Case: V/O Tractor Export, Moscow Vs. M/S. Tarapore &amp; Company &amp; Anr

A contract was entered into on February 2, 1965, between the Indian and the Russian firms for the supply of earth-moving machinery for a value of Rs. 66, 09, 372.00. The machinery was required by the Indian firm for executing the work of excavation of a feeder canal as part of the Farraka Barrage Project. On June 9, 1965, the Indian firm opened a Letter at Credit with the Bank of India Ltd., for the entire value of the machinery in favour of the Russian firm. The consignments started arriving at Calcutta in October 1965. On February 22, 1966, the Indian firm wrote to the Russian firm saying that there was something wrong with the design and working of motorised scrapers which had been supplied and which formed one of the items of machinery covered by the contract. On June 6, 1966 came the devaluation of the Indian rupee by 57.48% as a result of which the amount that became payable by the Indian firm to the Russian firm under the contract increased by Rs. 25 lakhs or so. On June 20, 1966, the Russian firm demanded an increase in the Letter of Credit owing to the devolution. On August 1, 1966, the Indian firm served a notice on the Russian firm containing the main allegations relating to breach of contract on the part of the Russian firm. The latter was called upon to remedy the breaches and pay compensation. It was made clear that until this was done the Russian firm would not be entitled to encash the Letter of Credit for the balance amount. On August 4, 1966, the Indian firm field a suit on the original side of the Madras High Court and obtained and ex parte order of injunction in respect of the operation of the Letter of Credit. On August 14, 1966, the parties arrived at a settlement at Delhi after mutual discussion4. Pursuant to the agreement the suit was withdrawn by the Indian firm but no amicable settlement, as contemplated, took place. The Indian firm instituted a suit (No. C.S. 118 of 1967) on the original side of the Madras High Court on August 14, 1967. It also filed an application for an interim injunction in the matter of the operation of the Letter of Credit. On October 26, 1967, another application was filed for an interim injunction against the encashment of the devaluation drafts. On November 4, 1967, the Russian firm instituted proceedings in terms of the arbitral clause in the Contract before the Foreign Trade Arbitration Commission of the U. S. S. R. Chamber of Commerce, Moscow. On November 14, 1967, the Russian firm entered appearance under protest before the Madras High Court in the suit filed by the Indian firm. On the same date the Russian firm filed an application under Section 3 of the Foreign Awards (Recognition and Enforcement) (Act XLV of 1961), hereinafter called the Act. A prayer was made for stay of the suit. On January 15, 1968, the Indian firm filed an application for an interim injunction restraining the Russian firm from taking any further part in the arbitration proceedings at Moscow. We are not concerned with the branch of the litigation which came up to this Court at a prior stage in respect of the interim injunctions granted by the stage judge with regard to the operation of the Letter of Credit and the subsequent arrangement made for payment as a result of devaluation. It is sufficient to mention that the appeals brought to this Court were allowed on November 26, 1968, and the temporary injunction granted by the learned single judge relating to the operation of the Letter of Credit was vacated5. The application which had been filed by the Russian firm for stay of the suit under Section 3 of the Act was dismissed by Ramamurthi, J., on April 12, 1968. The application of the Indian firm for an interim injunction restraining the Russian firm from taking any further part in the arbitration proceedings at Moscow was, however, granted. The Russian firm preferred appeals against the orders of the learned single judge before a division bench. The Bench maintained the orders of Ramamurthi, J. The present appeals have been brought by the Russian firm by special leave both against the order of the division bench and against the judgment of the learned single judge. This was presumably done because there was some controversy about the finality of the orders which had been made by the single judge of the HighThe first respondent had entered into a contract with the Government of India for the excavation work in the feeder canal of the Farakka Barrage project. To fulfil this contract with the Government of India and for the excavation work the first respondent required certain construction machinery such as scrapers, both towed and motorised, crawlers, tractors and bulldozers. The respondent No. 1 agreed to purchase them for the appellant and the latter agreed to supply and deliver and the terms and conditions of the contract were embodied in a document, dated February 2, 1965 signed by both the parties. In pursuance of the contract the first respondent opened a confirmed irrevocable and divisible letter of credit with the second respondent for the entire value of the equipment, that is, Rs. 66, 09, 372/- in favour of the appellant negotiable through the Bank of Foreign Trade of the U. S. S. R., Moscow. Under the said letter of credit the second respondent was required to pay to the appellant on production of the documents particularised in the letter of credit along with the drafts. One of the conditions of the letter of credit was that 25% of the amount should be paid on the presentation of the specified documents and the balance of 75% within one year from the date of the first payment. On the strength of the contract the appellant supplied all the machinery which it undertook to supply by about the end of December, 1965. After the machinery was used for some time the first respondent complained that the machinery did not conform to the terms and conditions of the contract and consequently it had incurred and continued to incur considerable loss. Meanwhile the Indian rupee was devalued on June 6, 1966 and in consequence the price of the machinery went up by about 57.48%. The increase in the price