  dispute               regarding  the  terms and conditions  of  this               agreement  and your appointment  hereunder  as               Managing  Agents of the aforesaid business  or               any  matter arising from and relating  thereto               or  the subject matter thereof,  such  dispute               shall  be decided by arbitration  as  provided               under  Co-operative Societies Act II  of  1912

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             and you undertake and agree to be bound by the               provisions for arbitration in the said Act". The agreement was to last for a period of three years but on July  5,  1954 the Society terminated the agreement  by  its letter dated July 5, 1954, The plaintiffs therefore  brought a suit on August 217 18, 1954 in the Court of the Subordinate Judge, First Class, Delhi praying for a declaration that the termination of  the Managing Agency agreement by the Society was illegal and the plaintiffs  were  entitled  to  continue  the  business   of Managing Agents in accordance with the terms and  conditions of  the  agreement.  The plaintiffs prayed for  a  mandatory injunction    restraining   the    defendant-Society    from terminating the agreement.  The Society made an  application under  S. 34 of the Indian Arbitration Act, 1940 before  the Subordinate Judge, Delhi, for an order for staying the suit. It  was claimed by the Society that the suit was  not  main- tainable, because under S. 51 of the Co-operative  Societies Act the dispute was to be adjudicated upon by the  Registrar of  Co-operative  Societies.   In  the  alternative  it  was alleged  that by agreement between the parties  the  dispute was to be referred to arbitration in accordance with the Co- operative Societies Act and consequently proceedings  should be  stayed.  The trial court stayed the proceedings  but  on the  appeal of the plaintiffs the order of the  trial  court was set aside and the application of the Society under S. 34 of  the Indian Arbitration Act was dismissed.   The  Society moved  the  Punjab High Court in revision but  the  revision application  was  dismissed  and  the  order  of  the  lower appellate court was confirmed. It  is  necessary  at this stage to  set  out  the  relevant provisions  of the Indian Arbitration Act (Act 10 of  1940). Section 34 of this Act states:               "34.   Where  any  party  to  an   arbitration               agreement  or  any person claiming  under  him               commences  any legal proceedings  against  any               other  party  to the agreement or  any  person               claiming  under him in respect of  any  matter               agreed to be referred, any party to such legal               proceedings  may, at any time before filing  a               written statement or taking any other steps in               the   proceedings,  apply  to   the   judicial               authority  before  which the  proceedings  are               pending  to  stay  the  proceedings,  and   if               satisfied  that there is no sufficient  reason               why  the  matter  should not  be  referred  in               accordance with the arbitration agreement  and               that  the applicant was, at the time when  the               proceedings were commenced, and still remains,               ready  and willing to do all things  necessary               to the proper conduct of the arbitration, such               authority  may  make  an  order  staying   the               proceedings".               Section 46 provides as follows:               "46.  The provisions of this Act, except  sub-               section  (1) of section 6 and sections 7,  12,               36  and 37, shall apply to  every  arbitration               under  any other enactment for the time  being               in force, as if the arbitration were  pursuant               to an 5301- 16(a)               218                arbitration   agreement  as  if  that   other               enactment   were  an  arbitration   agreement,               except in so far as this Act is in. consistent

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             with  that other enactment or with any  rules,               made thereunder".               Section 47 reads as follows:               "47.  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:               Provided  that an arbitration award  otherwise               obtained  may  with  the consent  of  all  the               parties interested be taken into consideration               as a compromise or adjustment of a suit by any               Court before which the suit is pending". There was some controversy in the lower courts as to whether the  arbitration  under  cl.  28  of  the  agreement  was  a statutory  arbitration  and  whether s.  46  of  the  Indian Arbitration  Act was applicable to the case.  It was  argued by  Mr.  Sinha on behalf of the  appellant-Society  that  no statutory arbitration is created by cl. 28 of the  agreement but the parties had merely agreed to act in accordance  with the provisions of the Co-operative Societies Act (Act 11  of 1912) and the Rules made thereunder.  