Union of India V.s Birla Cotton
Spinning & Weaving Mills Ltd. [1963] INSC 73 (27 March 1963)
27/03/1963 SHAH, J.C.
SHAH, J.C.
SINHA, BHUVNESHWAR P.(CJ) AYYANGAR, N.
RAJAGOPALA
CITATION: 1967 AIR 688 1964 SCR (2) 599
ACT:
Arbitration-Balance of price of goods
supplied under a contract Liability to pay admitted-Invocation of the arbitration
clause in the contract to set off money due Under a different and independent
contract-Whether permissible Arbitration Act, 1940 (X of 1940), s. 34.
HEADNOTE:
The respondent supplied to the appellants
goods of the value of Rs. 1,06,670.89 nP. under a contract entered into by the
parties and received about Rs. 93,727/as part payment.
The appellant declined to pay the balance on
the plea that an amount of about Rs. 10,625/was due to the appellant under
another contract between the parties. The respondent thereupon filed a suit
before the Senior Sub-ordinate Judge, Delhi for realisation of the amount. 'The
appellant applied under s. 34 of the Arbitration Act, 1940, for stay of (lie
suit alleging that a dispute had arisen between the parties and there being an
arbitration agreement it could be invoked by the appellant. The respondent
submitted that there was no dispute concerning the contract which was covered
by any valid arbitration clause and which attracted the application of s. 34 of
the Arbitration Act.
600 The Subordinate judge held that before s.
34 could be invoked the suit must raise a dispute in respect of the matter
agreed to be referred to arbitration and not independent of it and as no
dispute was raised by the appellant about its liability to pay the amount
claimed by the respondent arising out of the contract and the only dispute
which was sought to be raised was in respect of the liability of the respondent
under another contract the suit could not be stayed. An appeal against this
order was dismissed in limine by the High Court. The present appeal was by way
of special leave granted by this Court.
It was contended that the terms of the
arbitration agreement included a dispute relating to a refusal to meet the
obligations arising under the contract even though the refusal was not founded
on any right arising under the terms of the contract.
Held that for enforcement of the arbitration
clause there must exist a dispute; in the absence of dispute between the
parties to the arbitration agreement there can be no reference.
A plea that the appellant though liable to
pay the amount under the terms of the contract would not pay it because it
(disired to appropriate it towards another claim under another independent
contract cannot reasonably be regarded as a dispute "under or in
connection" with that contract under which the liability sought to be
enforced has arisen.
Uttam Chand Saligram v. Jewa Mamooji, I.L.R.
46 Cal, Chundaumull Jahaleria v. Clive Mills Go., Ltd., I.L.R. (1948) 2 Cal.
297 and Heyman v. Darwins Ltd., L.R. [1942] A.C. 356 distinguished.
CIVIL APPELLATE JURISDICTION : Civil Appeal
No. 609 of 1961.
Appeal by special leave from the judgment and
order dated April 12, 1960 of the Punjab High Court (Circuit Bench) at Delhi in
First Appeal from Order No. 43-D of 1960.
N. S. Bindra and H. Dhebar, for the
appellant.
G.B. Pai, J.B. Dadachanji, O.C. Mathur and
Ravinder Narain, for the respondent 601 1963. March 27. The judgment of the
Court was delivered by SHAHJ.-The Birla Cotton Spinning and Weaving Mills Ltd.hereinafter
called 'the Company'-supplied to the Union of India goods of the value of Rs.
1,06,670.89 nP. under a contract dated January 30, 1956 and received Rs.
93,727/as part payment of the price. The Union declined to pay the balance of
Rs. 12,943.89 nP. The Company then commenced Suit No. 386 of 1958 in the Court
of the Senior Subordinate Judge, Delhi, against the Union of India for a decree
for Rs. 10,625/and Rs. 2, 762.50 nP. as interest from October 12, 1956 till
date of suit and interest pendente lite and costs of the suit. The Company
alleged that the Union had withheld payment of the balance of Rs. 12,943. 89
nP. on the plea that an amount of Rs.10, 625/was due to the Union under another
contract between the parties for a bulk purchase order No. PBI/ 7028-705 dated
December 16, 1949.
The Company submitted that there was no such
contract and the dispute raised in that behalf by the Union had been referred
to the arbitration of the Officer on Special Duty, Directorate General of
Supplies and Disposals and Shri Ramniwas Agrawala but had since been adjourned
sine die by the arbitrators.
The Union by petition dated May 19, 1959
applied under s. 34 of the Indian Arbitration Act for stay of the suit alleging
that a dispute had arisen between the parties and there being an arbitration
agreement which could be invoked under the circumstances and the Union being
ready and willing to do all things necessary for the proper conductof the
arbitration under cl. 21 contained-in form No. WSB133. The Company resisted the
petition contending that there was no dispute concerning the contract which was
covered by any valid submission arbitration clause, and which attracted the
application 602 of s. 34 of the Arbitration Act. The subordinate judge held
that before s. 34 could be invoked the suit must raise a dispute in respect of
the matter agreed to be referred to arbitration and not independent of it and
as no dispute was raised by the Union about its liability to pay the amount
claimed by the Company arising under the contract and the only dispute which
was sought to be raised was in respect of the liability of the Company under
another contract, the suit could not be stayed. An appeal against the order
refusing to stay the suit was dismissed in limine by the High Court of Punjab.
