[IN THE COURT OF APPEAL.]

CZARNIKOW v. ROTH, SCHMIDT AND COMPANY.

Arbitration - Questions of Law arising in Reference - Agreement not to require Arbitrator to state a Special Case - Validity of Agreement.

A contract for the sale of sugar provided that the contract was subject to the rules of the Refined Sugar Association. The rules required that all members of the Association making contracts subject to those rules should refer any disputes arising out of such contracts, including any questions of law, to the arbitration of the Council of the Association; and by r. 19: "Neither buyer, seller, trustee in bankruptcy, nor any other person as aforesaid shall require, nor shall they apply to the Court to require, any arbitrators, to state in the form of a special case for the opinion of the Court any question of law arising in the reference, but such question of law shall be determined in the arbitration in manner herein directed." A dispute between the buyers and sellers was referred to the arbitration of the Council. The buyers requested the arbitrators either to state their award in the form of a special case under s. 7 of the Arbitration Act, 1889, or alternatively to state a case for the opinion of the Court under s. 19 upon certain points of law arising in the reference, or to give them an opportunity of applying to the Court for an

order directing them to state a case. The arbitrators, thinking themselves precluded by r. 19, refused to comply with that request, and made their award without giving the buyers an opportunity of applying to the Court for an order. The buyers moved to set aside the award on the ground of misconduct of the arbitrators in so refusing:-

Held, that r. 19 and the agreement embodying it were contrary to public policy and invalid, as involving an ouster of the statutory jurisdiction of the Courts under the Arbitration Act, and that the award must be set aside.

Judgment of Divisional Court affirmed.

APPEAL from an order of the Divisional Court setting aside an award of arbitrators.

By a contract made on a form issued by the Refined Sugar Association and dated August 6, 1921, Messrs. C. Czarnikow, Ld., sold to Messrs. Roth, Schmidt & Co. "about twenty thousand (20,000) cases Belgian cubes refined sugar at 27s. per cwt. f.o.b. Antwerp, packed in cases of about 1 cwt. nett each, for delivery during October, 1921." The contract contained the terms: "This contract is subject to the Rules of the Refined Sugar Association as fully as if the same had been expressly inserted therein and even though one of the parties to it be not a member of the Association."

By r. 17 of the Refined Sugar Association Rules it is provided that: "All disputes from time to time arising out of any such contract, including any question of law arising in the course of the proceedings, whether arising between the parties thereto, or between one of the parties thereto and the trustee in bankruptcy or personal representative of the other party, shall be referred to arbitration in accordance with these Rules. Such submission or reference shall be to the Council of the Refined Sugar Association, London, and the word 'arbitrators' in this book shall signify the said Council. ...."

Rule 19 provides that: "Such submission or reference shall be in writing. .... Neither buyer, seller, trustee in bankruptcy, nor any other person as aforesaid, shall require, nor shall they apply to the Court to require any arbitrators to state in the form of a special case for the opinion of the Court, any question of law arising in the course of the reference, but such question of law shall be determined by arbitration in manner herein directed."

A dispute arose between the parties as to the fulfilment of the contract, the buyers claiming that they were entitled under the circumstances of the case to refuse to accept delivery of 7574 cases. This the sellers disputed, and in accordance with the submission contained in the contract the dispute went to arbitration before the Council of the Refined Sugar Association. In the contentions in writing put before the arbitrators on behalf of the buyers the arbitrators were asked to state a case for the opinion of the Court under s. 19 of the Arbitration Act, 1889, or alternatively under s. 7 of the said Act on a number of points of law set out seriatim, and the said contentions concluded with the request: "If the Council refuse to state a case as requested above kindly ask them to defer further consideration of the matter in order to give us an opportunity of applying to the Court for an order directing them so to state a case." On the hearing of the arbitration on November 21, 1921, the buyers' representative, Mr. Bronislaw Nussbaum, verbally and in writing by putting in the said contentions requested the arbitrators to state their award in the form of a special case, or alternatively to state a case for the opinion of the Court upon the questions of law raised by the buyers. The arbitrators refused to state their award in the form of a special case or to state a case for the opinion of the Court, and further refused to delay the issue of their award to enable the buyers to make an application to the Court for an order directing them to state a case for the opinion of the Court on these questions of law, and before the buyers had any opportunity of applying to the Court for such an order the arbitrators on November 23, 1921, issued their award. The buyers thereupon moved the Divisional Court for an order that the said award be set aside upon the following (amongst other) grounds: "That the said Council as arbitrators misconducted themselves by refusing the reasonable and proper request of the" buyers "to state a special case under s. 7 or alternatively under s. 19 of the Arbitration Act, 1889, and/or also by declining to give the" buyers "any or any reasonable opportunity of applying to the High Court

