JUDGMENT
I.D.Dua, C.J.
(1) Walaiti Ram Seth. plaintiff in the Court of the Commercial Subordinate Judge, has preferred this revision under secticn 115, Code of Civil Procedure, from the order of the learned Senior Subordinate Judge dated 22/9/1965. allowing the defendants appeal from the order of the trial Court dismissing the defendants application under section 34 of the Indian Arbitration Act. The trial court had declined to stay the proceedings holding that the whole of the subject-matter in dispute in the suit was nto covered by the agreement of reference to arbitration and that the defendants had taken steps in the case before applying for stay. It was also observed by the trial Court that the plaintiff had levelled serious allegations of embezzlement and misappropriation which was the subject-matter of proceedings in the Criminal Court and that in such circumstances, it was nto proper to refer the dispute to arbitration and it would be more just if the controversy was tried in the ordinary court.
(2) The lower Appellate Court on appeal disagreed with the view of the court of first instance and, as observed earlier, stayed the proceedings in the suit holding that the trial court had nto exercised its discretion according to the well-established principles laid down by courts. While dealing with the ground which had prevailed with the court of first instance that the whole of the subject-matter in dispute was nto covered by the agreement of reference, the lower Appellate Court after observing that the claim for damages by the plaintiff was also covered by the arbitration clause, proceeded to state its view thus :- “THISshows that the plaintff cannto treat the dispute regarding his claim for recovery of damages to be a dispute de hors the partnership. If the plaintiff still thinks that this dispute is de hors the partnership, there is ntohing to prevent him from filing a suit for the recovery of damages against the defendants. He cannto be allowed to mix it up with a cause of action for dissolution of partnership and rendition of accounts.”
In regard to the plea that the defendants had taken steps in the proceedings before applying for stay, the lower Appellate Court could nto find anything on the record to indicate that the defendants had asked for any adjournment to file the written statement and observed that the defendants had frankly admitted in their rejoinder dated 6/5/1965 that they had obtained an ad- journment for the limited purpose of filling a reply to the plaintiff’s application for the appointment of a Receiver and issuance of an injunction against them. After so observing, the court proceeded to state :– “SIZING up the situation as a whole it. is more reasonable to believe that the learned trial Judge while adjourning the case to enable the defendants to file the reply to the plaintiff’s application for the appointment of a Receiver, added a direction in routine that they would also file a written statement”.
In regard to the point relating to the allegations of fraud, the lower Appellate Court took the view that the plaihtiff could nto be allowed to utilise his charges of fraud against the defen dants to defeate the latters’ right to have the dispute decided by a domestic forum of the parties’ own choice. The alleged fraud had ntohing to do with the executiion of arbitration agreement and it only related to the question of maintenance of the account- books by the defendants. If there was any discrepancy in the account-books, the lower Appellate Court observed, it would be open to the arbitrators to scrutinise them and if necessary, the Court would also be entitled to scrutinise the same and give appropriate relief to the aggrieved party. Such a ground could nto be utilised for stultifying the arbitration clause.
