V.B. RAJU

(1) One of the parties to an agreement which contained a clause relating to arbitration of disputes that may arise between the parties file a suit without getting the dispute settled by arbitration. The suit was stayed and arbitrators were appointed by the parties. On 6-4-59 on of the arbitrators limited that he wanted to resign vide Ex. 40 Then the plaintiff gave an application Ex. 41 to the Court to supersede the arbitration and the Court passed the following order :-

The order of the appointment of arbitrators is superseded and the stay of the suit is vacated and I order to proceed further with the suit.

(2) This order was confirmed in appeal and aggrieved by this order the defendant has now come in revision.

(3) It is contended that the Court should have followed the provisions contained in sections 9 and 10 of the Indian Arbitration Act 1940 which will hereinafter be referred to as the Act and that the learned Judge was wrong in passing an order which purported to be one under section 25 of the Act.

(4) The learned counsel for the opponent contends that the order is perfectly correct in view of the scheme of the Act. Chapter II of the Act deals with arbitration without intervention of a Court Chapter III of the Act deals with arbitration with intervention of a Court where there is no suit pending. Chapter IV deals with arbitration in suits. The contention of the learned counsel for the opponent is that Chapter IV which deals with arbitration in suits deals with arbitration in suits whether the arbitration agreement be prior to the suit or subsequent to the suit. Section 21 which is in Chapter IV reads an follows: Where in any suit all the parties interested agree that any matter in difference between them in the suit shall be referred to arbitration they may at any time before judgment is pronounced apply in writing to the Court for an order of reference . It is therefore clear that if this Chapter applies the parties interested in the suit must agree that any matter in difference between them in the suit shall be referred to arbitration; they should then apply to the Court for an order of reference and the Court should under section 23 of the Act refer to the arbitrator the matter in difference which is required to be referred to him. In cases to which Chapter IV is applicable a provision is made in section 25 of the Act. Section 25 reads as follows:- The provisions of the other Chapters shall so far as they can be made applicaable apply to arbitrations under this Chapter: Provided that the Court may in any of the circumstances mentioned in sections 8 10 11 and 12 instead of filling up the vacancies or making the appointments make an order superseding the arbitration and proceed with the suit and where the Court makes an order superseding the arbitration under section 19 it shall proceed with the suit. The order in question has obviously been made under section 25 of the Act. It is conceded by the learned counsel for both sides that the order in question has been passed under section 25 of the Act. In cases to which Chapter 4 is not applicable the Court may order that the arbitration agreement shall cease to have effect with respect to the difference referred. This can be done under section 12(2)(b) of the Act in cases to which Chapter II is the applicable. Under section 19 of the Act also the Court has power to supersede arbitration in cases to which that section is applicable. On this contention it is necessary to remember the provisions of section 34 of the Act. Section 34 reads as follows:-

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 proceeding may at any time before filing a written statement 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. The Legislature has therefore made provisions for cases where a party to an arbitration agreement commences a legal proceeding without complying with the terms of the arbitration agreement in such a case the Court can stay the proceedings of the suit. In such a case the Court does not make a reference to any arbitrator but merely makes an order staying the proceedings of the suit so that the parties can comply with the provisions contained in the arbitration agreement.

(5) But in cases to which section 21 which is in Chapter IV is applicable that is where an arbitration agreement is arrived at after the suit has been filed then the Court has to make a reference under section 23 of the Act. That is the difference between suits filed after the arbitration agreement and suits in which the arbitration agreement is arrived at after the suit is filed. Where the arbitration agreement arrived at after the suit is filed the provisions of Chapter IV should be followed but where the suit is filed the arbitration agreement the provisions of section 34 of the Act should be followed and where they are followed the provisions of Chapter II would come into operation after the suit has been stayed. The provisions of section 35 are also important. Sec. 35 of the Act reads as follows:-

(1) No reference nor award shall be rendered invalid by reason of the commencement of legal proceedings upon the subject matter 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 or proceedings is granted under section 34 be invalid. (2) In this section the expression parties to the reference includes any person claiming under any of the persons and litigating under the same title. It is therefore clear that the arbitration agreement contended to be valid after the proceedings in the suit have been stayed. It is therefore clear to me that Chapter IV does not apply to cases where the arbitration agreement between the parties is prior to the suit filed by one of the parties to the agreement and the Courts below were wrong in passing an order under sec. 25 of the Act. Where the suit is filed after the arbitration agreement and the suit has been stayed under sec. 34 of the Act the provisions of Chapter II would continue to apply and they should have been followed by the parties. In the present case as one of the arbitrators had wanted to resign; the provisions of sec. 9 of the Act would have been applicable and should have been followed. But the parties did not follow the provisions of sec. 9 of the Act and the Court also did not pay its attention to the provisions of sec. 9 and without doing so passed an order under sec. 25 of the Act. It is true that the Court itself had appointed the arbitrators and issued a letter of authority to the arbitrators.

(6) The Court somehow got the impression that the provisions of Chapter IV should be followed but the Court was wrong in doing so. In view of sec. 34 of the Act and the stay of the suit under sec. 34 the provisions of Chapter II should have been followed by the parties and the Court lost sight of this fact. It is next contended that the Court has inherent power to pass the order in question. But where the Act is clear and where the Act does not contemplate an order under sec. 25 of the Act but contemplate that the parties should follow the provisions contained in Chapter II to pass an order under sec 25 which is in Chapter IV of the Act is clearly a material irregularity in the exercise of jurisdiction and is not warranted by the application of the principle of inherent powers.

(7) The revision application is therefore allowed and the order of the lower Court is set aside. The question whether an order under sec. 12 (2)(b) of the Act should be passed should be considered by the Court at the proper stage. No order as to costs throughout. Application allowed.