Scott v Avery Clause- An Introduction

In Russell on Arbitration, Scott v Avery clause was explained as: “While parties cannot by contract oust the jurisdiction of the courts, they can agree that no right of action shall accrue in respect of any differences which may arise between them until such differences have been adjudicated upon by an arbitrator. Such a provision is often termed a Scott v. Avery clause.” All contracts made with The Grain And Feed Trade Association (GAFTA) – the only worldwide trade association – include a “Scott-Avery clause which reads:

“neither party shall bring any action or other legal proceedings against the other of them in respect of any such dispute until such dispute shall first have been heard and determined by the arbitrator(s) , in accordance with the Arbitration Rules and an award from the arbitrator(s) shall be a condition precedent to any action or other legal proceedings “. In 1856, the House of Lords decided a case called Scott v Avery, Alexander Scott and George Avery, at issue was a contract which provided that any differences or disputes had to be referred to arbitration.

Facts of the case

The case came as an appeal from a decision of the Court of Exchequer Chamber, reported 8Exch. 487, in an action brought by the appellant, as assured, on a policy on a ship effected by him with the respondents as insurers. The appellant, as the plaintiff in the action, filed a declaration setting forth the policy in the ordinary way, and the defended pleaded to that several pleas, the fifth of which set forth the following condition of the policy:

“The sum to be paid by the association (respondents) to any suffering member for any loss or damage shall in the first instance be ascertained and settled by the committee, and the suffering member, if he agrees to accept such sum in full satisfaction of his claim, shall be entitled to demand and sue for the same as soon as the amount to be paid has been ascertained and settled, but not before, which can only be claimed according to the customary mode of payment in use by the society; and if a difference shall arise between the committee (association) and any suffering member relating to the insurance, in such case the member dissatisfied shall select one arbitrator on his or her behalf, and the committee shall select another; and if the committee refuse for fourteen days to make such selection, the suffering member shall select two; and in either case the two selected shall forthwith select a third, which three arbitrators, or any two of them, shall decide upon the claims and matters in dispute according to the riles and custom of the club, to be proved on oath by the secretary; and on such arbitration the party demanding it shall state the sum which claims, and shall be allowed such proportion of the expenses occasioned by the arbitration as the sum awarded to him bears to the sum demanded, and the residue of such expenses shall be borne by him and deducted from the sum awarded to him. And in all cases where arbitration is resorted to, the settlement to the committee to be wholly rescinded, and the statement begun de novo. Provided always, and it is hereby expressly declared to be a part of the contract of insurance between the members of the association, that no member who refuses to accept the amount of any loss as settled by the committee in manner hereinbefore specified, in full satisfaction of such loss, shall be entitled to maintain any action at law or suit in equity of his policy, until the matters in dispute shall, have been referred to and decided by arbitrators appointed as hereinbefore specified, and then only for such sum as the said arbitrators shall award; and the obtaining the decision of such arbitrators on the matters and claims in dispute is hereby declared to be a condition precedent to the right of any member to maintain any such action or suit.”

The plea that a difference had arisen between the plaintiff and the committee, and the loss had never been ascertained and settled, but that the defendants were willing to have it settled and the plaintiff was no willing.

The Court of Exchequer gave judgment for the plaintiff, but that decision was reversed by the Court of Exchequer Chamber, and the plaintiff appealed to the House of Lords.

The House of Lords accordingly held that no action was maintainable until the award was obtained, the appeal was dismissed.

Opinions on Scott v Avery Case

Justice Campbell in Scott v Avery:

“….where it is expressly, directly and unequivocally agreed upon between the parties that there shall be no right of action whatever till the arbitrators have decided, it is a bar to the action that there has been no such arbitration”

Lord Cranworth in Scott v Avery:

“This doctrine depends upon the general policy of the law that parties cannot enter into a contract which gives rise to a right of action for the breach of it, and then withdraw the jurisdiction on such a case from the ordinary tribunals. But surely there can be no principle or policy of the law which prevents parties from entering into such a contract as that no breach shall occur until after a reference has been made to arbitration.”

“……..it appears to me perfectly clear that, until the award was made, no right of action accrued, and consequently the judgment of the court below, reversing the judgment of the Court of Exchequer and allowing the plea, was a perfectly correct judgment.”

The English Reports summary of the decision:

“It is a principle of law that parties cannot by contract oust the courts of their jurisdiction; but any person may covenant that no right of action shall accurse till a third person has decided on any difference that may arise between himself and the other party to the covenant.”

SCOTT V AVERY CLAUSE IN INDIA

Under Arbitration and Conciliation Act 1996, an arbitration agreement which seeks to exclude the jurisdiction of courts would be void. But it is open to the parties in the arbitration to stipulate that the award of the arbitrator shall be a condition precedent to the maintainability of ant suit. In such cases no action may be allowed until an award is obtained.

