Union of India Vs. Salween Timber
Construction (India) & Ors  INSC 226 (25 September 1968)
25/09/1968 RAMASWAMI, V.
CITATION: 1969 AIR 488 1969 SCR (2) 224
RF 1971 SC1495 (32) RF 1984 SC1072 (41) F
1985 SC1156 (45)
Arbitration--Arbitration clause in
contract--Dispute whether arises out of contract--Test for determining.
There was a dispute between the appellant and
respondent regarding the supply of timber. In pursuance of the clause in the
contract which provided that in the event of any question or dispute arising
under the. contract or in connection with the contract it should be referred to
arbitration, the dispute was so referred. One of the items in dispute was a
'claim by the respondent that there was an excess supply of timber to cover up
possible rejection, which should be returned by the appellant with compensation
for deterioration, or that payment should be made for it at the market value.
The appellant contended that the terms of the contract did not require the
respondent to tender for inspection and of quantity in excess of the contracted
quantity, that the claim was in retinue relating to an involuntary bailment and
not in relation to anything done in the performance, implementation or
execution of the contract; and therefore., it was not a dispute arising out of
the contract or in connection with the contract.
On the question whether the arbitrators had
jurisdiction to adjudicate upon the claim,
HELD: The test for determing the question is
whether recourse to the contract, by which both the parties are hound, was
necessary for the purpose of determining whether the claim of the respondent
was justified or otherwise. Since it was necessary to have recourse to the
terms of the, contract for the purpose of deciding the matter in dispute, the
matter was within the scope of the arbitration clause and the arbitrators had
jurisdiction to decide it.
Ruby General Insurance Co. Ltd. v. Peary Lal
Kumar,  5.C.R. 501, followed.
Piercy v. Young, 14 Ch.D. 200 and Turnock v.
Sartoris 43 Ch.D.150, explained.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 549 of 1966.
Appeal by special leave from the order dated
October 23, 1964 of the Punjab High Court, Circuit Bench at Delhi in Civil
Revision No. 438-D of 1964.
V.A. Seyid Muhammad and S.P. Nayar, for the
S.V. Gupte and A.K. Nag, for respondents Nos.
1 and 2.
A.G. Ratnaparkhi, for respondent No. 5.
225 The Judgment of the Court was delivered
by Ramaswami, J.This appeal is brought by Special leave against the judgment of
the Punjab High Court in Civil Revision No. 438-D of 1964 by which the revision
petition of the appellant against the order of Shri D.R. Khanna, Subordinate
Judge, 1st Class, Delhi dated 20th April, 1964 in Suit No. 128 of 1'963 was
dismissed in limine. Suit No.
128 of 1963 was an application by the Union
of India under sections 5, 12(2),31(3), 32 and 33 of the Arbitration Act, 1940
for obtaining a declaration that the reference of the claim of the respondent
firm in respect of excess quantity of timber alleged to have been delivered and
certain other matters was not covered by the arbitration agreement and for
leave to revoke the authority of the Arbitrators and Umpire.
The petition was rejected by the Subordinate
Judge by his order dated 20th April, 1964.
By a savingram dated 21st December, 1953 the
Union of India (hereinafter called the appellant) entered into a contract of
purchase of '1,01,750 cubic feet of teak logs at Rs. 9/12/Vet c.ft. to be
delivered F.O.R. Halisahaar and Lillooah, both in West Bengal near Calcutta.