With special leave, the Union has appealed to this Court.
The only contention raised in the appeal is
that the terms of the arbitration agreement include a dispute relating to a
refusal to meet the obligations arising under the contract even though the
refusal was not founded on any right arising under the terms of the contract.
The arbitration agreement is contained in cl, 21, which is so far as it is
material provides :
"In the event of any question or dispute
arising under these conditions or any special conditions of contract or in
connection with this contract (except as to any matters the decision of which
is specially provided for by these conditions) the same shall be referred to
the award of an arbitrator to be nominated by the purchaser and an arbitrator
to be nominated by the Contractor, or in case of the said arbitrators not
agreeing then to the award of an Umpire to be appointed by the arbitrators in
writing before proceeding on the reference and the decision of the arbitrators,
or in the event of their not agreeing of the Umpire appointed by them shall be
final and conclusive and the provisions of the Indian Arbitration Act, 1940,
and of the Rules there under and 603 any Statutory modification thereof shall
be deemed to apply to and be incorporated in this contract." The arbitration
clause is wide and includes not only disputes arising under the covenants of
the contract but also to disputes under conditions general or special or in
connection with the contract. But before an order for stay of a proceeding
maybe made under s. 34 of the Arbitration Act, the following conditions must
co-exist :
(i)there must be a subsisting and binding
arbitration agreement capable of being enforced between the parties ;
(ii) the subject-matter in dispute in the
proceeding sought to be stayed must be within the scope of the arbitration
agreement and (iii)the petition must be made to the judicial authority by a
party to the arbitration agreement or some person claiming under him at the
earliest stage of the proceeding i.e. before the filing of the written
statement or taking any other step in the proceeding.
The judicial authority may, if these
conditions exist, grant stay, if it is satisfied that the party applying is and
has also been at all material times before the proceedings were commenced ready
and willing to do all things necessary for the proper conduct of the
arbitration and there is no sufficient reason for not referring the matter in
accordance with the arbitration agreement.
The evidence recorded by the Trial Court
discloses that there was no dispute between the Company 604 and the Union
arising under the contract on which the suit was filed. The Union accepted
liability to pay the amount claimed by the Company in tile suit. The Union
still declined to pay the amount asserting that an amount was due from the
company, to the Union under a distinct contract.
This amount was not sought to be set-off under
any term of the contract under which the Company made the claim. The dispute
raised by the Union was therefore not in respect of the liability under the
terms of the contract 'which included the arbitration clause, but in respect of
an alleged liability of the Company under another contract which it may be
noted had already been referred to arbitration. The Union had no defence to the
action filed by the Company : it was not contended that the amount of Rs. 10,625/was
not due to the Company under the contract relied upon by the Company. For
enforcement of the arbitration clause there must exist a dispute : in the
absence of a dispute between the parties to the arbitration agreement, there
can be no reference.
It was urged that mere refusal by the Union
to pay the amount due is sufficient to raise a dispute "in connection with
the contract" within the meaning of cl. 21 of the Arbitration agreement.
We arc unable to agree with that contention. A dispute that the Union is not
liable to pay the price under the terms of the contract is undoubtedly a
dispute under the contract, and in any event in connection with the contract.
But a plea that the Union though liable to pay the amount under the terms of
the contract will not pay it because it desires to appropriate it towards
another claim under another independent contract cannot reasonably be regarded
as a dispute "under or in connection" with that contract under which
the liability sought to be enforced has arisen.
The decision of the Calcutta High Court in
Uttam Chand Saligram v. Jewa Mamooji (1). on (1) I.L,R. 46 Cal. 603 any
Statutory modification thereof shall be deemed to apply to and be incorporated
in this contract." The arbitration clause is wide and includes not only
disputes arising under the covenants of the contract but also to disputes under
conditions general or special or in connection with the contract. But before an
order for stay of a proceeding maybe made under s. 34 of the Arbitration Act,
the following conditions must co-exist :
(i) there must be a subsisting and binding
arbitration agreement capable of being enforced between the parties ;
(ii) the subject-matter in dispute in the
proceeding sought to be stayed must be within the scope of the arbitration
agreement and (iii) the petition must be made to the judicial authority by a
party to the arbitration agreement or some person claiming under him at the
earliest stage of the proceeding i. e. before the filing of the written
statement or taking any other step in the proceeding.
The Judicial authority may, if these
conditions exist, grant stay, if it is satisfied that the party applying is and
has also been at all material times before the proceedings were commenced ready
and willing to do all things necessary for the proper conduct of the
arbitration and there is no sufficient reason for not referring the matter in
accordance with the arbitration agreement.
The evidence recorded by the Trial Court
discloses that there was no dispute between the Company 604 and the Union
arising under the contract On which the suit was filed. -The Union accepted
liability to pay the amount claimed by the Company in tile suit. The Union
still declined to pay the amount asserting that an amount was due from the
Company to the Union under a distinct contract.
