Union of India v. Birla Cotton Spinning & Weaving Mills Ltd.

Shah J. 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 dis-missed 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 obligatiom 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 con-tained 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 norni nated by the Contractor, or in case of the said arbi· trators not agreeing then to the award of an Umpire co he 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 he final and conclusive and the provisions of thr. Indian Arbitration Act, 1\)40, and of the Rules thereunder and

any Statutory modification thereof shall be 1963 deemed to apply to and be incorporated in Union of India this con tract." v. Bi1la Cotton Spinnint & VV eaving Mills The arbitration clause is wide and includes not Ltd. only disputes arising under the covenants of the Shah J. 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 may be made under s. 34 of the Arbitration Act, the follow-ing 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 pro-

ceeding 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 state-ment 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 dis-closes that there was no dispute between the Company

1963 and the Union arising under the contract on [.'11i1m rf In fia which the suit was filed. The Union accepted liabi-

v. lity to pay the amount claimed by the Company in Hi1lii Cr.t1m1 _''lpi111;irig the suit. The Union still declined to pay the amount

iftai·illg A1iltJ

Ltd. asserting that an amount was due from the Company Shah J. 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 con-tract 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 arbit-ration clause there must exist a dispute : in the absence of a dispute between the parties to the arbi-tration 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 connecti.on with the contract" within the mean-ing 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 Uttarn ChrJnd. 8aliymrn v . .Jewa Marnooji ('), on (I) I.L,R. 46 Cal.

which reliance was placed by the Union does not, in 1963 our judgment, support any such proposition. In that case an award of the arbitrator was challenged on Union of India v. the ground that it was without jurisdiction, there Birla Cotton Spinning being no dispute between the parties, the party apply- & Weaving Mills Ltd. ing having admitted his liability under the contract.

Rankin J. held that though the existence of a dis-Shah J. pute was an essential condition for the arbitrator's jurisdiction, the dispute may be either in the acknow-ledgement 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 vacat-ing the award was that he was not under any obliga-tion to pay the amount due. This is clear from the observation made on p. 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 conclusivly 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 pay-ment 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. ('), on which also reliance was placed does not assist the Union. In that case the Court decided that an arbi-tration 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 th<:

\ll I.L,R. (1948) 2 Ca). 297.

196S contract itself has or has not been frustrated; but in Unir.11 of lndi:z the present case we arc not concerned about any dis·

v. pule relating to frustration of the contract.

Bfr/o Colian Spirming

1¥earin;: ,\.ti/ls

1.td. The principle of the decision of the House >heh J. of Lords in /1cy11tan v. Dancins Ltd. ('), 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 pro-vides without any qualification that any difference or dispute which may arise "in respect of" or "with re-gard to'" or "under the contract" shall be referred to arbitration. and the parties arc 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 perform-ed, which have the effct:t of discharging one or both parties from all subsequent liability under the con-tract, such as repudiation of thr contract by one party accepted by the other, or fru,tration 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, ano, 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 sub-mission. 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 claU1c cannot operate, for on this view the clause itself also is void. But in a situation where the parties are

(I) L. R. [1942) A, C. SS6.

at one in asserting that they entered into a 19N binding contract, but a difference has arisen Union of India between them whether there has been a breach v. by one side or the other, or whether circums· Birla Cotton Spinning & rVeudng ,Wills tances have arisen which have discharged one Lid. or both parties from further performance, such ,+.,'hah J. 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 com-mitted by one side or the other or whether circums-tances have arisen which have di;charged 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 some· what 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.

Appeal dismissed