The validity of Scott v Avery clause was approved by the Supreme Court in India in Vulcan Insurance Co v Maharaj Singh [1] ,a factory was insured against fire, which was lost in fire. The insurance company repudiated the all liability under the policy. The policy provided that if any dispute arose as to the amount of any loss or damage, the same would be decided by arbitration. The assured attempted to appoint an arbitrator by filing the agreement in the court. The court held that repudiation of

“A clause like the last part of Clause 18 making the award a condition precedent to any right of action or suit first came up for consideration in the case of Scott v. Avery [2] and since then such clauses are commonly called Scott v, Avery clauses. Generally it has been found that if the arbitration clause is couched in a comprehensive language taking within its ambit any kind of dispute arising under the policy, then obtaining of an award by arbitration is a condition precedent to the starting of any other legal proceeding. A clause like Scott v. Avery has repeatedly been held to be a valid one.

“Even a clause of this type, however, is not absolute in effect: where the court orders that the arbitration agreement cease to have effect in relation to a particular dispute, it has a discretion to order further that the Scott v. Avery clause cease to have effect, too” (vide pages 57, 58 of Russell on Arbitration, Eighteenth Edition).” [3]

Proposed amendment Bill of 2003 in Arbitration and Conciliation Act 1996 on Scott v Avery Clause [4]

Proposed section 8(6): An Exception to Scott vs. Avery clause

A Scott vs. Avery clause is one which requires an award to be first obtained as a condition for starting any legal proceedings. Such a clause is intended to see that parties do not bypass arbitration clauses and go to a Court of law so as to compel the opposite party to raise a plea based on the existence of an arbitration clause. Both in England and in India, such clauses have been upheld.

However, there was a provision in sec. 19 of the 1940 Act for supersession of the arbitration agreement by the Court in certain situations. The old Act therefore had to deal with a situation where the arbitration clause was superseded by the Court, for, in that event, a party would not be in a position to obtain an award and then the condition of first obtaining an award would be a condition impossible of being complied with. Hence sec. 36 of the old Act provided that in case the arbitration agreement is superseded, the Court should also supersede the Scott vs. Avery clause. A further provision was made in the old Act in sec. 37(2) that so far as the period of limitation is concerned, once the arbitration clause and the Scott vs. Avery clauses are not applicable, the period has to be reckoned from the date of the cause of action as done normally. Thus sec. 37(2) was consequential to sec. 36 which was in itself consequential to an order of supersession of the arbitration clause under sec. 19 of the old Act. The 1996 Act makes a deviation and there is no provision corresponding to sec. 19 of the old Act for superseding an arbitration clause. Hence, the legislature rightly dropped a provision corresponding to sec. 36 and sec. 37(2).

But then, there are proposals made by Law Commission for amending sec. 8 of the principal Act of 1996 enabling the ‘judicial authority’ to decide

whether an arbitration agreement is null and void,

inoperative or

not capable of enforcement

Whether there is a dispute in existence or

Whether there is an arbitration clause in existence.

Of these contingencies, if under (i), (ii) and (iii), it is held by the judicial authority that the agreement which is in existence is null and void or inoperative or incapable of enforcement, then, the arbitration agreement cannot be of any help and it is not possible to obtain an award initially, as required by the Scott vs. Avery clause. In that event, a provision has to be made that the ‘judicial authority’ under sec. 8 will refuse to stay the legal proceeding and will decide it on merits. In other words, in as much as it is not possible in contingencies (i), (ii) and (iii) to pass an award though the arbitration clause is in existence, it is necessary to have a provision that the Scott vs. Avery clause requiring an award to be obtained as a condition precedent is not applicable. Therefore, a provision nullifying the Scott vs. Avery clause in situations covered by contingencies (i), (ii) and (iii) above referred to, has to be made as under the English Act, 1996.

The English Act, 1996 contains a provision similar to the proposed sec. 8 and enables the Court to decide whether an arbitration agreement is null and void or inoperative or incapable of enforcement. If these pleas are accepted, the Court will refuse stay of the legal proceeding and decide the said proceeding on merits. The English Act, 1996, therefore, made a special provision in section 9(5) that in case the arbitration agreement goes out of operation on any of these grounds, the Scott vs. Avery clause does not apply. Section 9(5) of the English Act, 1996 states as follows:

“Section 9(5): If the court refuses to stay the legal proceedings, any provision that an award is a condition precedent to the bringing of legal proceedings in respect of any matter is of no effect in relation to the proceedings.”

Therefore, in view of the proposal to amend sec. 8 conferring power on the judicial authority to decide issues (i), (ii) and (iii), referred to above, a provision similar to sec. 9(5) of the English Act, 1996 becomes necessary, stating that if the judicial authority decides that the agreement is null and void, inoperative or unenforceable, then it will proceed to decide the legal proceeding on merits and refuse stay and that there is no need to obtain an award as a condition precedent.

Indian Cases on Scott v Avery clause

In P Manohar Reddy and Bros v Maharastra Krishna Valley Dev. Corp and Ors [5] , The famous case of Scott v Avery is referred, it was held that,

“A clause like the one in the Scott v Avery bars any action or suit if commenced for determination of a dispute covered by an arbitration clause. But if on the other hand, a dispute cropped up at the very outset which cannot be referred to arbitration as being not covered by the clause, then the Scott v Avery clause is rendered inoperative and cannot be pleaded as a bar to the maintainability of the legal action or suit for determination of the dispute which was outside the arbitration clause.”

