Case Note & Summary
The dispute arose from an application under Section 20 of the Indian Arbitration Act, 1940 for filing an arbitration agreement. The appellant had instituted Suit No. 1712 of 1949 in the Bombay High Court against the respondent for recovery of money on account of dealings. On or about February 18, 1954, the parties entered into an arbitration agreement to refer the disputes in the suit to the sole arbitration of Sri Ramrikhdas Parasrampuria and the agreement also provided for withdrawal of the suit. The suit was duly withdrawn on or about the same date. Subsequently, the arbitrator was removed and replaced by two other arbitrators, who were also removed, and Sri S. V. Gupte was appointed as arbitrator. The court extended the time for making the award up to March 21, 1958, but two further applications for extension were rejected. Sri Gupte was unable to make the award by March 25, 1958. On April 3, 1958, the appellant applied to the court under Section 20 for filing the arbitration agreement, for extension of time for Sri Gupte, in the alternative for reference of disputes to another person, and for exclusion of time from February 18, 1954 to April 3, 1958 to save limitation. The prayer for extension of time was rejected by K. K. Desai, J. and the appellate court and was no longer pressed. Both the single judge and the appellate bench rejected the prayer for filing the arbitration agreement under Section 20. K. K. Desai, J. held that the applicant must prove that the subject-matter of the arbitration agreement was not the subject-matter of any suit already instituted. The appellate bench held that the arbitration agreement, having been entered into five years after the institution of the suit, could not be said to be an arbitration agreement before the institution of any suit as contemplated by Section 20(1). The appellant appealed to the Supreme Court by special leave. The respondent contended that the opening words of Section 20 precluded filing of the arbitration agreement because it was entered into after the institution of a suit with respect to the subject-matter. The appellant raised alternative contentions: Section 20 permitted filing of an agreement entered during pendency of a suit if the suit is not pending when the party applies; Section 20 permitted filing of an agreement entered while no suit is pending though a suit might have been instituted previously; and the agreement dated February 18, 1954 was intended to be operative upon withdrawal of the suit, thus an agreement entered while the suit was no longer pending and could be filed under Section 20. The Supreme Court examined four possible interpretations of the phrase 'before the institution of any suit with respect to the subject-matter of the agreement or any part of it'. It held that the Arbitration Act, 1940 contemplates three classes of arbitrations: under Chapter II without court intervention, under Chapter III with court intervention where no suit is pending, and under Chapter IV in suits. An arbitration agreement between parties to a pending suit may be enforced under Chapter IV only by obtaining an order of reference from the court where the suit is pending. An agreement entered into while no suit with respect to its subject-matter is pending cannot be enforced under Chapter IV but can be enforced under Chapters II and III. Reading Section 20 with Section 2(a) and the heading of Chapter III, the Court concluded that the words 'before the institution of any suit' mean 'while no suit with respect to the subject-matter of the agreement or any part of it is pending', not 'where no suit has been instituted'. The Court also held that cases decided under paragraph 17 of Schedule II of the Code of Civil Procedure, 1908 were not decisive because the old provision lacked the heading and the words 'instead of proceeding under Chapter II'. Applying this interpretation to the agreement dated February 18, 1954, the Court found that withdrawal of the suit was an essential condition and the effective arbitration agreement came into existence when the suit was withdrawn; thus the agreement was entered into while no suit was pending and could be filed under Section 20. The ground on which the lower courts dismissed the application was set aside.
Headnote
A) Arbitration Law - Interpretation of Section 20 - 'Before the institution of any suit' means 'while no suit pending' - Arbitration Act, 1940, Section 20 - The Court construed Section 20(1) to mean that the phrase 'before the institution of any suit with respect to the subject-matter of the agreement or any part of it' refers to an arbitration agreement entered into while no suit with respect to its subject-matter is pending, not merely where no suit has ever been instituted; this interpretation harmonized with the heading of Chapter III and the general scheme of the Act. Held that Section 20 applies to an agreement entered into after a previously instituted suit had been withdrawn (Paras 691-693). B) Arbitration Law - Pending Suit and Arbitration Agreement - Agreement Conditional on Withdrawal of Suit - Arbitration Act, 1940, Section 20 - The agreement dated February 18, 1954, though signed while a suit was pending, provided for withdrawal of the suit as an essential condition; the withdrawal of the suit made the agreement operative and the effective arbitration agreement came into existence while no suit with respect to its subject-matter was pending. Held that the agreement could be filed under Section 20 and the lower courts erred in dismissing the application on the ground that it was entered into after institution of the suit (Paras 693-694). C) Arbitration Law - Distinction from Code of Civil Procedure Schedule II - Interpretation of Arbitration Act, 1940 - Code of Civil Procedure, 1908, Schedule II Paragraph 17 - Cases decided under paragraph 17 of Schedule II of the Code of Civil Procedure, 1908 were held not decisive for construing Section 20 of the Arbitration Act, 1940 because the heading of Chapter III and the words 'instead of proceeding under Chapter II' have no counterpart in the old provision; Section 20 must be construed in the light of its own language and the scheme of the 1940 Act (Para 693).
Issue of Consideration
Whether Section 20 of the Arbitration Act, 1940 applies to an arbitration agreement entered into while a suit with respect to the subject-matter was pending but withdrawn before the application for filing the agreement, and the correct interpretation of the phrase 'before the institution of any suit with respect to the subject-matter of the agreement or any part of it'.
Final Decision
The Supreme Court allowed the appeal and held that the words 'before the institution of any suit with respect to the subject-matter of the agreement or any part of it' in Section 20 mean 'while no suit with respect to the subject-matter of the agreement or any part of it is pending'. The Court further held that the arbitration agreement dated February 18, 1954 became operative upon withdrawal of the suit and the effective arbitration agreement came into existence while no suit was pending; therefore it could be filed under Section 20. The ground on which the lower courts dismissed the application was set aside.
Law Points
- Interpretation of Section 20 Arbitration Act
- 1940
- 'before the institution of any suit' means 'while no suit is pending'
- arbitration agreement in pending suit enforceable under Chapter IV only
- arbitration agreement entered while no suit pending enforceable under Chapter III
- effective arbitration agreement arises upon fulfilment of condition precedent like withdrawal of suit
