Easun Engineering Co. Ltd. Madras vs The Andhra Pradesh State Electricity Board

Madhava Reddy, J.—These two appeals arising under the Arbitration Act are directed against the order dated 24-1-1977 of the Additional Judge, City Civil, Court Hyderabad, in O.Ps. 136/75 and 135/75. O.P. 136/75 is a petition filed by the Andhra Pradesh State Electricity Board the plaintiff in O.S. No. 150/75, under Sections 31 (2), 33 and 35 of the Arbitration Act, to declare that there was no enforceable arbitration agreement between the parties and that the second respondent is not competent to act as an arbitrator. The first respondent in the petition is the 2nd defendent in the suit. O.P. No. 165/75 is a petition filed by the defendant in O.S. 150/75 under Sec. 34 of the Arbitration Act, requesting for stay of all proceedings in the said suit and for a direction to the arbitrator to resume the arbitration proceedings. To this petition, only the plaintiff in O. S. 150/75 was impleaded as a respondent.

Both the petitions were opposed by the respondent therein. While no witnesses were examined, several documents were marked by consent in the said petitions. The learned II Addl. Judge, on a consideration of the several pleas raised by the parties and the documents, held (1) that the arbitration agreement is not available for enforcement and so, the second respondent is not competent to function as arbitrator, (2) that the appointment of the second respondent as sole arbitrator is liable to be set aside in view of the above finding, (3) that the petitioner (appellant herein) by his own conduct is estopped from invoking the arbitration clause in Ex.A-4 since he has waived it by filing four suits at Madras and the petitioner is disentitled to invoke Sec. 34 of the Arbitration Act on the ground of estoppel and waiver, and (4) O.S. 150/75 is not liable to be stayed under Sec. 34 of the Arbitration Act. In the result. O.P. 136/75 was allowed with costs against respondent No. 1 and O. P. No. 165/75 was dismissed with costs.

A few facts necessary to appreciate the contentions raised in these two appeals preferred by the defendant in the suit (petitioner in O. P. 165/75 and 1st respondent in O. P. 136/75) may be stated. It would be convenient to refer to the parties, the plaintiff in O. S. 150/75 as the first respondent, M/s. Easun Engineering Company ltd, who is the sole defendant in the said suit as the appellant and V.V. Raghavan the second respondent in O.P. 136/75, the sole arbitrator appointed by the defendant, as the second respondent.

The first respondent is a statutory Corporation constituted u/s 5 of the Electricity Supply Act for the purpose of supplying electricity to the consumers within the State of Andhra Pradesh. It invited tenders for the supply of power transformers of varying capacities. The appellant having its registered office at Madras submitted its tenders in response to the said invitation and they were accepted by the first respondent and four separate orders were placed with the appellant. As per the purchase order, Ex. A-4, which incorporates the terms and conditions of the purchase, the appellant furnished bank guarantees for various sums towards earnest money, security deposit and performance guarantees. The first respondent was also required to advance 10% of the amount of the contract to the appellant. It is not necessary to go into the particulars of the terms and conditions of the contract for the purpose of these appeals. Suffice to note that there were allegations of breach of contract by both parties and a dispute arose between them as to who had committed the breach and who among them, was liable to pay damages to the other. The said contract contained the following clause for reference of the disputes to arbitration : --

Clause 38 of general conditions of contract for plant, machinery and manufactured equipment :--

Arbitration :-- If at any time any question, dispute or difference whatsoever shall arise between the purchaser or the Engineer and the other party upon or in relation to or in connection with the contract either party may forthwith give to the other, notice in writing of the existence of such question, dispute or difference and the same shall be referred to the arbitration of two persons, one to be nominated by the purchaser and other by other party or failing agreement between these two to an umpire appointed by them. Such submission shall be deemed to be a submission to arbitration within the meaning of the Indian Arbitration Act, 3940, or any statutory modification thereof. The award of the arbitrators or umpire shall be final and binding upon the parties. Upon every or any such reference, the costs of and incidentals to the reference and award respectively shall, subject to the conditions that the amount of such costs to be awarded to either party shall not in respect of a monetary claim exceed the percentage set out below of any such award, irrespective of the actual fees, costs and expenses incurred by either party be in the discretion of the arbitrators or umpire, who may determine the amount thereof, or direct the same to be taxed as between solicitor, and client or as between part and party and shall direct by whom and to whom, and in what manner the same shall be borne and paid. Work under the contract shall, if reasonably possible, continue during the arbitration proceedings and no payment due or payable by the purchaser shall be withheld on account of such proceedings.