The consignee was the District Controller of Stores, Eastern Railway. The
formal acceptance of tender confirming the savingram and containing the other
terms of the contract was issued on 13th January, 1954. Besides the quantity of
teak logs originally contracted to be supplied, the respondent firm
subsequently supplied a quantity of 1676.95 c.ft. Burma teak squares at the
same rate and the contract was accordingly amended on 13th December, 1957. It
was provided in clause 17(c) of the acceptance of tender that the respondent
firm was to offer the timber for inspection at its own premises at Halisahaar
and Lillooah. Although the delivery time was extended from time to time, upto
26th January, 1958. the respondent firm supplied only 77,21/.89 cubic feet of
timber and the contract in respect of the unsupplied quantity was cancelled on
20th june, 1958 and that the supplied quantity was repurchased by Government
from third party at a loss of Rs. 1,54,541.36 on 23rd July, 1958. Including
this item the appellant made a claim of Rs. 3,50.085.99 against the respondent
firm out of which it recouped Rs. 1,79.366 from the sums due to the respondent
firm leaving a balance of Rs.1.70,719.99. The contract in question is governed
by the arbitration agreement contained in clause 21 of the form W.S.B. 133 which
states as follows :-"Arbitration:
In the event of any question or dispute
arising under these conditions or any special conditions of contract or inconnection
with this contract (except as to any matters the decision of which is specially
provided for 226 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 thereunder and any Statutory modification thereof shall' be
deemed to apply to and be incorporated in this contract.
Upon every and any such reference, the
assessment of the costs incidental to the reference and award respectively shah
be in the discretion of the arbitrators or in the event of their not agreeing
of the Umpire appointed by them." In pursuance of the arbitration .clause
the respondent firm appointed one Mr. T.R. Sharma as its arbitrator and the
appellant appointed Mr. R.R. Desai, Deputy Legal Adviser, Ministry of Law, Government
of India as its nominee. Mr. P.S. Bindra, a retired District Judge was
appointed as the Umpire by order of the Sub-Judge dated 2-8-1961. Both the
parties filed their respective claims before the arbitrators. The respondent
firm claimed a sum of Rs.
73,50,000 while the appellant contended that
the respondent committed breach of the contract by not supplying the stipulated
quantity of timber under the contract and as such claimed damages to the extent
of Rs. 3,00,000. The case of the respondent firm was that in order to cover up
possible rejection, a quantity of timber much in excess of the contracted
quantity was dispatched to the consignees and the excess quantity measuring
3,400 tons i.e. 1,70,000 cubic feet was still lying with the Lillooah consignee
and 1,500 tons i.e. 75,000 cubic feet with the Halisahaar consignee and had not
been returned despite repeated requests. The respondent firm claimed return of
this quantity of timber and compensation for its deterioration. It was
alternatively contended that in case the Government failed to return the whole
or part of the excess timber, then payment for that quantity at the market rate
should be made.
The appellant in its reply denied the
allegation relating to the delivery and retention of excess quantity. It was
specifically denied that 4,900 tons or any quantity was due to be returned to
the respondent firm or that it was entitled to recover Rs. 73,50,000 or any
amount as claimed.
It was contended that in terms of the
contract the respondent firm was to offer inspection of the store at its own
premises 'at Lillooah and Halisahaar but instead doing so, the respondent firm
started to despatch the logs to the DCO's Lillooah and Halisahaar to be 227
inspected at the consignees' premises. This was done for its own convenience
and at its own risk. The inspected stores were retained by the consignee while
the rejected stores were to be removed by the respondent firm from the
consignee's premises at their own expense. It was submitted that the dispute
raised by the respondent firm was outside the scope of the arbitration
agreement and that the arbitrators had no jurisdiction to entertain such a
After hearing the parties, the Subordinate
Judge rejected the application of the appellant by his order dated 20th July,
It is necessary at this stage to quote the
relevant clauses of the contract. Clause 13 ( 1 ) provides:
"Inspection and Rejection: Facilities
for Test and Examination:---The Contractor shall afford at his own expense the
Inspector all reasonable accommodation and facilities for satisfying himself
that the stores are being or have been manufactured in accordance with the
particulars and for this purpose the Inspector shall have full and free access
at any time during the contract to the Contractor's work and may require the
Contractor to make arrangements for anything to be inspected at his premises or
at any other place and the Contractor shall reserve a similar right as regards
any sub-contract he may make.
