Wahl v Donaldson (1903) Cooper, J.

Plaintiff: Rudolph Wahl, Jr., Dr. Kurt Wahl

Defendant: Donaldson, Sims, & Co.
Concept: Arbitration clause
Brief facts: A contract was entered into between Wahl and Donaldson
for the purpose of lease of a ship and a stipulation in said contract
provides that conflicts shall be submitted before arbitrators in HK. A
complaint for sum of money was filed before the CFI. CFI first decided
in favor of Wahl, but upon application, the judgment by default was
set aside. The CFI in granting such motion to set aside judgment,
upheld the validity of the arbitration clause. The SC however reversed
the CFI and declared the clause contrary to public policy.
Doctrine: A condition in a contract that disputes arising out of it shall
be referred to arbitration is good where the amount of damages
sustained by a breach of the contract is to be ascertained by specified
arbitration before any right of action arises, but that it is illegal where
all the matters in dispute of whatever sort may be referred to
arbitrators and to them alone. In the first case a condition precedent to
the accrual of a right of action is imposed, while in the second it is
attempted to prevent any right of action accruing at all, and this can
not be permitted.
Facts:
Wahl and Donaldson entered into a contract by which Wahl
leased to the defendants a certain ship called Ptrarch for the
term of 6 months
Wahl then claimed that Donaldosn is still indebted to them
(Wahl) a balance of $ 25, 484.38 with interest. Wahl then
insituted a suit.
Donaldson failed to answer the complaint. Consequently, a
judgment by default was rendered in favor of Wahl wherein
Donaldson was asked to pay Wahl the sum of $17, 892.81
After almost 2 months, Donaldson made an application to the CFI
for a new trial which was granted and eventually set aside the
judgment by default.
After the grant of motion for new trial, a demurrer was made by
Donaldson to the complaint which presented the question of the
competency of the CFI to try the case basing this argument on a
provision in the subject contract
o Contract provides that in case of conflict, the difference
shall be referred for arbitration to 2 competent persons in
HK
Issue: WON the provision is invalid as being against public policy (Yes)

Ratio:
A condition in a contract that disputes arising out of it shall be
referred to arbitration is
o Valid where the amount of damages sustained by a
breach of the contract is to be ascertained by specified
arbitration before any right of action arises
Ratio for validity it is a condition precedent to the
accrual of a right of action
o Illegal where all the matters in dispute of whatever sort
may be referred to arbitratiors and to them alone
Ratio for invalidity it is attempted to prvent any
right of action accruing at all, and this cannot be
permitted
Rule proviided above is the rule in the US which shall also be
applicable in our jurisdiction because our Code of Civil Procedure,
which is the law applicable in the case at bar, is copied from the
Civil Code of Procedure of California
Moreover, the CFI erred in granting the motion for new
trial.
o The general rule for grant of the said motion is that the
application should show merits, and that this should be
done with some degree of certainty and not left to surmise.
o In the case at bar, the affidavit submitted by Donaldson
merely states that they have a counterclaim against Wahl
based upon the failure on the part of the plaintiffs (Wahl) to
perform the contract with regard to the Petrarch. The SC
finds such statement too vague and uncertain to show
merits in the defense.
o Also, after the application to set aside the judgment had
been granted, a demurrer was submitted based upon a
purely technical ground that under the contract the parties
had agreed to settle the matters in dispute by arbitration
at HK. Such is not meritorious.
Disposition: CFI decision set aside. Order for new trial issued.