of the machinery was in accordance with the gold clause of the contract entered into between the parties. Clause 13 of the Contract read asseller and the buyers shall take all measures to settle amicably and disputes and differences which may arise out of or in connection with this contract. In case of the parties being unable to arrive at an amicable settlement, all disputes are to be submitted without applicable to the ordinary courts for the settlement by Foreign Trade Arbitration Commission at the U. S. S. R. Chamber of Commerce in Moscow in accordance with the Rules of Procedure of the said Commission. The Arbitration award will be filed be final and binding upon boththe clause the first respondent instituted a suit C. S. 134 of 1966 in the Madras High Court and obtained an ex parte injunction against the appellant and the second respondent restraining them from negotiating the letter of credit. The appellant protested that the first respondent should not have instituted a suit in violation of the arbitration clause in the contract. By a subsequent agreement, dated August 14, 1966 the appellant and the first respondent agreed to settle the matter amicable in accordance with the contract. The appellant consented to extend the payment of letter of credit by one year and the first respondent thereupon withdrew the suit in C. S. 134 of 1966. The respondent No. 1 is said to have accepted the devaluation drafts representing increase in the price of the machinery consequent on the devaluation of the Indian rupee in accordance with the clause in the contract. Though correspondence was going on between the parties, no settlement could be arrived at. When the time came for the payment of the balance of 75% of the letter of credit the first respondent instituted a suit C. S. 118 of 1967 in the Madras High Court in violation of the arbitral clause and obtained an ex parte injunction against the appellant instituted arbitral proceedings before the Foreign Trade Arbitration Commission of U. S. S. R. Chamber of Commerce, Moscow in accordance with Clause 13 of the contract for payment of the price of the machinery. Notice was issued to the first respondent to choose its nominee to represent it in the Arbitration Commission and the date of hearing was also notified by the first respondent. But the first respondent failed to appear before the Foreign Trade Arbitration Commission. Thereafter the appellant entered appearance in C. S. 118 of 1967 under protest and filed and application No. 2604 of 1967 before the High Court under Section 3 of the Foreign Awards (Recognition and Enforcement) Act, 1961 (45 of 1961) for the stay of the suit. The first respondent also filed an application No. 106 of 1968 before the High Court praying that the appellant should be restrained from taking part in the arbitration proceedings at Moscow. After hearing the parties Ramamurthi, J., dismissed the application of the appellant No. 2604 of 1967. The learned Judge allowed the application of the first respondent and granted and injunction restraining the appellant from taking part in the arbitral proceeding at Moscow. The appellant preferred appeals O. S. A. 25 and 26 of 1968 against the orders of Ramamurthi, J. The appeals were dismissed by a Division Bench of the High Court on December 16, 1968

Reasoning:
18. It is true by taking the above view the purpose and object behind the Protocol and the conventions may not be fully carried out. The intention underlying Article 4 of the Protocol of 1923 and Article 2 of the Convention of 1958 undoubtedly appears to be that whenever the parties have agreed that their differences arising out of a commercial contract be referred to an arbitration, the court of a contracting State when seized of an action in the matter, shall refer the parties to an arbitrations unless it finds that the agreement is null and void or is inoperative or incapable of being performed. We apprehend it would hardly be conducive to international commercial arbitration not to have legislation giving full and complete effect to what is provided by the Protocol and the Conventions. We also share in full measure the anxiety and the effort of those who desire to respect the terms of international Protocols and Conventions in letters and spirit. But we arethe Indian Firm has been guilty of breach of the agreement to refer the matter to arbitration at Moscow and therefore it has disentitled itself to the exercise of the Courts discretion in its favour in the matter of granting anIf the venue of the arbitration proceedings had been in India and if the provisions of the Arbitration Act of 1940, had been applicable, the suit and the arbitration proceedings could not have been allowed to go on simultaneously and either the suit would have been stayed under Section 34 or if it was not stayed, and the arbitrators were notified about the pendency of the suit, they would have had to stay the arbitration proceedings because under Section 35 such proceedings would become invalid if there was identity between the subject-matter of the reference and the suit. In the present case, when the suit is not being stayed under Section 3 not to grant an injunction restraining the Russian Firm from proceeding with the arbitration at Moscow. The principle essentially is that the arbitrators should not proceed with the arbitration side by side in rivalry or in competition as if it were a Civil Court28. Ordinarily, a party which has entered into a contract of which an arbitral clause forms an integral party should not receive the assistance of the court when it seeks to resile from it. But in the present case a suit is being tried in the courts of this country which, for the reasons already stated, cannot be stayed under Section 3 of the Act in the absence of an actual submission of the disputes to the arbitral tribunal at Moscow prior to the institution of the suit. The only proper course to follow is to restrain the Russian Firm which has gone to the Moscow Tribunal for adjudication of the disputes from getting the matter decided by the tribunal so long as the suit here is pending and has not been disposedthe present case if there was any such