Sri Lanka Law Reports
 2 Sri L.R
COMMERCIAL LEASING CO. LTD AND ANOTHER
COURT OF APPEALAMARATUNGA, J. ANDBALAPATABENDI, J.
D.C. COLOMBO 43938/MHPAUGUST 29, ANDSEPTEMBER 10, 2002
Civil Procedure Code, sections 147, 693 and 698 – Issues of law to be triedfirst – Arbitration agreement – Arbitration Act, No. 11 of 1995 sections 2 (1), 2(2) and 47 – Arbitration Ordinance, section 7 – Conditions precedent to insti-tution of action or bare agreement to arbitrate?
The 2nd defendant petitioner, raised two legal issues, and invited court to con-sider the said Issues on jurisdiction – framed as issues of law. The learned trialjudge disallowed the application.
It was contended that section 5 of the Arbitration Act debars the jurisdiction ofcourt in respect of disputes covered by the arbitration agreement.
Arbitration clauses in contracts are of two main kinds, (i) bare arbitra-tion agreements (ii) agreements making an arbitration award a condi-tion precedent to any right of action.
The lease agreement and the guarantee bond have been entered intoby the parties on 17.7.75. The Arbitration Act, No. 11 of 1995 came intooperation on 1.8. 1995. Though section 5 debars the jurisdiction ofcourt in respect of a dispute covered by an arbitration agreement, theAct came into operation after the execution of the lease agreement.The parties are bound to oblige with conditions of agreement enteredat the time of its execution.
On a perusal of the lease agreement, the only inference that could bedrawn is that, the option for arbitration/or to institute legal proceedingsin court is vested with the lessor,
The arbitration clause in the lease agreement is only a bare agreementto arbitrate and is not a condition precedent to the institution of legalaction in court.
Ramachandran v Commercial Leasing Co. Ltd. and. another
APPLICATION for leave to Appeal from the Order of the District of Colombo.Cases referred to:
Hotel Galaxy (Pvt) Ltd., v Mercantile Hotels Management Ltd. (1987) 1Sri L.R.5
Scoff v Avery – (1865) 5 HGLR case 811
Gorden Frazer (Pvt) Ltd., v Jean Marie Casio and Marlin Wenzel -(1984) 2 Sri LR 85
Hemantha Situge for 2nd defendant-respondentBimal Rajapakse for respondent.
November 14, 2002BALAPATABENDI, J.
This is an application for leave to appeal against an order 01made by the learned District Judge on 08.10.2001.
The plaintiff-respondent (a Company) instituted an actionagainst the 1st defendant-respondent and the 2nd defendant-peti-tioner to recover the moneys due to the plaintiff-respondent on theLease Agreement marked as “A” and on the guarantee of the LeaseAgreement marked as “B". The Lease Agreement marked “A” indi-cates that the 1 st defendant and the 2nd defendant-petitioner togeth-er entered into an Agreement as partners in a partnership with theplaintiff-respondent (a company) and also the 2nd defendant-peti- 10
tioner separately entered into a guarantee of the Lease Agreement“A” with the plaintiff-respondent by document marked “B”.
The 2nd defendant-petitioner moved Court to amend his orig-inal answer filed, by expressly traversing an averment as to thejurisdiction of the Court. Court allowed the amendment of theanswer by the order 11.08.99.
At the trial on 29.5.2000 2nd defendant-petitioner raised twolegal issues, among other issues, to wit:-
whether this Court has jurisdiction to hear this case?
(e@®Sc3^®0 o®@ q“3z3(5€Soc5 cSqo iSoS)^?)
Sri Lanka Law Reports
 2 Sri L.R
If the above issue (5) is determined in favour of the 2nddefendant, could the plaintiff have and maintain this action againstthe 2nd defendant?
(tjicBza(5) 2 gOS SajiSzadjosJ 0o3oc>o£) esats)
ej®€3@23>c5jc) 25 SaijSajdjO cSodSQ g®@ 2?)QO oDoiDaGCDsn cjd aajsSq?)
As the plaintiff-respondent objected to the above mentionedtwo issues, the learned Distinct Judge made an order acceptingthe two issues.
Thereafter, on the next trial date (25.4.2001) the counsel forthe 2nd defendant-petitioner made an application under section 30147 of the Civil Procedure Code, to consider these two issuesframed as issues of law, and submitted that the case could be dis-posed of by answering those two issues. On the written submis-sions filed by both parties the learned District Judge disallowed theapplication on 08.10.2001. The case was fixed for further trial on allthe issues (1 to 7) framed before Court. This leave to appealapplication was preferred against that order.