The Contractor shall pay all costs connected
with such tests and provide, without extra charge, all materials, tools, labour
and assistance of every kind which the Inspector may consider necessary for any
test and examination other than special or independent tests which he shall
require to be made on the contractor's premises, and shall pay all the costs
attendant thereon failing these facilities (in regard to which the inspector
will be the sole judge) at his own premises for making the tests, the
Contractor shall bear the cost of Carrying out such tests elsewhere".
Clause 13(4) reads as follows :-"Inspection
and rejection: The whole of a consignment may be rejected, if, on inspection, a
portion upto 4 per cent of the consignment (at the sole discretion of the
Inspector) is found' to be unsatisfactory." Clause 13(5) states:
"Rejection: If any stores are rejected
as aforesaid then, without prejudice to the foregoing provisions, the
Secretary, Department of Supply shall be at liberty to :-228 (a) allow the
contractor to resubmit stores in replacement of those rejected within a time
specified by the Secretary, Department of Supply, the contractor bearing the
cost of freight in such replacement without being entitled to any extra
payment, or (b) buy the quantity of the stores rejected or others of a similar
nature elsewhere at the risk and cost of the contractor without affecting the
contractor's liability as regards supply of any further consignment due under
the contract, or (c) terminate the contract and recover from the contractor the
loss the purchaser thereby incurs".
On behalf of the appellant Dr. Seyid Mohammad
presented the argument that the dispute regarding the respondent's claim in
respect of the excess quantity of timber measuring 4,900 tons said to have been
tendered but not inspected was not a dispute 'arising under the contract"
0r 'in connection with the contract' and hence the arbitrators had no
jurisdiction to adjudicate upon that claim. It was stated that the terms of
contract did not require the respondent firm to tender for inspection any
quantity in excess of the contracted quantity of timber and the alleged placing
of unlimited stocks of timber at the disposal of the Government officials far
in excess of the quantity ordered was beyond the scope of the contract. It was
argued that the claim should be treated as a claim relating to a transaction of
involuntary bailment and not to anything done in the performance.
implementation or execution of the contract. It was said that the claim for
return of these goods and damages for deterioration or in the alternative for
their market value was a claim in detinue and the dispute was not hence a
dispute "arising out of the contract" or 'in connection with the
contract' but was a dispute relating, to a tort of wrongful detention. We do
not think that there is any justification for the argument put forward on
behalf of the appellant. In our opinion. the claim made by the respondent firm
was a claim arising out of the contract. The test for determining the question
is whether recourse to the contract by which both the parties are bound is
necessary for the purpose of determining whether the claim of the respondent
firm is justified or otherwise. If it is necessary to take recourse to the
terms of the contract for the purpose of deciding the matter in dispute. it
must be held that the matter is within the scope of the arbitration clause and
the arbitrators have jurisdiction to decide this case. In Herman & lint. v.
Darwins Ltd.(1) the law on the point is very clearly stated in the following
(1)  A.C. 356 at 365.
229 "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 ab 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 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".
In Stebbing v. Liverpool & London and
Globe Insurance Company Ltd. (1) the policy of insurance contained a clause
referring to the decision of an arbitrator "all differences arising out of
this policy". It also contained a recital that the assured had made a
proposal and declaration as the 'basis of the contract, and a clause to the
effect that compliance with the conditions indorsed upon the policy should be a
condition precedent to any liability on the part of the insurers. One of the
conditions provided that if any false declaration should be made. e or used in
support of a claim all benefit under the policy should be forfeited. In answer
to a claim by the assured, the insurers alleged that statements in the proposal
and declaration were false. When the matter came before tire arbitrator, the
assured objected that this was not a difference in the arbitration and that the
arbitrator had no power to determine whether the answers were true or not, or
to determine any matters which called in question the validity of the policy.
In holding that the arbitrator had jurisdiction to decide the matter, Viscount
Reading, C.J. observed:
"If the company were seeking to avoid
the contract in the true sense they would have to rely upon some matter outside
the, contract, such as a misrepresentation (1)  2 K.B. 433.
230 of some material fact, inducing the
contract, of which force and effect are not declared by the contract itself. In
that case the materiality of the fact and its effect in inducing the contract
would have to be tried.