for an order directing them to state a special case for the opinion of the Court upon questions of law arising in the course of the reference."

The Divisional Court (Swift and Acton JJ.), without deciding whether r. 19 was against public policy, held that the arbitrators were guilty of misconduct in not giving the buyers an opportunity of having that question decided by the Court, and on that ground they set aside the award.

The sellers appealed.

Jowitt K.C. and Van Breda for the appellants. The arbitrators were not guilty of misconduct. At the most they made a mistake of law in treating r. 19 as valid, and on the authorities it is an open question whether it is not so. In In re Hansloh and Reinhold (1) an arbitration clause contained a similar provision to the present, that neither party should apply to the Court to require the arbitrator to state a special case on any point of law arising in the reference; there Mathew J. ordered a special case to be stated. But in the later case of In re Montgomery and Liebenthal (2) where a contract contained a similar clause, it being unnecessary to decide the point, Collins L.J. expressly said that he left the question open whether such an agreement was good or bad. Since the decision in Scott v. Avery (3) an agreement to refer disputes to arbitration is no longer regarded as ousting the jurisdiction of the Courts. And in Atlantic Shipping Co. v. Dreyfus (4) an arbitration clause containing a provision that on failure to appoint an arbitrator within a limited time the defaulting party's claim should be barred was held by the House of Lords not to be invalid.

Neilson K.C. and Claughton Scott for the respondents. If the arbitrator refuses to state a special case or to state his award in the form of a special case the right of the applicant is to be given an opportunity of applying to the Court for an order under s. 19 directing him to do so: In re Palmer & Co. and Hosken & Co. (5); In re Fischel & Co. and Mann &

(1) (1895) 1 Com. Cas. 215.

(2) (1898) 78 L. T. 406.

(3) (1856) 5 H. L. C. 811, 830.

(4) (1922) 38 Times L. R. 534.

(5) [1898] 1 Q. B. 131.

Cook. (1) It is for the Court to decide whether r. 19 of the Association's rules bars the application to the Court, it is not for the arbitrator. Until the case gets before the Court the other side cannot take the point that r. 19 is a bar. The refusal of an opportunity to apply to the Court was misconduct. The rule in question is invalid, as it precludes the parties from having recourse to the Court. As Martin B. said in Scott v. Avery (2): "A prospective agreement not to have recourse to the Courts of law or equity of the country in respect of future causes of action to arise, is against the liberty of the law, which secures to every one the right of submitting to the Courts any matters in respect of which he claims redress." And not only does r. 19 preclude the parties from going to the Court, it equally precludes the arbitrators themselves, for it provides that any question of law "shall be determined in the arbitration," that is by the arbitrators and no one else. The clauses of the Arbitration Act are based on the obligation of the arbitrator to decide according to the law of the land. No doubt arbitrators may act upon documents instead of hearing the parties, but that is only a matter of procedure.

Van Breda in reply.

July 7. The following written judgments were delivered:-

BANKES L.J. The parties to this appeal entered into a contract for the sale and purchase of a quantity of sugar f.o.b. Antwerp. The contract contained a clause in the following terms: "This contract is subject to the rules of the Refined Sugar Association, as fully as if the same had been expressly inserted therein, and even though one of the parties to it be not a member of the Association." The contract is made on the contract form of the Association. Rule 7 of the rules of the Association relating to the constitution provides that: "It shall be an express condition of these rules that all members making contracts subject to them or on contract forms of this Association shall be bound

(1) [1919] 2 K. B. 431.