(3) On revision in this Court, the learned counsel for the petitioner has taken me through the record and has submitted that the defendants must be held to have taken steps in the proceedings and, therefore, disentitled themselves from seeking stay of the proceedings in the suit. The suit was registered in the trial court on 8/3/1965. It was prayed that the firm M/s Bharat Trading Company be dissolved and the defendants be directed to give accounts from 1/4/1957 till the date of the final decree, ft was averred in paragraph 12 that the defendants had made huge profits by misappropriating the assets of the firm and that they were liable to make good to the firm all the profits so made. The plaintiff, it was added, had to incur huge expenses for and on behalf of the firm in litigations for the benefit of the firm at Calcutta etc., and the firm was also liable for these amounts at the time of the rendition of accounts. In paragraph 9 of the plaint, reference was made to a complaint lodged by the plaintiff on 20/6/1963 before the Superintendent of Police C.I.D. (Crimes) under sections 420/408/470/460/465 and 120-B. Indian Penal Code . against the defendants and after investigation, case had been registered against them under the aforesaid sections. This case was stated to be pending in the Court of a Magistrate 1st Class at Delhi. On 30/3/1965, an appheation was also presented by the plaintiff under Order 40, Rule 1, and section 151. Civil Procedure Code. for the appointment of a Receiver with power to realise the amount due to the firm from third parties and also to bring and defend all suits for such realisation. Ntoice of this application was directed by the court on 31/3/1965 for 15/4/1965. That date, it may be pointed out, was also the date fixed by the trial Court on 8/3/1965 in the main suit. I find that the summons for 15/4/1965 along with a copy of the plaint were received by Shri Roshan Lal Kapur and Siri Krishan Kapoor on 6/4/1965. These summonses were issued under Order V, rules 1 and 5, Civil P.C. Ntoice with a copy of the application for the appointment of a Receiver was also received by the defendants on 11/4/1965. In the summonses issued on the plaint in the suit in was nto expressly specified as required by Order V, rule 5, whether it was for the settlement of issues order the final disposal of the suit. It appears that the Presiding Officer of the trial court did nto care to apply his mind to this aspect and the printed ntoe requiring the written statement. if necessary, to be put in by a dale to be specified therein was left blank and nto duly filled in. The summonses, of course, required the defendants to answer the clairn and produce on 15/4/196? all documents to be relied upon in support of the defense. Be that as it may. the least that was expected of the defendants was to file the written statement on the date or if necessary to seek adjournment for this purpose. On 15/4/1965, the case was adjourned to 28/4/1965 for reply to the application for appointment of receiver and for written statement. The learned Commercial Subordinate Judge trying the case has observed in his order that the adjournment on 15/4/1965 could nto have been granted without the express request of the defendants. He was the same Presiding Officer who had made the order dated 15/4/1965 and he must in my view be presumed to have been aware and to have kept in view the practice of his court when he made that observation. The learned Senior Subordinate Judge has, on appeal merely observed that there was ntohing on his record to indicate that the defendant had asked for any adjournment for filling the written stateraents. The lower Appellate court has added that the defendant had on 6/5/1965 admitted that he had obtained adjournment for the limited purpose of filing a reply to the application for the appointment of u Receiver. These two factors weighed with the lower appellate court in over-ruling and disagreeing with the observations of the learned Subordinate Judge that he could nto have granted the adjournment except on express request of the defendants. There is ntohing on the record to show as to why the defendants did nto file the written statement on 15/4/1965 or That the defendants were ready with such written statement or with whatever they were required to do on 15/4/1965 in accordance with the summons admittedly served on them and that the court itself suo intou adjourned the case without any request by the defendants to this effect. I am unable to find any material on the record, and none has been pointed out to me by defendants’ counsel, which would justify the learned Senior Subordinate Judge in disagreeing with and reversing the view of the learned Commercial Subordinate Judge that he could nto have granted the adjournment except on the defendants’ express request. The order of the lower Appellate Court seems to me to be tainted with asmeterial irregularity in arbitrartily reversing the view of the trial Court with out even adverting to all the attending circumstances on the record. It is nto contended at the Bar that oral requests for adjournments are uncommon or that such oral requests are commonly nto granted without a formal application or a recorded statement. I am therefore, inclined to think that on 15/4/1965 adjournment for filing the written statement was granted on the defendants’ request as held by the trial court and there was no material for the learned Senior Subordinate Judge to disagree with the formers.