The contention of the 2nd defendant-petitioner was that inthe Agreement marked ‘A’ clause 16 contains an ‘Arbitration-Clause which reads as follows:-40
(1) “In the event of any default or non-observance by lesseeof the terms and conditions contained in this leaseAgreement or in other case and in the event of any dis-pute, difference or question which may from time to timeand at any time hereafter arise or occur between lessorand lessee or their ^respective representatives or permit-ted assigns touching or concerning or arising out of,under in relation to it in respect of this lease agreementor any provision matter or thing contained herein or thesubject matter hereof, or the operation, interpretation or soconstruction hereof or of any clause hereof or as to therights duties or liabilities of either party hereunder or inconnection with the premises or their respective repre-sentatives or permitted assigns including all questionsthat may arise after the termination or cancellation of thislease, such dispute, difference or question may, not with-standing the remedies available under this Lease
Ramachandran v Commercial Leasing Co. Ltd. and.another
Agreement or in Law, by lessor only, after 14 days oflessor presenting its final claim on disputed matters, besubmitted in writing as its" sole option for arbitration by asingle arbitrator to be nominated by the parties or if suchnomination is not practicable, by two arbitrators one to beappointed by lessor and the other by lessee and anumpire to be nominated by the two arbitrators and if eitherparty refuses to nominate an arbitrator by a sole arbitratorto be nominate by the other party.”
“Lessor shall forthwith notify lesses of every matter indispute or difference so submitted, and only such disputeor difference which has been so submitted and no othershall be the subject of arbitration between the parties. It ishereby agreed that if either party refuses to take part inthe arbitration proceedings or does not attend the samethe arbitrator or the arbitrators and the umpire shall andshall be entitled to proceed with the arbitration in theabsence of such party and make his or their award afternotice to such party. The relevant provisions of theArbitration Ordinance (Cap 98) and the provisions of theCivil Procedure Code or any statutory re-enactment ormodifications thereof for the time being in force in so faras the same may be applicable shall govern and shall beapplicable to such arbitration”.
Clause 16 of the Agreement debars the jurisdiction of thecourts to hear and determine this case – section 47 of theArbitration Act, No. 11 of 1995 has repealed
the Arbitration Ordinance (Chapter 98) and
Sections 693 to 698 of the Civil Procedure Code (Chapter
101).Hence this Lease Agreement now falls within the purview ofthe Arbitration Act, No. 11 of 1995.
It is interesting to note that the Lease Agreement ‘A’ and theGuarantee Bond ‘B’ have been entered into by the parties on17.7.1995. But the Arbitration Act, No. 11 of 1995 came into opera-tion in 1st August 1995. (Admitted by the 2nd defendant-petitioner)
Sri Lanka Law Reports
 2 Sri L.R
To circumvent this problem the 2nd defendant-petitionerstates that Part I preliminary section 2(1) of the Arbitration Act ispertinent to this question. Section 2(1) states that
“The provisions of this Act shall, subject to the provision ofsection 48 apply to all arbitration proceedings commenced in SriLanka after the appointed date, whether the arbitration agreementin pursuance of which such arbitration proceedings are com- 100menced was entered into before or after the appointed date.”
It is obviously clear that it applies only to cases where,“Such arbitration proceedings are commenced" (emphasis added)
Section 2(2) of the Arbitration Act states that “Where arbitra-tion proceedings were commenced prior to the appointed date theLaw in force prior to the appointed date, shall, unless the partiesotherwise agree, apply to such arbitration proceedings.” section 5of the Arbitration Act, No. 11 of 1995 states that “Where a party toan arbitration agreement institutes legal proceedings in a Courtagainst another party to such agreement in respect of a matter noagreed to be submitted for arbitration under such agreement, theCourt shall have no jurisdiction to hear and determine such matterif the other party objects to the Court exercising jurisdiction inrespect of such matter”.
Though section 5 of the Act debars the jurisdiction of Court inrespect of a dispute covered by an arbitration agreement, the Actcame into operation after the execution of the Agreement ‘A’.Therefore the parties to the agreement are bound to oblige withconditions of agreement entered at the time of execution of it.
As to the 2nd cause of action, on the Guarantee of Lease 120Agreement (marked as ‘B’) the 2nd defendant- petitioner allegedthat the plaintiff-respondent could not have and maintain the actionbecause clause 1 of the Guarantee Bond ‘B’ is incorporated withthe arbitration clause – 16, in the Lease Agreement ‘A’.
The contention of the plaintiff-respondent was that, the 2nddefendant-petitioner in his amended answer while admitting para-graph (3) of the plaint, which relates to the cause of action and tothe jurisdiction of the District Court has however averred in theanswer that the District Court cannot hear and adjudicate the suitper-se.130
Ramachandran v Commercial Leasing Co. Ltd. and another
It was on that background that the two issues (5) and (6)were framed, and allowed by the Court.
The plaintiff-respondent contended that, it is very clear in theLease Agreement that the arbitration clause (16), (supra) – con-tains the sole option to resort for arbitration is entirely left with theplaintiff respondent (the Lessor),
(1) In Hotel Galaxy (Pvt) Ltd v Mercantile HotelsManagement Ltd.^) It has been held that "arbitration clauses incontracts are of two main kinds, namely:-
bare arbitration agreements, when the parties agree that uodisputes arising out of the contract shall be referred to arbitration;here, the provision for arbitration is a mere matter of procedure forascertaining the rights of parties with nothing in it to exclude a right
of action on the contract itself but leaving it to the party againstwhom an action may be brought to apply to the discretionary powerof the Court to stay proceedings in the action in order that the par-ties may resort to the procedure to which they have agreed.
agreements making an arbitrator’s award a conditionprecedent to any right of action under the contract based not upon
the original contract but upon the award made under the arbitration 150clause.