This amount was not sought to be set-off
under any term of the contract under which the Company made the claim. The
dispute raised by the Union was therefore not in respect of the liability under
the terms of the contract 'which included the arbitration clause, but in
respect of an alleged liability of the Company under another contract which it
may be noted had already been referred to arbitration. The Union had no defence
to the action filed by the Company : it was not contended that the amount of
Rs. 10,625/was not due to the Company under the contract relied upon by the
Company. For enforcement of the arbitration clause there must exist a dispute :
in the absence of a dispute between the parties to the arbitration agreement,
there can be no reference.
It was urged that mere refusal by the Union
to pay the amount due is sufficient to raise a dispute "in connection With
the contract" within the meaning of cl. 21 of the Arbitration agreement.
We are unable to agree with that contention. A dispute that the Union is not
liable to pay the price under the terms of the contract is undoubtedly a
dispute under the contract, and in any event in connection with the contract.
But a plea that the Union though liable to pay the amount under the terms of
the contract will not pay it because it desires to appropriate it towards
another claim under another independent contract cannot reasonably be regarded
as a. dispute "under or in connection" with that contract under which
the liability sought to be enforced has arisen.
The decision of the Calcutta High Court in
Uttam Chand Saligram v. Jewa Mammoji (1), on (1) I.L.R. 46 Cal. 605 which
reliance was placed by the Union does not, in our judgment, support any such
proposition. In that case an award of the arbitrator was challenged on the
ground that it was without jurisdiction, there being no dispute between the
parties, the party applying having admitted his liability under the contract.
Rankin J. held that though the existence of it dispute was an essential
condition for the arbitrator's jurisdiction, the dispute may be either in the
acknowledgement of the debt or as regards the mode and time of satisfying it.
In that case the Court held that the defence of the applicant applying for
vacating the award was that he was not under any obligation to pay the amount
due.
This is clear from the observation made on
1). 540 where the learned judge observed :
"x x x but in truth the petitioner's
later letters to the Chamber, his petition itself in paragraphs 5, 6 and 12,
paragraph 6 of the affidavit filed in this behalf in reply all show conclusion
that he was withholding payment under a claim of right so to do. That the claim
has little substance makes his case so much the worse." The Union is
however not seeking to withhold payment under a claim of right so to do. What
the Union contends is that under the contract they are liable to pay the
amounts due but they will not pay because they have another claim unrelated to
the claim in suit against the Company.
The decision of the Calcutta High Court in
Chundanmull Jhaleria v. Clive Mills Co. Ltd. (1), on which also reliance was
placed does not assist the Union. In that case the Court decided that an
arbitration clause in a contract, by which the parties thereto agree to refer
their disputes to arbitration; may be wide enough to include a dispute whether
the (1) I. L.R. (1948) 2 Cal. 297, 606 contract itself has or has not been
frustrated; but in the present case we are not concerned about any dispute
relating to frustration of the contract.
The principle of the decision of the House of
Lords in Heyman v. Darwins Ltd. (1), on which reliance was placed on behalf of
the Union has also no application. It was held in that case that when an
arbitration clause in a contract provides without any qualification that any
difference or dispute which may arise "'in respect of" or "with
regard to" or "under the contract" shall be referred to
arbitration, and the parties are at one in asserting that they entered into a
binding contract, the clause will apply even if the dispute involves an
assertion by one party that circumstances have arisen, whether before or after
the contract has been partly performed, which have the effect of discharging
one or both parties from all subsequent liability under the contract, such as
repudiation of the contract by one party accepted by the other, or frustration
of the contract, Viscount Simon, L.C., observed in that case:
"An arbitration clause is a written
submission, agreed to by the parties to the contract, and, like other written
submissions to arbitration, must be construed according to its language and in
the light of the circumstances in which it is made. If the dispute is whether
the contract which contains the clause has ever been entered into at all, that
issue cannot go to arbitration under the clause, for the party who denies that
he has ever entered into the contract is thereby denying that he has ever
joined in the submission. Similarly, if one party to the alleged contract is
contending that it is void an initio (because, for example, the making of such
a contract is illegal), the arbitration clause cannot operate, for on this view
the clause itself also is void. But in a situation where the parties are, (1)
L. R. [1942] A. C. 356.
607 at one in asserting that they entered
into a binding contract, but a difference has arisen between them whether there
has been a breach by one side or the other, or whether circumstances have
arisen which have discharged one or both parties from further performance, such
differences should be regarded as differences which have arisen "in
respect of," or "with regard to" or "under the
contract", and an arbitration clause which uses these, or similar,
expressions should be construed accordingly." But the Union is not seeking
to go to arbitration on a dispute between the parties about a breach committed
by one side or the other or whether circumstances have arisen which have
discharged one or both parties from further performance. It is a case in which
in substance there is no dispute between the parties "under",
"in connection with", or even "with regard to" the
contract. The plea raised by the Union for stay of the suit was frivolous. It
is somewhat surprising that the plea should have been raised and persisted in,
and even after going to arbitration in the other case have been brought up to
this Court involving large costs to the public exchequer.
The appeal therefore fails and is dismissed
with costs.
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