In another case Rosamma Joseph vs United India Insurance Co. Ltd. [6] , it was held that

“Since the contract between the parties stipulated arbitration and award as a condition precedent for instituting a suit and since the suit was not preceded by arbitration and award, it must follow that the suit is not maintainable.” But on the prayer of counsel for appellant to the court, they may order that the provision in the contract shall cease to have effect regarding the dispute. Section 36 which states, that where it is provided that an award under an arbitration agreement shall be a condition precedent to the bringing of an action with respect to any matter to which the agreement applies, the court, if it orders that the agreement shall cease to have effect as regards any particular difference, may further order that the said provision shall also cease to have effect as regards that difference.

This provision also was considered in Vanguard Fire & General Insurance Co. ‘s case [7] , Mathew J. observed that:

“The effect of the Scott v. Avery clause can be nullified by applying to the court for setting aside that clause.”

The Judge also quoted the following observations in Russel on Arbitration, [8] “ Where a court orders that an arbitration agreement shall cease to have effect in relation to a dispute, it may also order that any Scott v. Avery clause in force between the parties (whether contained in the arbitration agreement or not) shall likewise cease to have effect. This section in effect gives the court a discretion in suitable cases to treat the Scott v. Avery clause as a mere arbitration clause. There is power to make such an order:” But the judges after referring to the above ,in the present case, Rosamma Joseph v United India Insurance Co. Ltd. [9] , it was held as follows,

“Where the authority of an arbitrator or arbitrators or umpire is revoked by leave of the court. This would seem to cover any case where either the Scott v. Avery clause is contained in a submission proper and leave is given to revoke this, or it is contained in an agreement to submit and leave is given to revoke a submission made pursuant to the agreement.

Where the whole arbitral Tribunal is removed by the court, i.e., for misconduct or delay.

Where the dispute involves charges of fraud.

It is quite unnecessary for us to consider whether the three circumstances in which according to Russel the court may pass an order contemplated under Section 36 are exhaustive. It is sufficient to say that no such order was sought by the plaintiff in the trial court and no specific reason or ground is urged before us to persuade us to exercise the power under Section 36. Learned counsel for the appellant suggested that since the suit has been filed that itself would be a reason to exercise the power. If we accept this proposition, it will mean that defence can be nullified in every suit by the plaintiff invoking Section 36. That cannot be. No other ground is urged before us to persuade us to invoke the power under Section 36.” And in the case they did not invoke the section 36 so as to nullify the effect of Scott V Avery clause.

Conclusion

Scott v. Avery lays down a condition wherein the parties have to obtain the arbitration award before they can go to the Court for the issue to be settled. It is not the process whereby the Courts are relieved or ousted of the jurisdiction, but before moving to the Court, they should ensure that they have the arbitration award in their hand, if an arbitration clause is there in the agreement. It is not a questioning towards the judicial authority rather tries to impose a compulsory arbitration.

Section 8 of the Arbitration and the Conciliation Act, 1996 mention that, if there is arbitration agreement between the parties that agreement provide that the matter should be referred to arbitration. But against that, if one of the parties files a case before the Court, then section 8 says that at the first instance, if the other party produces the arbitration agreement and shows it to the Court, then the Court shall not go ahead with the case and the Court shall refer the matter to arbitration.

Under the 1940 Act, the Court has the discretion to go ahead with the case or to refer the case to arbitration. But under the 1996 Act, the Court is left with no discretion but to refer the parties to arbitration. The parties have to approach the arbitrator firstly, and only with the arbitration award the parties are able to approach the Court. This cannot be said to be ousting the jurisdiction of the Court but this can be said to be complying with the procedures or what has been mentioned in the agreement.

Scott v. Avery principle was applied in many Indian cases, and it was approved in the year 1976 by the Supreme Court while deciding Vulcan Insurance Co. case. The Indian Courts are not hesitant to approve and apply the principle in the cases which are coming before the Indian Courts. In the cases, where the principle is applied, the Court will ask the parties to approach the arbitrator first and obtain the award, and then approach the Court and it is then only that the Court has the power to interfere in the case or the suit got before it. Thus we can say that the Scott v. Avery clause is imposing on the agreement some conditions, which upon the fulfillment of the same, lies a right to approach the court for the remedy which the parties require. The effect of this clause is that of compulsory arbitration whereby the parties are left with no option but to go for arbitration. If the agreement contains anything which is invalid, or if the agreement is null and void , then the court has the power to determine the same and only after that, the same can be referred to arbitration. Thus this principle has found its application in the Indian scenario and the Courts are repeatedly resorting to this clause in the necessary circumstances. And to make the application of the clause more clear a bill is proposed to amend the section 8 of Arbitration and Conciliation Act as discussed above.