In the case cited above Sharvananda, CJ has stated that, abare agreement to arbitrate cannot be pleaded in bar of an actionon the contract. But under an agreement with Scott v Avery^2)clause, the right to bring an action depends upon the result of thearbitration; arbitration followed by an award is a condition prece-dent to an action being instituted. Where a dispute is governed bysuch a condition an action in respect of that dispute cannot suc-ceed. On such an arbitration clause, arbitration is not a mere mat-ter of procedure, but the proceeding to arbitration is essential to a 160right of action in the plaintiff. But there is statutory provision inEnglish Law vesting the court with discretion to override a ScottAvery Clause.”
In Gordon Frazer (Pvt) Ltd v Jean Marie Losio and MarlinWenzel It had been held that:-
(1) “The provision in the contract for reference to arbitrationis not a Scott v Avery clause and is not a condition precedent to
Sri Lanka Law Reports
 2 Sri L.R
the institution of an action. The jurisdiction of the Court is not oust-ed by the failure to refer the dispute to arbitration. An agreement tooust the jurisdiction of the courts altogether is illegal and void asbeing contrary to public policy. Where there is an agreementbetween the parties to refer their differences to arbitration and oneof the parties commences a suit without prior recourse to arbitra-tion, the Court can on application made to it stay the proceedingsand refer the matter to arbitration under section 7 of the ArbitrationOrdinance. But only the parties to a contract containing an arbitra-tion clause can have recourse to section 7 of the ArbitrationOrdinance.”
(2) “where the defendants are trying to repudiate the contractentered into by them with the plaintiff-petitioner, such a dispute con-stitutes a dispute “relative to” the contract and falls within the arbi-tration clause set out in the contract”.
The 2nd defendant-petitioner alleged in his amendedanswer para (4) that the calculation of the accounts by the plain-tiff-respondent was erroneously and/or falsely done which in itselfis an allegation brought on the Lease Agreement and on theGuarantee Bond, which has to be decided on evidence.
It is significant to note that, the 2nd defendant-petitioner didnot make an application under section (7) of the ArbitrationOrdinance to "stay the proceedings and refer the matter to arbitra-tion at any time in the proceedings in the District Court, as theLease Agreement marked ‘A’, has provided for the application ofthe provisions of the Arbitration Ordinance.
It is very pertinent to note that in the Lease Agreementmarked ‘A’ there is a clause for jurisdiction. Clause (19) statesthat:-
‘(1) This Agreement shall be deemed to have been enteredinto at the place where it has been signed by the lessor.”
(2) All moneys payable to the lessor by the lessee and orparties to this agreement which shall include herein rentals, dam-ages, insurance premia, compensation for depreciation etc. shallbe made at the registered office of the lessor No. 21, Bristol Street,Colombo 01 and nowhere else. Where the lessee makes paymentelsewhere or to or through any other source that aforesaid obliga-tion to pay only at the lessor’s registered office shall remain
Ramachandran v Commercial Leasing Co. Ltd. and another
unchanged notwithstanding the fact that said moneys are acceptedby or on behalf of the lessor.”
“The obligation to make the aforesaid payments only at thelessor’s registered office is not intended to be waived or modifiedor extinguished by acceptance of moneys elsewhere than at the 210lessor’s registered office and shall not be treated as having beenso waived modified or extinguished. In the event of default to makeany of the aforesaid payments the causes of action for purposes ofinstituting legal proceedings shall arise within the jurisdiction of theappropriate Court within whose jurisdiction the lessor's registeredoffice is situated. “Causes of action mean the wrongs with respectto which legal proceedings are to be instituted."
For the aforesaid premise, the only inference that could bedrawn on the Lease Agreement ‘A’ is that the option for arbitra-tion/or to institute legal proceedings in Court is vested with the 220lessor.
I am therefore of the view that the arbitration clause in theLease Agreement marked ‘A’, is only a bare-agreement to arbitrate,and is not a condition precedent to the institution of legal action inCourt.
On a perusal of the order made by the learned DistrictJudge, it is clear that to ascertain whether the Court is vested withthe jurisdiction to hear the case, evidence has to be led on theLease Agreement and on the Guarantee Bond, to answer all theissues (1 to 7) framed before Court.230
The above mentioned facts when taken into consideration, itshows that the finding of the learned District Judge to proceed withthe case and to adjudicate on all the issues framed was a correctdecision.
For the aforesaid reasons, I refuse to grant leave to appeal,casting the 2nd defendant-petitioner costs in a sum of Rs. 7500/-
RAMACHANDRAN v. COMMERCIAL LEASING CO. LTD AND ANOTHER