(2) (1856) 5 H. L. C. 811, 830.

to refer any dispute arising to the arbitration of the Council." Rule 17 provides that: "All disputes from time to time arising out of any such contract including any question of law arising in the course of the proceedings whether arising between the parties thereto, or between one of the parties thereto and the trustee in bankruptcy or personal representative of the other party shall be referred to arbitration in accordance with the rules." Rule 19 (inter alia) provides that "it is expressly agreed that the obtaining an award from the tribunal shall be a condition precedent to the right of either party to sue the other in respect of any claim arising out of any such contract. Neither buyer seller trustee in bankruptcy nor any other person as aforesaid shall require nor shall they apply to the Court to require any arbitrators to state in the form of a special case for the opinion of the Court any question of law arising in the reference, but such question of law shall be determined in the arbitration in manner herein directed." A dispute arose between the parties in reference to the sugar, which was referred in accordance with the rules to the Council of the Association. The respondents applied to the Arbitration Tribunal to state their award in the form of a special case, or to state a special case, or to postpone making their award until the respondents had had the opportunity of applying to the Court for an order requiring them to state a special case. The Arbitration Tribunal refused the application and proceeded to make their award. The respondents thereupon applied to the Divisional Court to set the award aside upon the ground of misconduct. No suggestion was made on the one side that the respondents were seeking to raise a frivolous point of law, nor on the other that the Arbitration Tribunal was not acting in good faith and in accordance with what it believed to be the binding agreement of the parties. The Divisional Court set the award aside on a somewhat narrow ground. They declined to decide whether r. 19 was against public policy and therefore not binding, but they held that inasmuch as that question was obviously a serious and important one the Arbitration Tribunal should have acceded to the respondents' application

in order that the question might be decided. The effect of this decision would be to involve the parties in further litigation in order to obtain the decision of some other Court upon the point. This does not appear to me to be a satisfactory way of disposing of the matter, and as all the materials are before this Court it should, I think, give a decision as to the validity of the rule. The ground of objection to the rule is that as an agreement it ousts the jurisdiction of the Courts of law, and is consequently against public policy and void. The importance of maintaining in its integrity the rule of law in reference to public policy is in my opinion a matter of considerable importance at the present time. Powerful trade organizations are encouraging, if not compelling, their members and persons who enter into contracts with their members to agree, as far as they can lawfully do so, to abstain from submitting their disputes to the decision of a Court of law. The present case is a case in point. There have been others before the Courts. Among commercial men what are commonly called commercial arbitrations are undoubtedly and deservedly popular. That they will continue their present popularity I entertain no doubt, so long as the law retains sufficient hold over them to prevent and redress any injustice on the part of the arbitrator, and to secure that the law that is administered by an arbitrator is in substance the law of the land and not some home-made law of the particular arbitrator or the particular association. To release real and effective control over commercial arbitrations is to allow the arbitrator, or the Arbitration Tribunal, to be a law unto himself, or themselves, to give him or them a free hand to decide according to law or not according to law as he or they think fit, in other words to be outside the law. At present no individual or association is, so far as I am aware, outside the law except a trade union. To put such associations as the Refined Sugar Association in a similar position would in my opinion be against public policy. Unlimited power does not conduce to reasonableness of view or conduct. It is however with the purely legal position that we have to deal.