It was contended  that the parties had merely incorporated the statutory provisions by  reference  in their agreement and s. 47  of  the  Indian Arbitration Act will, therefore, be applicable to the  case. This  legal position was not controverted by Mr. K. K.  Jain appearing on behalf of the respondent.  The only question in debate  was whether the lower court rightly exercised  their jurisdiction  under s. 34 of the Indian Arbitration  Act  in not granting the stay of the proceedings of the suit. If  the  arbitration  agreement is not to be  treated  as  a statutory arbitration under s. 46 of the Arbitration Act but an  arbitration agreement under s. 47 of the Act,  then  the procedure  to  be followed for the  arbitration  under  that agreement  will  be  that provided  under  the  Co-operative Societies Act and the Rules framed thereunder.  Under S.  47 of  the  Indian  Arbitration Act  the  arbitration  will  be governed  only by such rules of the  Co-operative  Societies Act and rules framed thereunder as are not inconsistent with the provisions of the Indian Arbitration Act.  In this  con- nection  it is necessary to refer to Rules 115, 116 and  117 of  the Co-operative Societies Rules framed under s.  43  of the Co-operative Societies Act.  Rule 115 states as follows:               "Any  dispute  touching  the  business  of   a               registered society (i) between members or past               members  of  a  society  or  persons  claiming               through  a  member  or past  member,  (ii)  or               between  a member or a past member or  persons               so  claiming and the society or its  committee               or               219               any officer of the society, (iii) between  the               society  or its committee and any  officer  of               the  society,  and (iv) between  two  or  more               registered societies, shall be decided  either               by  the Registrar or by arbitration and  shall               for that purpose be referred in writing to the               Registrar".               Rule 116 provides:               "The Registrar on receipt of a reference shall               either decide the dispute himself, or refer it               for decision to an arbitrator or to two  joint               arbitrators  appointed  by  him  or  to  three               arbitrators,  of whom one shall be  nominated,

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             by each of the parties to the dispute and  the               third by the Registrar who shall also  appoint               one of the arbitrators to act as chairman".               Rule 117 states:               "In  case  it  is  decided  to  appoint  three               arbitrators-               (i)   The  Registrar  shall  issue  a   notice               calling on each of the parties to nominate one               person  as its nominee within 15 days  of  the               receipt of the notice.                (ii)  if  a party consists of more  than  one               person,  such persons shall jointly make  only               one nomination.                (iii) if more than one person is nominated by               a party the Registrar shall appoint either one               of  the nominees or some other person  of  his               own choice as the nominee of that party,                (iv)   if  a  party  fails  to  nominate   an               arbitrator within the appointed time or if its               nomination  is  not valid  the  Registrar  may               himself make the nomination,                (v)  if  one  of  the  arbitrators  fails  to               attend  or refuses to work as  an  arbitrator,               the  remaining  arbitrators  may  decide   the               dispute.   If two of the arbitrators  fail  to               attend  or refuse to work as  arbitrators  and               the  claim  is  not  admitted  the   remaining               arbitrator   shall  refer  the  case  to   the               Registrar  who  may authorise him to  give  an               award  or appoint one or more  arbitrators  to               proceed,  with the reference or he may  decide               the case himseff".  It  has been observed by the High Court that it would be  a difficult  task   for the arbitrator to  investigate  as  to which of the rules made under the Co-operative Societies Act are  consistent  with  and  which of  those  rules  are  not consistent with the provisions of the Indian Arbitration Act and therefore it was, a fit case in which discretion of  the court  under s. 34 of the Indian Arbitration Act  should  be exercised  in not staying the proceedings of the  suit.   In our  opinion,  the  reasoning of the  High  Court  has  much substance. 220 There is also another reason why there should not be a  stay of  the  proceedings under S. 34 of the  Indian  Arbitration Act.   The suit was filed in-1954 and, though 12 years  have elapsed, nothing has been, done in the suit and it will  not be  in the interest of speedy disposal of the  suit  between the  parties-if  the  proceedings in the  suit  are  further stayed and the parties are referred to arbitration. There is also another ground why the proceedings in the suit should not be stayed in the present case.  