The percentages above referred to in this clause are five per cent on any such monetary award clause or which does not exceed Rs. 10.000/-; three per cent on the next Rs. 40,000/- or any part thereof, two per cent on the next Rs. 50,000/- or any part thereof; and (me per cent on any excess over Rs. 1,00,000/-.

The banks that furnished guarantees on behalf of the appellant as per the contract are the Andhra Back Ltd., Madras, having its Head Office in Andhra Pradesh, and the Indian Bank, Madras. The bank guarantees furnished by the Andhra Bank Ltd. are marked as Exs. A-6 to A-10 and those furnished by the Indian Bank are marked as Exs. A-62 to A-69.

Under Ex. A-26, dated 21-8-1974, the first respondent called upon the appellant to supply the transformers covered by the purchase order Ex. A-4, within 15 days and informed them that in case of default, the purchase would be made from third parties at the risk of the appellant. By a telex message (Ex A-27), dated 7-9-1974 the appellant sought one week''s time for reply. The first respondent informed the appellant by letter, dated 13-9-1974 (Ex. A-28 that it refused to grant the time sought and called upon the appellant to depute their representatives with definite delivery schedule. The appellant, thereupon by letter, dated 14-9-1974 (Ex. A-29) rescinded the contract. Thereupon the first respondent called upon the guaranteeing banks by letters, dated 24-9-1974 (Ex. B-9) and 11-10-1974 (Ex. A-31) remit the amount. It also sent telegrams on 11-10-74 to the banks concerned.

The appellant at this stage filed four suits--C.S. Nos. 200/74, 201/74 and 203/74 in the Madras High Court, and O.S. 899/74 in the City Civil Court, Madras, against the first respondent and the respective banks praving for a declaration that the first respondent is not entitled to encash the bank guarantees and for a further declaration that the plaintiff therein (appellant herein) has not incurred any liability in respect of the contract entered into by it with the first respondent, and for an injunction restraining the banks from making any payment to the first respondent in pursuance of the said guarantees. To the suit filed in the City Civil Court, Madras, the New India Assurance Co. Ltd. was also made a party. The first suit (C.S. 200/74) was filed on 16-10 1974 and the subsequent three suits mentioned above viz., C.S. 201/74, 203/74 and O.S. 8999/74 were filed respectively on 21-9 1974, 2.9-10-1974 and 21-11-1974. In ail the suits, applications were made for an interim injunction rest (sic) the banks from paying any amount to the first respondent under the guarantees furnished by them. But before the injunction order was served, the Andhra Bank Ltd. which has its Head Office in Andhra Pradesh made payment of the guarantee amount to the first respondent white the other bank did not. The first respondent filed its written statement in all the four suits.

White the matter stood thus, the appellant-company by letter, dated 8-2-1975 (Ex. A-35) informed the first respondent that it (the appellant) was, invoking the arbitration clause, and appointed V.V. Raghavan, a retired Judge of the Madras High Court as an arbitrator and called upon the first respondent to nominate its arbitrator. The appellant claims that it sent another Utter on 15-2-1975 and also a notice, both of which, according to the first respondent, were never received by it. After obtaining the interim injunctions in the said suits, the appellant once again by its letter, dated 30-3 1975 (Ex. A-38) purported to invoke the arbitration clause and called upon the first respondent to nominate its arbitrator. The first respondent then filed OS. 150/75 on 14-4-75 (Ex. B18) for the recovery of Rs. 1,69,63,860/- as damages, against the appellant for the breach of the contract (Ex A-(sic)). The appellant''s counsel addressed a letter, dated 2-5-1975 (Ex. A-43) to the arbitrator, the second respondent herein, with a copy to the first respondent, intimating them that in as much as the first respondent had not nominated its own arbitrator the second respondent had become the sole arbitrator. The second respondent now, as the sole arbitrator, called upon both the parties under Ex. A.44, dated 4 5-1975 to appear before him on 14.5.1975 at 11-00 A.M. at Hotel Nagarjuna, Hyderabad. The first respondent sent a reply Ex. A-45, dated 7-5-1975 to the arbitrate that the subject matter of the dispute between the parties was already comprehended by O.S. 150/75 and the four suits filed by the appellant in Madras, and requested him to desist from proceeding further in the matter. However the second respondent by letter, dated 10-5-1975 (Ex. A-46) informed the parties that he intended to proceed with the arbitration. The first respondent sent a telegram on 13-5-1975 (Ex. B 21) intimating that it does not recognise the second respondent as the duly constituted arbitrator. The second respondent communicated the minutes (Ex. A-48) on 14-5-19/5 to the first respondent fixing the next date of hearing on 12-7-1975. The first respondent thereupon filed O.P. 136/75 on 19-6-1975 to set aside the appointment of the second respondent as the sole arbitrator and also to stay the arbitration proceedings. Stay of all further proceedings was ordered by the II Addl. Judge, City Civil Court on 9-7-1975. The appellant then filed O.P. 165/75 on 14-8-1975 to stay the proceedings in O.S. 150/75.