No one has ever attempted a definition of what constitutes an ouster of jurisdiction. Each case must depend on its own circumstances. Each agreement needs to be separately considered. To what an extent opinions may differ in respect of a particular agreement is well indicated by the difference of opinion which existed among the judges who advised the House of Lords in Scott v. Avery (1), Crompton J.(2) saying that he considered the agreement which came under consideration in that case a mere attempt to evade the law, while Coleridge J. (3) entertained the view, which was upheld by the House, that the judgment of the Court of Exchequer stood on a safe distinction between an agreement which would close entirely the access to the Courts of law and that which only imposes as a condition precedent to the appeal to them that the parties shall have first settled by an agreed mode the precise amount to be recovered there. The recent case of Atlantic Shipping Co. v. Dreyfus (4) is another illustration of the same kind of difference of opinion, the House of Lords putting an entirely different construction upon the agreement between the parties to that which was put upon it in this Court. In the present case the agreement is expressed in perfectly plain terms. By r. 19 it is provided as a first step that the obtaining of an award is a condition precedent to the existence of any liability. The effect of this is that either party can obtain an order staying an action if an action is brought in lieu of proceedings for arbitration. To a substantial extent this is an ouster of the jurisdiction of the Courts, but it has been held in Scott v. Avery (1) to be legitimate and not contrary to public policy. In the present case the parties have expressly agreed, by r. 17, that questions of law as well as questions of fact must be submitted to arbitration. If therefore the agreement that neither party shall apply to the Court to require the arbitrator to state a special case is to stand, the only hold which the Court can have over the proceedings is, (1.) if the Arbitration Tribunal itself states a case for the opinion of the Court, or states its award in the form

(1) 5 H. L. C. 811.

(2) Ibid. 836.

(3) 5 H. L. C. 843.

(4) 38 Times L. R. 534.

of a special case, or (2.) if either party applies to set aside the award for misconduct on the part of the Arbitration Tribunal or upon the ground of error on the face of the award. To hold that under these circumstances the agreement not to apply for a special case is not to oust the jurisdiction of the Court within the meaning of the rule of law as I interpret it is in effect to decide that the Appeal Tribunal is entitled to be a law unto itself, and free to administer any law, or no law, as it pleases. I cannot but think that this is against public policy. I therefore hold that so much of r. 19 as provides that neither party shall apply for a special case, when incorporated into an agreement, is unenforceable and void. The Arbitration Tribunal should therefore in my opinion have acceded to the respondents' application, and having refused to do so they have brought themselves within the decision in Palmer's Case. (1) I agree therefore in the result with the decision of the Divisional Court though not on the same grounds. The appeal must be dismissed with costs here and below, and the award will be set aside.

SCRUTTON L.J. The Refined Sugar Association require all their members to incorporate in their contracts the rules of the Association. Rule 17 provides that all disputes on such contracts shall be referred to the arbitration of the Council. Rule 19 provides that the obtaining of an award from the tribunal shall be a condition precedent to the right of either contracting party to sue the other, and the rule continues: "Neither buyer, seller, trustee in bankruptcy, nor any other person as aforesaid shall require, nor shall they apply to the Court to require, any arbitrators to state in the form of a special case for the opinion of the Court, any question of law arising in the course of the reference, but such question of law shall be determined by arbitration in manner herein directed." An arbitration took place before the Council between C. Czarnikow, Ld., and Roth, Schmidt & Co. It is not necessary to say more of the merits than that some views as to the meaning of an f.o.b. contract which were distinctly

(1) [1898] 1 Q. B. 131.

unusual were put forward by the parties. During the arbitration the buyers asked the arbitrators to state a special case for the opinion of the Court, or to adjourn to allow the buyers to apply for such a case. The tribunal declined to take either course and at once made their award. The tribunal acted thus because in their view the rules of the Association embodied in the contract in question prevented the parties from making such a request. The buyers therefore applied to the Court to set aside the award on the ground of the misconduct of the arbitrators in not affording an opportunity for an application to the Court; In re Palmer & Co. and Hosken & Co. (1) The sellers replied that in view of r. 19 there was no misconduct of the arbitrators; to which the buyers rejoined that the rule was contrary to public policy as ousting the jurisdiction of the Courts. The Divisional Court did not decide this question, but did decide that under In re Palmer & Co. and Hosken & Co. (1) it was misconduct of the tribunal not to give an opportunity of application to the Court for a special case. They therefore set the award aside. As however under the rules an award must be obtained before an action can be brought, this merely postpones the day when it must be decided whether the rules of the Refined Sugar Association purporting to prevent the parties from applying for a special case on matters of law are rules to which the King's Courts will pay any attention. I am of opinion that r. 19 of the rules of the Refined Sugar Association in so far as it purports to prevent a party to an arbitration before the Association from exercising his right under the Arbitration Act to ask for a special case for the opinion of the Court on a question of law is contrary to public policy and so unenforceable. In countless cases parties agree to submit their disputes to arbitrators whose decision shall be final and conclusive. But the Courts, if one of these parties brings an action, never treats this agreement as conclusively preventing the Courts from hearing the dispute. They consider the merits of the case, including the fact of the agreement of the parties, and either stay the action or allow it to proceed