If Rules 11.5 and 116 of the Co-operative Societies Rules are applicable  then the reference of the dispute has to be made to the Registrar of  the  Co-operative Societies who may  either  decide  the dispute himself or refer the dispute to an arbitrator or two joint arbitrators appointed by him or to three  arbitrators, of whom one shall be nominated by each of the parties to the dispute  and  the  third by the  Registrar  who  shall  also appoint  one of the arbitrators to act as Chairman.   It  is alleged by the respondent that the Registrar of Co-operative Societies is ex-officio President of the Society and it  was with  his  approval  that  the  agreement  in  dispute   was terminated.  It was also pointed out that the Registrar  was the chief controlling and supervising officer of the Society

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under  its  bye-laws.  It was submitted for  the  respondent that  the  Registrar may not, therefore, act fairly  in  the matter and it is improper that he should be an arbitrator in the  dispute between the parties.  In our opinion, there  is much validity in this argument.  The legal position is  that an  order  of  stay  of  suit under  s.  34  of  the  Indian Arbitration Act will not be granted if it can be shown  that there  is good ground for apprehending that  the  arbitrator will  not  act fairly in the matter or that it is  for  some reason  improper  that he should arbitrate  in  the  dispute between  the parties.  It is, of course, the normal duty  of the  Court to hold the parties to the contract and  to  make them present their disputes to the forum of their choice but an  order  to stay the legal proceedings in a Court  of  law will not be granted if-it is shown that there is good ground for apprehending that the arbitrator will not act fairly  in the  matter or that it is for some reason improper  that  he should arbitrate in the dispute.  Reference may be made,  in this  connection, to the decision of the House of  Lords  in Bristol  Corporation  v. John And & Co.(1).  This  case  was concerned with an application for stay of proceedings  under s.  4 of the English Arbitration Act which is similar to  s. 34  of the Indian Arbitration Act.  Upon the  settlement  of the  final  account  there arose a bona fide  dispute  of  a substantial   character  between  the  contractor  and   the engineer,  who  was  the  arbitrator   under  the  contract, involving  a  probable conflict of evidence  between,  them. The House of Lords held, affirming the decision of the (1)[1913] A,C. 241. 221 Court  of appeal, that the fact that the  engineer,  without any  fault  of his own, must necessarily be  placed  in  the position of a Judge and a witness is a sufficient reason why the  matter  should not be referred in accordance  with  the contract.  At pp. 247-248 of the report Lord Atkinson stated as follows:               "Whether it be wise or unwise, prudent or  the               contrary, he has stipulated that a person  who               is  a  servant  of the  person  with  whom  he               contracts  shall be the judge to  decide  upon               matters upon which necessarily that arbitrator               has  himself formed opinions.  But though  the               contractor is bound by that contract, still he               has  a right to demand  that,  notwithstanding               those  preformed views of the  engineer,  that               gentleman   shall  listen  to   argument   and               determine  the  matter  submitted  to  him  as               fairly  as he can as an honest man; and if  it               be shown in fact that there is any  reasonable               prospect  that he will be so biased as  to  be               likely   not  to  decide  fairly  upon   those               matters,  then  the contractor is  allowed  to               escape  from  his  bargain  and  to  have  the               matters  in  dispute  tried  by  one  of   the               ordinary  tribunals of the land.  But I  think               he has more than that right.  If, without  any               fault of his own, the engineer has put himself               in  such a position that it is not fitting  or               decorous  or  proper  that he  should  act  as               arbitrator  in  any  one  or  more  of   those               disputes,  the  contractor has  the  right  to               appeal to a Court of law and they are entitled               to  say,  in answer to an application  to  the               Court to exercise the discretion which the 4th               section of the Arbitration Act vests in  them,