In the present case the company are claiming
the benefit of. a clause in the contract when they say that the parties have
agreed that the statements in question are material and that they induced the contract.
If they succeed in escaping liability that is by reason of one of the clauses
in the policy. In resisting the claim they are not avoiding the policy but
relying on its terms. In my opinion, therefore, the question whether or not the
statement is true is a question arising out of the policy".
The principle has been reiterated by this
Court in Ruby General Insurance Co'. Ltd. v. Pearey Lal Kumar & Anr.(1).
In that case the appellant company insured a
car belonging to respondent No. 1 and issued the policy which contained, inter
alia, the following terms :"All differences arising out of this policy
shall be referred to the decision of an arbitrator to be appointed by the
parties .... If the company shall disclaim liability to the insured for any claim
hereunder and such claim shall not within twelve calendar months from the date
of such disclaimer have been referred to arbitration then the claim shall have
been deemed to have been abandoned and shall not be recoverable".
The car was lost and company through its
Branch Manager disclaimed liability on three different dates. The insured did
not take any action in regard to the appointment of an arbitrator until more
than twelve months after the last disclaimer by the company. The case of the
company was that the insured must be deemed to have abandoned his claim by
virtue of the contract of insurance policy while the respondent averted that
there was never any valid disclaimer by the company of its liability as the
Branch Manager had no authority to disclaim the liability and it could have
been disclaimed only by the resolution of the company. The company made an
application under s. 33 of the Indian Arbitration Act praying for a declaration
that the reference to arbitration was illegal and the award if made by the
arbitrator would not bind the company. It was contended on its behalf that the
arbitration clause had ceased to be operative and the question as to the
existence and validity of the arbitration agreement was triable by the court
under s. 33 of the Arbitration Act and not by the arbitrator. The argument was
rejected by this Court. It was held that the point on which the parties were in
dispute was a difference (1)  3.C.R. 501.
231 arising out of the policy, because
recourse to the contract by which both the parties were bound was necessary for
the purpose of determining the matter in dispute between them.
As there was no contention raised by either
of the parties that there was no contract entered into at all or that it was
void a initio the arbitrator had jurisdiction to decide the matter referred to
him. In our opinion, the principle applies to the present case and it follows
that the dispute between the parties falls within the scope of the arbitration
On behalf of the appellant reliance was
'placed upon the decision of Court of Appeal in Percy v. Young(1) in which it
was held that the clause "that any differences or disputes that may arise
between the partners shah be settled by an arbitrator" does not include a
dispute whether the partnership has been terminated, or whether certain shares
have been paid on account to the partnership or to one partner alone. In our
opinion, the principle does not apply in the present case where the question
presented for determination is quite different. Counsel for the appellant also
referred to Turnock v. Sartoris(2). In that case the lessor was under a covenant
to supply his lessee with a specific quantity of water. The lease contained a
comprehensive arbitration clause. Dispute having arisen as to the supply of
water, an agreement was subsequently entered into, binding the lessor to take
certain steps to secure the supply and varying the rights of the parties in
respect of the supply. The lessee brought an action alleging that the steps
agreed upon had not been taken and that he had not been fully supplied with
water and asking for an action of the .damages to be taken. The lessor moved to
have the action stayed. lit was held that the disputed matters arose partly
under the agreement and were outside the arbitration clause in the lease and
that even if all the matters for which damages were claimed could be brought
within the arbitration clause it would not be proper to refer them to an
arbitration who would not have the authority to construe the agreement to
determine its effect upon the lease. It is manifest that the decision has no
bearing upon the question presented for determination in the present case.
For the reasons. already expressed, we hold
that the claim of the respondent firm was within the scope of the arbitration
clause and the application made by the appellant in Suit No. 128 of 1963 was.
rightly dismissed by the Subordinate Judge. Accordingly, the appeal fails and
is dismissed with costs.
V.P.S. Appeal dismissed.
(1) 14 oh. D. 200.
(2) 43 Cn. D. 150.