(1) [1898] 1 Q. B. 131.

according to the view they form of the best method of procedure; and they have always in my experience declined to fetter their discretion by laying down any fixed rules on which they will exercise it. If they allow the action to proceed they pay no further attention, and give no legal effect, to any further proceedings in the arbitration: Doleman Sons v. Ossett Corporation. (1) They do not allow the agreement of private parties to oust the jurisdiction of the King's Courts. Arbitrators, unless expressly otherwise authorized, have to apply the laws of England. When they are persons untrained in law, and especially when as in this case they allow persons trained in law to address them on legal points, there is every probability of their going wrong, and for that reason Parliament has provided in the Arbitration Act that, not only may they ask the Courts for guidance and the solution of their legal problems in special cases stated at their own instance, but that the Courts may require them, even if unwilling, to state cases for the opinion of the Court on the application of a party to the arbitration if the Courts think it proper. This is done in order that the Courts may insure the proper administration of the law by inferior tribunals. In my view to allow English citizens to agree to exclude this safeguard for the administration of the law is contrary to public policy. There must be no Alsatia in England where the King's writ does not run. It seems quite clear that no British Court would recognize or enforce an agreement of British citizens not to raise a defence of illegality by British law. But for the decision of Tullis v. Jacson (2) I should have thought it equally clear that no agreement not to raise a defence of fraud was enforceable. Fraud usually involves a criminal offence, and if there were in fact fraud an agreement not to bring it before the King's Courts was, I should have thought, clearly contrary to public policy. I reserve my right to consider Tullis v. Jacson (2) if a similar clause should come before me. Without attempting precisely to define the limits within which an agreement not to take proceedings in the King's Courts is unenforceable, I think an agreement to shut out the

(1) [1912] 3 K. B. 257, 269.

(2) [1892] 3 Ch. 441.

power of the King's Courts to guide the proceedings of inferior tribunals without legal training in matters of law before them is calculated to lead to erroneous administration of law, and therefore injustice, and should therefore not be recognized by the Courts. I am ready to go very far in ignoring technicalities and irregularities on the part of arbitrators, unless there is some real substance of error behind them, but I think commercial men will be making a great mistake if they ignore the importance of administering settled principles of law in commercial disputes, and trust to the judgment of business men, however experienced in business, based only on the facts of each particular case, and with no knowledge of or guidance in the principles of law which must control the facts and which arbitrators must administer.

I think it is necessary to add a word about the effect of Scott v. Avery. (1) I have always understood it to be a decision that while parties cannot agree to oust the jurisdiction of the King's Courts, they can agree that no action shall be brought in those Courts till the amount of liability has been settled by arbitration. Alderson B. (2) states this as agreed by all parties, and Lord Cranworth (3) begins his judgment in the same way. I do not think the language of Lord Dunedin in commencing his judgment in Atlantic Shipping Co. v. Dreyfus (4) can have been meant to impugn the first part of this proposition. The Courts always decline to recognize an agreement to refer all disputes to arbitration as compelling them to stay an action, and do so because such an agreement would oust the jurisdiction of the King's Courts. I prefer the language of Lord Sumner, concurred in by Lords Buckmaster and Atkinson, to the effect that as long as a clause does not exclude the claimant from such recourse to the Courts as is always open by virtue of the provisions of the Arbitration Act, 1889, but only requires certain conditions as precedent to a valid claim, it does not oust the jurisdiction. I think that Lord Sumner would have regarded a clause depriving the claimant of the protection of the Arbitration Act as an

(1) 5 H. L. C. 811.

(2) Ibid. 844.