In view of the above facts and the contentions raised by the parties as well as the findings recorded by the learned trial judge, the point that arises for consideration in these two appeals preferred by the defendant in O.S. 150/75 are: --

Whether there is a subsisting and enforceable agreement for arbitration which could be invoked by the appellant--one of the parties to the contract (Ex. A-4);

Whether the appellant have waived its right to invoke the arbitration agreement or is estopped from doing so; and

Whether the order made by the lower Court is discretionary and calls for interference by the appellate court.

Points No. 1 & 9:--The agreement, Ex. A-4 and the trems and conditions there of are not in dispute. That the said contract also incorporates an arbitration clause is admitted. There is also no dispute that there is a breach of the agreement. Although each party alleges that the other party is guilty of the breach, the fact remains that there is a breach of the contract. As the parties are not ad idem as to who has committed the breach and of the two who is entitled to any damages for the breach of the contract, the dispute has necessarily to be referred to arbitration as envisaged by Clause 18 of the Agreement extracted above; and it for any reason, the arbitration clause cannot be invoked, the matter has to be decided by a civil court.

As there were allegations by each party that the other party has committed breach of the agreement and as the first respondent, purporting to exercise its right under the agreement and the term relating to the guarantees furnished by the banks, sought to encash the guarantees, the appellant rushed to the court to restrain him by filling the four suits, three in the Madras High Court and one in the City Civil Court, Madras as and seeking interim injunction. There can be little doubt that these suits were filed for the enforcement of the rights purporting to be arising under Ex. A4 of the Contract Though the suits do not cover the entire claim or relief to which the appellant purports to be entitled to as a result of the breach of the contract alleged to have been commuted by the first respondent, the reliefs, namely; (1) for declaration that the Board is not entitled to encash the bank guarantees, (2) for a declaration that the plaintiff has not incurred any liability in respect of the contract and (3) for an injunction restraining the banks from making any payment to the Board in pursuance of the Bank guarantees, claimed by the appellant are "in relation to or in connection with the contract" The Arbitration clause provides for reference of any question, dispute or difference whatsoever arising between the purchaser and the Engineer, i.e., the first respondent and the appellant in relation to or in connection with the contract. It does not stipulate that on]y when all the reliefs to which a party is entitled to as a consequence of the breach of the contract by the other party are claimed, the dispute should be referred to arbitration. In fact, in the same clause it is provided that while one of the disputes may be referred to arbitration, the other part of the contract may continue to subsist between the parties and the supplies may be made end payments received. However, as the contract itself has been rescinded by the appellant and the appellant has chosen to file suits, though for limited reliefs, it cannot be said that any portion of the contract is still subsisting between the parties. If at all they are entitled to damages for breach of the contract, for, none of the parties is keen upon specific performance of the contract. Hence for all or any of the reliefs which a party to the contract is entitled to, that party bad a right to invoke the arbitration clause and appoint an arbitrator. However, the appellant who took the first step for obtaining the reliefs which it claimed to be entitled against the other party to the contract, instead of invoking its right to appoint an arbitrator under the said clause, rushed to the Court and filed the four suits referred to above. It held thus, by its conduct, waived its right to invoke the arbitration clause.

It was however, contended by the learned counsel for the appellant that after the defendant filed the written statement and the defendant-first respondent called upon the appellant to withdraw its letters dt 8-2-75 and 15-2-75 the appellant withdrew the said letters and was prepared to negotiate. The appellant accordingly wrote to the first respondent on 30-3-75 and it is only when the first respondent failed to negotiate that the appellant named the arbitrator on its behalf on 22-11-75, and requested the arbitrator to continue the arbitration proceedings It cannot however be ignored that the four suits were filed long before the appellant invoked the arbitration clause and called upon the first respondent to appoint an arbitrator. While the first suit was filed on 16-10-1974 and, within a period of one month thereafter the three other suits were filed, the arbitration clause was invoked by the appellant for the first time on 8-2-1975. Hence the subsequent letter dated 30-3-1975 addressed by the appellant expressing its readiness and willingness to negotiate cannot take away the effect of the institution of the four suits. May be, after the suits were filed and interim injunction was obtained in three of them, the appellant was ready and willing to the reference of the disputes to the arbitrator. That is not enough. The appellant should have been ready and willing to refer the matter to arbitration when the dispute arose and should have been always ready and willing to do all things necessary for the proper conduct of arbitration. The institutions of these suits positively demonstrates the appellant''s unwillingness to the disputes being settled by recourse to arbitration as provided under the arbitration clause.