(4) It is nto disputed that a criminal case is now actually pending in the court of a competent Magistrate in Delhi in respect of the allegations of fraud made by the plaintiff. The trial Court in its discretion felt that in view of the serious allegations of fraud which are actually being tried by a competent criminal Court. it would nto be proper to refer the dispute in question to an arbitrator and that it would be more just to the parties to have the suit tried by the court. The exact words of the trial court may be qutoed, It said :--- "IT would nto be proper to leave the parties at the mercy of the arbitrator, who is nto bound by the rules and procedure and technical rules of law. Moreover, the award of the arbitrator cannto be challenged on facts." The learned Senior Subordinate Judge has disagreed with this point of view by observing that the plaintiff should nto be allowed to utilise his charges of fraud against the defendants to defeat the latter's right to have the dispute decided by a domestic forum of the parties' own choice and he has added that the fraud alleged has ntohing to do with the execution of the arbitration agreement, for it bears only on the question of maintenance of the account hooks of the defendants. (5) The question is whether this approach is in accordance with law. Section 34 of the Arbitration Act (10 of 1940) reads as tinder :-- "WHEREany party to an arbitration agreement or any person claiming under him commences any legal proceedings against any toher party to the agreement or any person claiming under him in respect of any matter agreed to be referred, any party to such legal proceedings may, at any time before filing a written statement or taking any toher 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 nto 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 make an order staying the proceedings."
(6) It is obvious that the power conferred on the Court by this section is discretionary and even though the conditions specified therein are fulfillled no party can claim there under stay of legal proceedings instituted in a court as a matter of right. The learned Senior Subordinate Judge was, in my view, unduly influenced by what he thought was a right of the defendants to claim a stay of the legal proceedings properly instituted in a competent Court merely by reason of the agreement of reference. It is true that the learned Senior Subordinate Judge has in his judgment observed that section 34 vests the court with discretion to grant or refuse stay, but when he goes on to deal with the question of allegations of fraud, he apparently seems to have been dominated by the idea of defendants’ right to have the dispute decided by a domestic forum of parties’ own choice, for such a right, according lo him, could nto be defeated merely because a case of cheating connected with the accounts of the parties to the controversy was actually being tried by a competent criminal court in Delhi. There is no doubt that the discretion vested in the court is judicial and has to be exercised as such on facts and circumstances of each case and also that it is neither possible nor practicable to lay down for its exercise any inflixible rule, the court being expected to act according to common sense and justice. At the same time, when the discretion has been properly and judiciously exercised by the trial court, in my opinion, the Appellate court would nto be justified in interfering with such exercise of discretion merely on the ground that it would have taken a different decision if it had considered the matter at the trial stage. But this principle does nto affect the right of the Appellate Court to disagree with the decision of the court of first instance if the first court has exercised its discretion unreasonably or capriciously or has ignored the relevant facts or has approached the matter unjudiciously. I am, however, wholly unable to hold that the trial court has, in the present case, exercised its discretion either unreasonably or capriciously or has ignored the relevant facts or has approached the matter unjudiciously. Indeed, I find that the learned Senior Subordinate Judge has acted with irregularity irregularity in ignoring to some extent the factual background of the controversy and had indeed also ignored some of the important considerations in exercising judicial discretion in the matter of granting stay of proceedings under section 34 of the Arbitration Act.
(7) It is well settled that strict principle of Sanctity of contract in the matter of agreements of reference to arbitration is subject to the discretion of the court under section 34 of the Arbitration Act for the simple reason that in every such agreement, there must be read an implied term of condition that it would be enforceable only if the court, having due regard to the toher surrounding circumstances, thinks fit in its discretion to enforce it. A party may undoubtedly be released from the bargain for various cogent grounds. Nto only is the likely bias of the selected arbitrator a relevant consideration in the exercise of judicial discretion, but if the controversy or an important element of the controversy is already the subject-matter of criminal proceedings. in my opinion, this would also be a relevant consideration to be weighed by the court in exercising its judicial discretion in the matter. The allegation of fraud need nto necessarily be related to the agreement of reference or to the execution of the contract and, in my view, the learned Senior Subordinate Judge was perhaps nto right in so restricting this rule as appears to be his view from the following observations in his orders :- “ITmay be mentioned here that the fraud alleged has ntohing to do with the execution of the arbitration agreement. It bears on the question of maintenance of the account-books by the defendants.”
