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Letters Patent Appeal No. 23 of 1968, decided on 23rd April 1968.

Ss. 34 & 35‑Words "the whole of the subject‑matter" in S. 35‑N, a party to arbitration proceeding, filing declaratory suit, pending arbitration, and claiming that an endorsement on a particular receipt relied upon by S, the other party, was fraudulent‑Held, legal proceedings, in circum. stances, cannot be said to have commenced upon "whole of the subject‑matter"‑Contention that if declaration sought for were granted it could furnish complete answer to claim of other party in arbitration proceeding‑Held, mere fact that party could thus inferentially succeed in arbitration proceeding not same thing as trial by Court of "entire subject‑matter" of arbitration proceeding-Proceeding stayed under S. 35 by arbitrator on application of N vacated and application of S under S. 34 for stay of N's suit accepted by court.

, S. 34‑Stay of Court proceedings pending arbitration‑Arbitration proceeding between S and N commenced and arbitrator appointed by Court‑Suit by N, pending arbitration, that endorsement on a receipt was fraudulent-Application of S under S. 34 for stay of N's suit, in circumstances, accepted‑Held, question of fraud or dishonesty can be settled by arbitrator.

Russell's Book on Arbitration, 16th Edn. ref:

Sheikh Haider for Appellant.

S. A, Sarwana aria Ibrahim Pishori for Respondent,

Date of hearing: 23rd April 1968.

‑This is a Letters Patent Appeal from the order of our learned brother Mr. Justice Feroze Nana Ghulamally dated the 18th of December 1967, by which he dismissed an application of the present appellant which was made under section 34 of the Arbitration Act to get the proceedings of Suit No. 267 of 1967 stayed.

2. The facts which form the background of this appeal are that there was an agreement between the parties for the construction of a Bund Wall which contained an arbitration clause as follows:

"In case National Refinery Limited and contractor do not agree on any matter arising out of the work then such dispute may be referred to arbitration by either party. Arbitration shall be in accordance with the provisions of the Arbitration Act, 1940 or any modification thereof and the decision of arbitration shall be binding on both parties. The work will not be stopped during the arbitration period."

The construction was allegedly completed by the appellant who submitted a final bill for Rs. 1,91,848.51. He was ‑paid Rs. 52,784.04 and a receipt was given by him, a copy of which is Annexure "C" to this appeal. It is dated the 25th of June 1966. The appellant gave a notice to the other party who is the Respondent in these proceedings stating in it Inter alia as follows:

"That the Management of Messrs National Refinery Ltd. paid an amount of Rs.52,784.04 vide Cheque No. 225061 dated 20‑6‑1966, drawn on National Bank of Pakistan Ltd. (Local Office): which amount was received by my client on 27‑6‑1966 under protest."

The notice was received by the respondent vide Annexure "E" dated the 29th of June 1966. Thereafter, a notice was given by the appellant for reference of disputes to arbitration. It is Annexure "F" dated the 9th of August 1966. The respondent replied to it vide Annexure "G" dated the 13th of March 1967. The stand taken by the respondent was that no claim was outstanding; therefore, there is no dispute between the parties with the result that there could be no reference to arbitration.

3. On receipt of the above reply, the appellant made an application under section 8(2) of the Arbitration Act, 1940 which was resisted by the respondent, but was accepted by a Single Judge of this Court vide an order dated the 4th of September 1967. The order contains following observations:

"The payment of Rs. 52,784.04 was accepted under protest, which I would interpret to mean without prejudice to the further claims of the plaintiff."

Further:

"The dispute under this clause read with clause 1 of the Schedule to the Act, are referable to one sole Arbitrator, and this sole arbitrator could be appointed with the consent and concurrence of both the parties. It is not denied that the defendants refused to give this concurrence, and it being so, the plaintiffs could come to this Court under section 8 (2) of the Arbitration Act for appointment of a sole arbitrator.

I am, therefore, of the opinion that disputes do exist between the parties to the present suit, and appointment of a sole arbitrator can be made by the Court under section 8(2) of the Arbitration Act. For these reasons, I would appoint Mr. Mehdi Ali Siddiqui, retired Additional District and Sessions Judge, 5/9, Block No. 4, Naaimabad, Karachi, as the sole arbitrator to adjudicate the disputes between the parties."

4. The arbitrator commenced proceedings and the parties appeared before him, but in the meantime, the respondent filed a suit bearing No. 267 of 1967, in which it sought the following reliefs:

"Plaintiff therefore prays that this Honourable Court be pleased to order:

(i) That the receipt dated 25-6‑1966/27‑5‑1966 be rectified by deleting the words under-protest' and the same may be read so as to express the real intention of the parties;

(ii) costs ; and

(iii) any other relief that this Honourable Court may deem‑fit and proper,

and made an application to the arbitrator dated the 6th of November 1967, stating in it that arbitration proceedings be stayed "as legal proceedings upon the matter of the reference have already commenced between the parties in the High Court. The appellant objected to it, but the arbitrator accepted that application and concluded his observations as follows:

"The claimant's (present appellant's) remedy is under section 34 and if he neglects it, the risk is his."