Russell On Arbitration (8th Edn) notes at page 149:--

A plaintiff, by bringing an action in respect of a matter agreed to be referred, shows that he is not at the time when the proceedings are commenced, ready and willing to do all things necessary to the proper conduct of the arbitration, and therefore is not entitled subsequently to apply for a stay.

P.B. Mukherji, J. in W. wood & Sons vs. Bengal Corporation AIR 1956 Calcutta 238 held:

An action in a court of law is inconsistent with readiness and willingness to go to arbitration. A party by bringing an action in respect of a matter agreed to be referred shows that he is not at the time when proceedings are commenced ready and willing to do all things necessary to the proper conduct of the arbitration and therefore is not entitled subsequently to apply for a stay under S. 34.

In Anderson Wright Ltd. Vs. Moran and Company, Mukherjee J. speaking for the Court held that for any stay of the suit under sec. 34 the party applying must satisfy the court not only that he is but also was at the commencement of the proceedings ready and willing to do everything necessary for the proper conduct of the arbitration.

This position was reiterated in the latest decisions of the Supreme Court in Food Corporation of India Vs. Thakur Shipping Co. and Others, in the following words:--

An applicant for stay of legal proceedings under this section must satisfy the court not only that he is but also was at the commencement of the proceedings ready and willing to do everything necessary for the proper conduct of the arbitration. Thus the readiness and willingness must exist not only at the time an application for stay is made but also at the commencement of the legal proceedings.

Where a party to an arbitration agreement chooses to maintain silence in spite of repeated requests by the other party to take steps for arbitration, the case is not one of mere inaction. Failing to do so is a positive gesture signifying unwillingness or want of readiness to go to arbitration.

Judged in the light of the principles enunciated by the Supreme Court it is abundantly clear that the appellant far from being ready and willing to invoke the arbitration clause, chose to repudiate it or in any case waived its right thereunder by rushing to court to enforce the rights arising from the alleged breach of contract by the first respondent. Thus, on and from the day of the institution of the suits it is clear that the appellant was not willing and ready to go to arbitration for the settlement of the dispute Any readiness or willingness on its part after obtaining the interim relief and injunction in the suits cannot again clothe it with the right to invoke the arbitration clause, more so when the first respondent, who is the first defendant in the above suits, had accepted the position taken up by the plaintiff (Appellant) in instituting the suits and had without invoking the arbitration clause and praying for stay of the suits under Sec. 34 of the Arbitration Act, itself filed written statement in those suits. In VIEW of the conduct of the appellant in the said suits, the defendant in these suits altered its position by not exercising the right conferred on it by Sec. 34 of the Act and filling the written statement. The appellant, therefore, must not only be deemed to have waived its right to invoke the arbitration clause but must also be held to be estopped from exercising that right even if that right were to subsist after the institution of the said suits.

It was however, argued by Mr. Subramanya Iyer that under the Contract (Ex A-4), for working out the rights of the parties, the courts in Hyderabad alone has jurisdiction and the courts at Madras had no jurisdiction in entertain a claim and consequently, the institution of the four suits in the Madras High Court and the City Civil Court at Madras cannot be deemed to be an abandonment of its right to invoke the arbitration clause. It must be pointed cut that the appellant company which has chosen to invoke the jurisdiction of the said courts in filing the said, for working out the right rising under the contract cannot be allowed to blow hot and cold. In filing the suits in the courts at Madras it has stated that those courts had jurisdiction to entertain the suits and it had submitted to their jurisdiction while it was the defendent first respondent herein who questioned the jurisdiction of these courts. For the purpose of these petitions, the appellant cannot be allowed to contend that the courts at Madras had no jurisdiction to entertain the suits. In any event, that is not a relevant factor for determining whether the appellant has waived its right to invoke the arbitration clause or is estopped from exercising that right.