reference to arbitration it was only on November 4, 1967, that is, about three weeks after the suit has been filed in the HighSection 3 of the Act. Even at the time of the Act of 1889, the word "submission" had received a special meaning as including a mere agreement to refer to arbitration as well as an actual reference or submission to arbitration and this special manner. In the Arbitration Clauses (Protocol) Act, 1924 the phrase "submission made in pursuance of the agreement" is used and the word "submission" is employed in the statutory sense. In any the Indian Arbitration Act, 1889, Section 4(b) defines submission in exactly the same terms as Section 27 of the English Act of 1889. In the English Arbitration Act of 1934 the word "agreement" is defined in Section 21(2) as a "written agreement to submit present or future differences to arbitration whether the arbitrator is named therein or not". It is clear, therefore, that expression "arbitration agreement" and the word "submission" are synonymous and connote the same idea. In my opinion the expression "submission made in pursuance of an agreement" in Section 3 of the Act must be construed in its historical setting. The word "submission" must, therefore, be interpreted to mean that the arbitral clause itself and the word "agreement" as the commercial or the business agreement which includes or embodies that clause. In other words the word "submission" in the opening words of the section means an agreement to refer to arbitration and the words "the agreement to which the Convention set forth in the schedule applies" mean the business agreement or contract containing the arbitral clause. It follows, therefore, that if there is an arbitral clause whether this is followed by actual reference to arbitration or not, the very existence of this clause in the commercial agreement would render the stay of the suit mandatory under Section 3 of the Act39. The view that I have expressed is also consistent with the rule of construction that as far as practicable the municipal law must be interpreted by the courts in conformity with international obligations which the law may seek to effectuate. It is well settled that if the language of a section is ambiguous or is capable of more than one meaning the protocol itself becomes relevant for there is prima facie presumption that Parliament does not intend to act in breach of international law, including specific treaty obligations. In the words of Diplock, L. J., in Salomonv. Commissioners of Customs andthis principle to the present case it is manifest that Article 2 of the Convention which is contained in the Schedule to the Act imposes a duty on the court of a contracting State when seized of such an action to refer the parties to arbitration. Section 3 of the Act must, therefore, be read in consonance with this international obligation or impose a refinement not warranted by the Convention itself will not bethis principle to the present case it is manifest that Article 2 of the Convention which is contained in the Schedule to the Act imposes a duty on the court of a contracting State when seized of such an action to refer the parties to arbitration. Section 3 of the Act must, therefore, be read in consonance with this international obligation or impose a refinement not warranted by the Convention itself will not bet is, however, maintained by the respondent that the words "submission" and "agreement" must be given their natural and grammatical meaning and the words "submission made in pursuance of an agreement" can only mean and actual submission of the disputes to the arbitral tribunal. So the word "agreement" can have reference to had can be constructed only in the sense of an arbitration agreement or arbitral clause in a commercial contract. The contention is that if submission has to be taken in the sense of an arbitration agreement it would render the words "submission made in pursuance of an agreement" meaningless and unintelligible.Civil Appeal Nos. 1208 and 1833 of 1969 arise out of the application No. 106 of 1968 filed by the first respondent for injunction to restrain the first respondent for taking further part in the arbitration proceedings in Moscow. Ramamurti, J., took the view that since the application No. 2604 of 1967 for stay of the proceedings in the pending suit C. S. 118 of 1967 had been dismissed the first respondents injunction petition should be allowed on the ground that the two forums were mutually exclusive. In the connected appeals I have taken the view that the appellant would be entitled to an order of stay of the proceedings in C. S. 118 of 1967 under Section 3 of Act 45 of 1961. Even assuming that Section 3 of the Act is not applicable this is not a proper case in which the High Court should have issued an injunction restraining the appellant from proceeding with the arbitration. As a rule the Court has to exercise its discretion will great circumspection for it is imperative that the right of access to the tribunals of a country should not be lightly interfered with. It is not sufficient merely to show that two actions have started for it is not prima facie vexatious to commence two actions about the same subject-matter, one here and one abroad. (See McHenry v. Lewis. The reason of this reluctance to exercise the jurisdiction is that owing to a possible difference between the law of the two countries, the stay of one of the actions may deprive the plaintiff of some advantages which he is justified in pursuing48. Thus he may have a personal remedy in one country and a remedy only against the goods in another; or a remedy against land in one State but no such remedy in another. The rule, therefore, is that a plea of lis alibi pendens will not succeed and the court will order a stay of proceedings unless the defendant proves vexation in point of facts. He must show that the continued prosecution of both actions is oppressive or embarrassing, an onus which he will find it difficult to discharge if the plaintiff can indicate some material advantage that is likely to result from each separate action. Each case, therefore, depends upon the a setting of its own facts and circumstances.