(3) 5 H. L. C. 846.

(4) 38 Times L. R. 534.

ousting of the jurisdiction and unenforceable. And I can conceive some conditions precedent to enforcing a claim which English Courts would decline to enforce.

I am of opinion that the view of the Divisional Court was correct in regarding the action of the tribunal as wrong in refusing an opportunity to apply for a special case. Arbitrators must understand that parties before them have a right to take the opinion of the Court as to whether the arbitrators should be given the guidance of the Court in matters of law, and that they must not attempt to stop the action of the Courts by interfering with or hindering such a right of parties. For that reason I think the decision must be affirmed setting aside the award. I am also of opinion that the latter part of r. 19 is unenforceable, and that parties are entitled in spite of it to apply to the Court, and in a proper case obtain from it a special case on matters of law. I do not decide that the present is a proper case; the matter has not been argued before us. The parties however should consider their position. They must obtain an award as a condition precedent to recovering anything, and therefore must go to some arbitrators. I see no reason to assume that the present tribunal will not, if ordered to do so, state a proper special case, and it may be that the best course to take is to remit the matters to the arbitrators in the existing arbitration, when an application to order them to state a special case can be made in the usual way. The appeal however must be dismissed with costs.

ATKIN L.J. I agree with the judgments that have been delivered, and desire to add but little on my own account. I should not be prepared to decide this case in favour of the respondents on what I venture to think was the narrow ground adopted by the Divisional Court. If in fact the buyers were bound by a valid agreement not to apply to the Court for a direction to the arbitrators to state an advisory case, I should hardly consider it misconduct of the arbitrators to refuse to adjourn for the purpose of enabling the buyers to make an application upon which they were bound

to fail. I think this Court ought to determine the question whether the suggested agreement is valid. In my opinion it is not. I think that it is still a principle of English law that an agreement to oust the jurisdiction of the Courts is invalid. It is so stated or assumed in all the judgments of the judges who advised the House of Lords in Scott v. Avery (1), and the principle is affirmed by Lord Chelmsford. The effect of the decision is to establish that an agreement that the rights of the parties shall be determined by arbitration as a condition precedent to an action is not an agreement ousting the jurisdiction of the Court. There is no cause of action and therefore no jurisdiction until an award is made, and when made the Courts have complete jurisdiction. The jurisdiction that is ousted in this case is not the common law jurisdiction of the Courts to give a remedy for breaches of contract, but the special statutory jurisdiction of the Court to intervene to compel arbitrators to submit a point of law for determination by the Courts. This appears to me to be a provision of paramount importance in the interests of the public. If it did not exist arbitration clauses making an award a condition precedent would leave lay arbitrators at liberty to adopt any principles of law they pleased. In the case of powerful associations such as the present, able to impose their own arbitration clauses upon their members, and, by their uniform contract, conditions upon all non-members contracting with members, the result might be that in time codes of law would come to be administered in various trades differing substantially from the English mercantile law. The policy of the law has given to the High Court large powers over inferior Courts for the very purpose of maintaining a uniform standard of justice and one uniform system of law. Analogous powers have been possessed by the Court over arbitrators, and have been extended by the provisions of s. 19. If an agreement to oust the common law jurisdiction of the Court is invalid every reason appears to me to exist for holding that an agreement to oust the Court of this statutory jurisdiction is invalid. I have anxiously considered the case of

(1) 5 H. L. C. 811.

Atlantic Shipping Co. v. Dreyfus (1), which reversed a judgment of the Court of Appeal to which I was a party, lest I should be departing from the decision of the House of Lords in that case. But it appears to me plain that the majority of the House differed from the Court of Appeal only in the construction of the contract, holding that the agreement did not oust the jurisdiction of the Court but merely made an award a condition precedent, and threw no doubt on the general proposition affirmed in Scott v. Avery. (2) I agree that the appeal should be dismissed.

Solicitors for the appellants: Richards & Butler.

Solicitors for the respondents: Wm. A. Crump & Son.

J. F. C.

(1) 38 Times L. R. 534.

(2) 5 H. L. C. 811.