5. "The appellant accordingly, applied under section 34 of the Arbitration Act for stay of the proceedings of the suit. It was opposed by the present respondent and was dismissed as mentioned above vide the order dated the 18th of December 1967. The learned Single Judge has observed as follows:

"The order of the arbitrator is based on the fact that there is a possibility of a conflict of decisions and since the basis of the suit is the receipt dated the 25th June 1966 and its interpretation‑and in view of the conduct of the defendant I do not feel that this application by the defendant should be granted. The application is therefore rejected."

6. The above order is questioned in this appeal. We enquired from counsel for the respondent as to under what provision of law they could apply to the arbitrator for staying the arbitration proceedings on the ground that it had instituted a declaratory suit with respect‑to the receipt in question. They replied that the application was and could be made under section 35 of the Arbitration Act, 1940. Subsection (1) of that section is relevant and runs as follows:

"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 of proceedings is granted under section 34, be invalid."

The most important words in the above provision for the, present purpose are: "the whole of the subject‑matter of the reference" In this case the suit which has been filed by the respondent and the prayer clause which has been reproduced above relate to the disputed receipt only. Counsel for the respondent argued that this relief covered the entire subject‑matter of the arbitration proceedings because if the respondent succeeds in obtaining the declaration that the words "under protest" be deleted then, there could be no doubt that it would constitute a complete answer to the claim of the present appellant. This reasoning shows that in the event of the success of the suit, the defence of the respondent could inferentially succeed in the arbitration proceedings, but the successful use of a declaration or cancellation granted by the Court is not the same thing as the entire subject- matter of the arbitration proceedings. In fact we have been informed by counsel for the respondent that as yet they have not even submitted their entire defence to the claim of the appellant before the arbitration. This means that the whole of the subject‑matter of the reference cannot be defined at present. In these circumstances, we do not find that section 35 of the Arbitration Act, 1940 supports the stand of the respondent.

7. Counsel for the respondent additionally argued that the application of the present appellant under section 34 of the Arbitration Act, 1940 to get the proceedings of the suit stayed, was rightly rejected and should not be granted because allegations of fraud and dishonesty should be decided in the regular proceedings of a Court, and not by an arbitrator. In support of this contention, counsel referred to the following passage which occurs in Russell's Boot on Arbitration, 16th Edition, as follows:‑.--

"Although a dispute involving a charge of fraud or dishonesty can be settled by arbitration, it is usually better for such a dispute to be settled by a Court. Thus a Court will usually refuse to enforce an agreement to refer such a dispute to arbitration allowing an action upon the dispute to proceed, or ordering that the agreement cease to have effect, or giving leave to revoke any submission made thereunder."

Counsel said that the above observation could be supported by citing decisions of Pakistan, Indian and English Courts. Assuming for the sake of argument that counsel can cite a large number of such cases, we find that according to the above observation questions of fraud and dishonesty can be settled by arbitration. If there is a choice, then, it can be made by a party or by the Court. In this case, arbitration proceedings have commenced after a contest between the parties, and a finding of a Single Judge of this Court that the reference should be made; in fact the sole arbitrator was appointed by the learned Single Judge himself. No letters patent appeal was preferred against that order with the result that it has become final.

8. Counsel for the respondent contended that the words "under protest" on which the appellant relies were written on the receipt in such a manner that they were not noticed by the respondent. According to counsel, they were noticed for the first time on the 4th of September 19675 during the proceedings which took place before the learned Single Judge in Court. The date of the receipt is the 25th of Tune 1966 and a notice of the appellant in which it was claimed that the receipt was given under protest was received by the respondent on the 29th of June 19666. Counsel for the respondent, however, says that in spite of the claim of the appellant that the receipt was granted under protest, nobody noticed the words on the receipt until the 4th of September 1967. In this connection counsel has stated that the manner in which the words "under protest" have been written on the receipt itself creates a suspicion that the document is riot free from grave doubts.

9. In these proceedings we do not have to consider whether fraud as alleged by counsel for the respondent has been played by the appellant or not. This is the subject‑matter of the suit which is sought to be stayed by the present appellant and can obviously be the subject‑matter of the arbitration proceedings also. How, easily, the respondent may succeed in establishing the allegation of fraud, is therefore, not a matter on which the respondent can rely in these proceedings. At present we have to consider whether the application to the arbitrator made under section 35 of the Arbitration Act, 1940, was rightly made under that section or not, and whether the order made under section 34 of the Arbitration Act, 1940, has been validly made or not.

10. We have explained above that section 35 of the Arbitration Act, 1940 does not help the respondent and that in the circumstances of this case the application made under section 34 of the Arbitration Act, 1940, should be accepted.

II. We, accordingly, accept this appeal and stay the proceedings of Suit No. 267 of 1967. The arbitrator is now free to proceed with the arbitration proceedings.

A. E./K. B. A. Appeal accepted.

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