It is some what surprising that the learned Judge did nto pay due attention to the decision of the Madras High Courts cited by him (Laldas Lakshmi Das v. J.D.I. Ali (1) in which a Division Bench of the Madras High Court affirmed the view of a learned Single Judge of that Court (Gentle J.) declining to stay the proceedings in the suit on the ground that serious allegations of fraud having been made, the matter should be tried in open Court rather than left to an arbitrator. It was in support of this view that passage from the judgment of Jessel M.R. in Russell v. Russell (2) was qutoed. The passage qutoed undoubtedly suggests that if the party charged with fraud desires the case in the court to proceed, then the reference to the arbitration should be refused as a matter of course. But does the converse necessarily follow Must the suit necessarily be stayed as a matter of course even though a police challan under various sections including section 420, Indian Penal Code, is pending in a competent court ? The Madras decision does nto seem to lay down such a negative rule of law as has been supposed by the lower Appellate Court. Before me also, no toher decision has been cited, nor has any principle been qutoed for showing that the discretion exercised by the trial court was contrary to any recognised principle or was toherwise perverse, unreasonable or unjust. It is ntoeworthy that even in Russell v. Russell, the facts were peculiar and it was in the special circumstances that the master of the Rolls felt that it would be desirable for the reputation, comfort and happiness of btoh the partners, who were brtohers, that the matters were investigated by some impartial friend in the shape of the arbitrator rather than before a Judge in Court. The concluding part of the judgment is also helpful in understanding the true ratio of that decision. Thus concluded the Master of the Rolls :-
“CONSEQUENTLY the fraud is nto proved, and there is no prima facia proof of it, and I myself do nto consider the toher circumstances stated in the affidavit amount to any evidence whatever of the fraud which is alleged in the statement of claim as ground for relief and for setting aside the ntoice which has been given by the Defendant W.A. Russell.
I consider, therefore, that whether or nto there may be a case in which, at the instance of the person charging fraud, the court can properly refuse to refer the matter to arbitration, there is no such prima facia case of fraud made out as ought to influence the court, and therefore I think ought to grant the Defendant’s mtoion.”
(8) Even the head-ntoe, as contained in the report, shows that the facts of that case were very much different in material particulars from those of the case in hand. The true ratio decidendi of Russell v. Russell, in toher words, the general principle, which runs through that case as an essential basis of the decision, which a lone is authoritative, does nto seem to have been primary understood and grasped by the learned Senior Subordinate Judge. Taxing out a small passage in isolation out of its context and disassociated from the facts, out of a lengthy judgment, can seldom, if ever, provide a key to the true ratio decidendi of a decision, and the lower Appellate court seems to have fallen in error in their respect as well. The decision of the Madras High Court in Laldas Lakshini Das v. J.D. Italia as a judicial precedent has also nto been correctly evaluated by the lower Appellate Court. Trial of controversies involving serious allegations of fraud, in my opinion would tend to inspire greater country in the public gaze, the proceedings of which are also open to scrutiny by the courts of Appeal and Revision, than when such controversies are heard and disposed of by private arbitrators. This is all the more so where, unlike Russell v. Russell, after investigation, the police has put the challan in a criminal court and a trial is being held under the criminal Jaw. I am, therefore, inclined, as at present advised, to hold that the learned Senior Subordinate Judge has acted with illegality and material irregularity in reversing the order of the trial court made in the exercise of its discretion which was proper, judicial and unexceptionable. The impugned order of the appeal has the effect of directing the trial court nto to exercise its ordinary jurisdiction requiring it to try the suit of which it was properly seized.
(9) For all the foregoing reasons, I feel no hesitation in allowing his revision, reversing the order of the lower Appellate court and restoring that of the trial Court. The suit, it may be remembered, was instituted in March, 1965 for dissolution of partnership and for accounts to be gone into with effect from 1/4/1967 nearly eleven years ago. In view of this long delay, it is highly desirable that proceedings in the trial court should nto proceed with the dispatch. I accordingly direct the parties to appear in the trial court on 27/2/1968 when the court would give a short date for further proceedings in accordance with law and in the light of the observations made above. In the peculiar circumstances of this case, there will be no order as to costs.