Wahl v. Donaldson
REITERATIONFacts
The Antecedents: Plaintiffs Rudolph Wahl & Co. leased a ship named Petrarch to defendants Donaldson, Sims & Co. for six months. Plaintiffs claimed a balance of $25,484.38 with interest from July 30, 1901, based on the contract. Procedural History: Suit was filed on March 4, 1902. Defendants failed to answer, and a judgment by default was rendered on April 18, 1902, for $17,892.81. On June 10, 1902, defendants applied for a new trial under section 113 of the Code of Civil Procedure, 1901. The Court of First Instance granted the motion and set aside the default judgment on June 20, 1902. The Petition: After the default judgment was set aside, defendants filed a demurrer to the complaint, questioning the competency of the Court of First Instance to try the case. The objection was based on a contract clause stipulating that any difference of opinion between the parties, whether on the principal matter or details, shall be referred for arbitration to two competent persons in Hongkong, with a third to be called in case of disagreement, and the majority opinion to be final and obligatory. The question presented was whether this arbitration clause was invalid as against public policy.
Issue(s)
Whether a stipulation in a contract requiring all disputes to be referred to arbitration is invalid as against public policy. Whether the Court of First Instance erred in granting the motion for a new trial and setting aside the judgment by default.
Ruling
The Supreme Court held that the judgment sustaining the demurrer to the complaint and holding that the Court of First Instance did not have jurisdiction on account of the arbitration clause was erroneous. The judgment was set aside, and a new trial was ordered. Costs were adjudged against the appellees.
Ratio Decidendi
On the validity of the arbitration clause: The Court held that a stipulation in a contract that all matters in dispute are to be referred to arbitrators and to them alone is contrary to public policy. Such a stipulation attempts to prevent any right of action from accruing at all, which cannot be permitted. This aligns with the general rule in the United States and the civil law. However, the Court distinguished this from a condition precedent where the amount of damages is to be ascertained by arbitration before a right of action arises, which is considered valid. Therefore, the Court of First Instance should have entertained jurisdiction despite the arbitration clause. On the granting of the motion for a new trial: The majority of the Court were of the opinion that there was no error in the action of the Court of First Instance in granting the motion to set aside the judgment by default. The application was made under section 113 of the Code of Civil Procedure, 1901, which allows relief from a judgment taken through mistake, inadvertence, surprise, or excusable neglect, provided the application is made within a reasonable time. The defendants failed to show any excuse for their failure to answer within the prescribed time. The application was based on the general statement that defendants had a counterclaim for $125,000 due to plaintiffs' failure to perform the contract regarding the Petrarch, which the Court found too vague and uncertain to show merits. The defense presented after the motion was granted was a demurrer based on the arbitration clause, which the Court considered a purely technical ground. The writer of the opinion (Justice Cooper) dissented on this point, believing the application was defective and insufficient to justify setting aside the default judgment.
Main Doctrine
A stipulation in a contract that all matters in dispute shall be referred to arbitrators and to them alone is contrary to public policy and does not divest the courts of their jurisdiction. However, a condition precedent to the accrual of a right of action, requiring arbitration for the ascertainment of damages, is valid.