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Issues: (i) Whether the original contract of sale containing the arbitration clause stood superseded by the subsequent arrangement dated 13 September 1969 so that the arbitration clause did not survive. (ii) Whether the defendants had taken steps in the suit proceedings so as to disentitle them to a stay under section 34 of the Arbitration Act, 1940.
Issue (i): Whether the original contract of sale containing the arbitration clause stood superseded by the subsequent arrangement dated 13 September 1969 so that the arbitration clause did not survive.
Analysis: The original transaction under the Sale of Goods Act, 1930 was followed by a fresh arrangement after breach, under which the defendants acknowledged an ascertained liability, agreed to pay by instalments, and furnished additional security by guarantee, pledge of shares and debentures, and an irrevocable power of attorney. The arrangement created new rights and obligations foreign to the original sale contract. The earlier liability was replaced by a self-contained substituted contract, amounting to novation and accord and satisfaction under section 62 of the Contract Act. Once the original contract ceased to exist, its arbitration clause could not continue to govern the new arrangement.
Conclusion: The original arbitration clause did not survive the substituted arrangement, and the plea for reference to arbitration failed.
Issue (ii): Whether the defendants had taken steps in the suit proceedings so as to disentitle them to a stay under section 34 of the Arbitration Act, 1940.
Analysis: The defendants filed a reply to the injunction application, sought adjournment until filing of the written statement, and later moved to set aside the ex parte injunction. These acts were treated as participation in the progress of the suit and as submission to the court's jurisdiction on the merits of the controversy. Section 34 required an for stay before taking steps in the proceedings, and the defendants' conduct occurred after such steps had been taken.
Conclusion: The defendants had taken steps in the proceedings and were not entitled to a stay under section 34.
Final Conclusion: The appeal failed because the dispute was governed by a substituted contract without the earlier arbitration clause, and the defendants had also forfeited the right to seek stay by participating in the suit proceedings.
Ratio Decidendi: Where parties substitute a fresh, self-contained arrangement for an earlier contract, the earlier contract including its arbitration clause is extinguished, and a party who thereafter participates in the suit proceedings takes steps that bar relief under section 34 of the Arbitration Act, 1940.
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