Point No. 3:--Under Sec. 34 of the Arbitration Act any party to the arbitration agreement or a person claiming under him may at any time before filing a written statement or taking any other step in any proceeding apply to the judicial authority before whom the proceedings are pending to stay the said proceedings. Upon such an application, if the court is satisfied that there is no sufficient reason why the matter should not be referred in accordance with the arbitration agreement and if the court further finds, that the party so applying was always ready and willing and continue to be ready and willing to do all things necessary to the proper conduct of the arbitration proceedings may make an order staying the proceedings. While Section 34 makes it obligatory on the person invoking the jurisdiction of the court to be vigilant and apply for stay of the proceedings under Sec. 34 at the earliest opportunity, the court is given a discretion either to stay or refuse to stay proceedings. However, if the court is inclined to order stay of proceedings, it must be satisfied mat the party applying was always ready and willing to do all things necessary for the proper conduct of the proceedings and it should so find that there is no sufficient reason why the matter should not be referred to arbitration as per the agreement. In other words, it can take into account various factors having regard to which reference to arbitration may not be found to be advisable in suit of the other requirements of the section being satisfied. The Supreme Court in Uttar Pradesh Co-operative Federation Ltd. Vs. Sunder Brothers of Delhi, dealing with the aspect as to what extent the question of stay of proceedings before the court lay within the discretion of the court, held:--

The since principle of sanctity of contract is subject to the discretion of the court under Sec. 34 of the Indian Arbitration Act, for there must be read with 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.

The Court then went on to point out some of the circumstance where the court would refuse the relief to stay of proceedings under Sec. 34, in the following words:--

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, Consequently, an order of stay of suit under Sec. 34 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.

Thus, it is indisputable that even if the other conditions of Sec. 3 are satisfied, the court may, having regard to the facts and circumstances of each case in its discretion refuse to grant stay of further proceedings in a suit. The appellant who has invoked the jurisdiction of the court, as already pointed out, was the first person among the parties to the contract to rush to the Court. It had also obtained interim injunction in the three of the suits though it was unsuccessful in one of the suits. The injunction order obtained by the appellant, in the said three suits is still subsisting. The suit comprehend the entire gamut of the dispute between the parties, for the declaration claimed is that first respondent is not entitled to enforce the terms relating to the payment of the amount of guarantee money and also that the appellant has not incurred any liability in respect of the contract entered into between the parties. How far that court has jurisdiction to grant the relief prayed for is another matter, but the fact remains that the question as to who has committed breach of the contract falls for determination before that court. The appellant has not chosen to refer this aspect of the contract to an arbitrator. The first respondent, accepting that position, has not only filed the written statement in the above suits, but has also instituted a comprehensive suit in the court as Hyderabad, which even according to the appellant, is the only court that has jurisdiction to entertain the suit and grant reliefs to other of the parties to the contract. The proceeding have been already pending in the Madras Courts now for last three years and in the Hyderabad Court for the last two years. In these circumstances if the lower court has refused to grant stay, it would be wholly in appropriate for this court to interfere with the discretionary order refusing to stay that suit and holding that the appellant is no longer entitled to invoke the arbitration clause and declaring that the second respondent cannot proceed with the arbitration in respect of the contract, Ex.-A-4. We, therefore, see no reason to interfere with order under appeal. These two appeals, therefore, fall and accordingly dismissed with costs.

After the pronouncement of the above judgment, the learned counsel for the appellant requested that leave may be granted u/s 39 (2) of the Arbitration Act for appeal to the Supreme Court. Section 39 (2) reads as follows:-- No second appeal shall lie from an order passed in appeal under this section but nothing in this section shall affect or take away any right of appeal to the Supreme Court.

It is clear from the said provision that the provision by itself does not confer any right of appeal to the Supreme Court against the appellate order of this Court. It merely declares that the right of the Supreme Court is not taken away. The only other provisions which the learned counsel could point out under which he could ask for leave of this court to apply to the Supreme Court, is Art. 133. So far as this article is concerned, it has been the practice of this court to require the unsuccessful party to the appeal to file a formal petition before such request could be considered. It has never been the practice of this court to entertain an oral request in this behalf. Since Sec. 39 (2) does not provide for any oral request for leave to appeal to the Supreme Court being made immediately after the pronouncement of the judgment. Since the practice of this court has been to require the party to file a petition under Art. 133 of the Constitution before leave is either granted or refused against any final order of this court, the petitioner may, if so advised, file such a petition. The oral request that is now made is, therefore, rejected.