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             "We  are not satisfied that there is not  some               reason  for not submitting these questions  to               the  arbitrator".   In the  present  case  the               question is, has that taken place"?               Lord  Moulton after tracing the growth of  the               law   of   arbitration  made   the   following               observations in his speech:               "But,  My  Lords, it must be  remembered  that               these  arbitration  clauses must be  taken  to               have  been  inserted with due  regard  to  the               existing  law of the land, and the law of  the               land  applicable to them is, as I  have  said,               that it does not prevent the parties coming to               the  Court,  but only gives to the  Court  the               power  to  refuse  its  assistance  in  proper               cases.  Therefore to say that if we refuse  to               stay  an  action we are not carrying  out  the               bargain  between the parties does  not  fairly               describe  the position.  We are  carrying  out               the bargain between the parties, because  that               bargain  to substitute for the Courts  of  the               land  a domestic tribunal was a  bargain  into               which  was written, by reason of the  existing               legislation, the condition that it should only               be  enforced if the Court thought it a  proper               case for its being so enforced".               222 Lord   ;Parker,  after  pointing  out  that  s.  4  of   the Arbitration Act’ gave a discretionary power to the Court  to be  exercised  after  it was’ satisfied that  there  was  no sufficient  reason why the matter should not be referred  in accordance  with  the submission, expressed  the’  following views:                "In  making  up its mind on  this  point  the               Court must of course give due consideration to               the  contract  between  the  parties,  but  it               should, I think, always be remembered that the               parties  may  have agreed  to  the  submission               precisely  because of the discretionary  power               vested in the Court under the Arbitration Act.               They  may, very well, for instance, have  said               to  themselves, ’If in any particular case  it               would  be unfair to allow the  arbitration  we               are  agreeing  to proceed we  shall  have  the               protection of the Court". It  is  manifest that the strict principle  of  sanctity  of contract is subject to the discretion of the Court under  s. 34 of the Indian Arbitration Act, for there must be read  in every  such agreement an implied term or condition  that  it would be enforceable only if the Court, having due regard to the  other  surrounding  circumstances, thinks  fit  in  its discretion to enforce it.  It is obvious that a party may be released  from the bargain if he can show that the  selected arbitrator is likely to show bias or by sufficient reason to suspect that he will act unfairly or that he has been guilty of  continued  unreasonable  conduct.  As  we  have  already stated, the respondent has alleged in the present case  that the  Registrar,  Co-operative  Societies  has  approved  the termination  of  the contract of Managing  Agency  with  the plaintiff  and the Registrar was the chairman of the  defen- dant-Society.   We are accordingly of the opinion  that  the High Court properly exercised its discretion under s. 34  of the  Indian  Arbitration Act in not granting a stay  of  the proceedings in the suit. It  is well-established that where the discretion vested  in

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the Court under s. 34 of the Indian Arbitration Act has been exercised  by the lower court the appellate court should  be slow to interfere with the exercise of that discretion.   In dealing  with the matter raised before it at  the  appellate stage the appellate court would normally not be justified in interfering with the exercise of the discretion under appeal solely on the ground that if it had considered the matter at the  trial stage it may have come to a contrary  conclusion. If  the  discretion has been exercised by  the  trial  court reasonably  and  in  a judicial manner  the  fact  that  the appellate  court would have taken a different view  may  not justify  interference  with the trial  court’s  exercise  of discretion.  As is often said, it is ordinarily not open  to the  appellate  court  to substitute  its  own  exercise  of discretion for that of the trial Judge; but if it appears to the,  appellate court that in exercising its discretion  the trial  court has acted unreasonably or capriciously  or  has ignored  relevant facts then it would certainly be  open  to the appellate court 223 to interfere with the trial court’s exercise of  discretion. This  principle  is  well-established;  but,  as  has   been observed by Viscount Simon, L. C., in Charles Osenton &  Co. v. Johnston(1):               "The  law  as to the reversal by  a  court  of               appeal  of an order made by a Judge  below  in               the  exercise  of  his  discretion  is   well-               established, and any difficulty that arises is               due  only to the application  of  well-settled               principles in an individual case". For these reasons we hold that the appellant has made out no case  for our interference with the order of the High  Court refusing stay of the proceedings in the suit under S. 34  of the  Indian Arbitration Act.  The appeal  accordingly  fails and is dismissed with costs. Appeal dismissed. 224