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PETITIONER: GAYA ELECTRIC SUPPLY CO., LTD.

       Vs.

RESPONDENT: THE-STATE OF BIHAR.

DATE OF JUDGMENT: 03/02/1953

BENCH: MAHAJAN, MEHR CHAND BENCH: MAHAJAN, MEHR CHAND DAS, SUDHI RANJAN HASAN, GHULAM

CITATION:  1953 AIR  182            1953 SCR  572  CITATOR INFO :  E&D        1985 SC1156  (49,52)

ACT: Indian  Arbitration  Act  (X  of  1940),  s.  34-   Contract containing  arbitration  clause-Rescission of  contract  and suit  by  one party--Application for stay of  suit-Scope  of arbitration clause-Construction of clause.

HEADNOTE: If the arbitration agreement is broad and, comprehensive and embraces  any dispute between the parties in respect of  the agreement, or in respect of any provision in the  agreement, or in respect of anything arising out of it, and one of  the parties  seeks  to  avoid  the  contract,  the  dispute   is referable  to arbitration if the avoidance of  the  contract arises  out  of the terms of the  contract  itself.   Where, however,  the party seeks to avoid the contract for  reasons dehors  it, the arbitration clause cannot be resorted to  as it  goes along with other terms of the contract.   In  other words,  a  party cannot rely on a term of  the  contract  to repudiate it and still say the arbitration clause should not apply. Where,  however, an arbitration clause is not so  comprehen- sive  and is not drafted in the broad language namely  "  in respect  of  " any agreement, or "in  respect  of  something arising  out  of it", that proposition does not  hold  good. The arbitration clause is a written submission agreed to  by the parties in a contract and like every written  submission to arbitration must be considered according to its  language and in the light of the circumstances in which it is made. Disputes  which  arose  between the State of  Bihar  and  an Electric  Supply Company whose licence had been  revoked  by the  State were settled by an agreement which provided  that the  State should make an advance payment of Rs. 5 lakhs  to the   company,  and  the  company  should  hand   over   the undertaking to the State.  The undertaking was to be valued, within  3  months  and if any money was  found  due  to  the company as per the Government valuation over 5 lakhs it will be paid to the company and if the valuation was less than  5 lakhs  the company would refund the excess received  by  it. The agreement, contained an arbitration clause which ran  as

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follows: " In the case of any difference or dispute  between the  parties  over  the  valuation  as  arrived  at  by  the Government  and  that  arrived at by the  company  any  such difference  or  dispute including the claim  for  additional compensation  of 20% shall be referred to arbitration."  The company  instituted a suit against the State  alleging  that the State bad failed to make its valuation.  and  to make, payment of the excess  within  the time  fixed and as time was of the essence of the  contract, it   had  rescinded  the  agreement,  and  praying   for   a declaration that the undertaking belonged to it, for damages and  appointment of a receiver.  The State applied under  s. 34 of the Arbitration Act for stay of the suit: Held,  that  the scope of the arbitration  clause  was  very narrow; -it conferred jurisdiction on the arbitrator only on the  question  of  valuation of  the  undertaking  pure  and simple.  Questions relating to the breach of contract or its rescission were outside the scope of the clause and the suit could not be stayed under s. 34. Heyman v. Darwins Ltd. (119421 A.C. 356) referred to. Harinagar  Sugar  Mills Ltd. v. Skoda (India)  Ltd.  (A.I.R. 1948 Cal. 230) and Governor-General in Council v. Associated Livestock Farm Ltd. ([1937] 41 C.W.N. 563) distinguished.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 175 of 1951. Appeal by Special Leave from the Order and Decree dated  the 30th  March, 1951, of the High Court of Judicature at  Patna (Ramaswami  and Rai JJ.) in Miscellaneous Appeal No.  19  of 1951 arising out of the Order dated the 18th December, 1950, of the ’Court of the Additional Sub-Judge Second at Gaya  in Title Suit No. 47 of 1950. N.   C.  Chatterjee  (Rameshwar  Nath,  with  him)  for  the appellant. M.   C.  Setalvad  Attorney-General for India,  and  Mahabir Prasad,  Advocate-  General of Bihar (B.   J.  Umrigar  with them) for the respondent. 1953.   February 3. The Judgment of the Court was  delivered by MAHAJAN  - J. This appeal by special leave arises out of  an application  made  by the State of Bihar  against  the  Gaya Electric  Supply  Co. Ltd. under section 34 of  the  Indian- Arbitration  Act for stay of proceedings in a suit filed  by the company on 28th September, 1950.  The facts relevant  to this enquiry are these. 574 A licence of or the supply of electric energy in the town of Gaya  was obtained by one Khandelwal in the year 1928  under the  Indian  Electricity  Act,  1910.   With  the   required sanction  of the Government the licence was  transferred  to the  company  in 1932.  By a notification dated  23rd  June, 1949, the licence was revoked by the Government with  effect from  9th  July, 1949.  Thereupon the company filed  a  suit against  the State for a declaration that the revocation  of the  licence  was  arbitrary, mala  fide  and  ultra  vires. During the pendency of the suit negotiations started between the  company and the State for a settlement of  the  dispute and  ultimately on 28th October, 1949, a deed  of  agreement was  arrived at between them.  The effect of  the  agreement and the correspondence referred to therein was substantially as; follows :- (a) That the company would withdraw the suit No. 58 of 1949 unconditionally on 25th October, 1949.

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(b)  That  within three days of the withdrawal of ,the  suit the  State of Bihar would make an advance payment of  rupees five  lakhs to the company, and, simultaneously the  company would  formally hand over the possession of the  undertaking to an authorized officer of the Government. (c)  That both parties will make their respective valuations within three months of talking over the undertaking and  any balance of money found due to the company as per  Government valuation  will  be  paid  to the company  and  in  case  of overpayment the excess paid to the company on account of the "  on  account  -payment  " of rupees  five  lakhs  will  be refunded to the, Government. (d)  That  in  the  case  of  any  difference  or   dispute between,the  parties over the payment of the  balance  which may  be  found  due after valuation such  dispute  shall  be submitted to the-sole arbitration of a single arbitrator who should  be  a  high government  officer  of  the  provincial government  of  rank equal to or higher  than  a  Divisional Commissioner  and  his award shall be binding and  final  on both parties. 575 The  arbitration clause is contained in a letter dated  13th October, 1949, and was substantially accepted by the company in  its letter dated 17th October, 1949.  As set out by  the State  Government in its application  under section  34,  it runs as follows "  In  the  case of any difference or  dispute  between  the parties  over the valuation as arrived at by the  Government and  that  arrived  at by the company,  such  difference  or dispute, including the claim for additional compensation  of 20 % shall be referred to arbitration..." In  pursuance of the agreement the respondent took over  the undertaking  on 28th October, 1949, and also made a  payment of rupees five lakhs to the company. On  the 19th January, 1950, the company sent a statement  of valuation  of the assets amounting to RS. 22,06,072, to  the Chief  Electrical  Engineer, Bihar.   The  Chief  Electrical Engineer  characterized  the valuation of 22  lakhs  by  the company  as fantastic and stated that according to  a  rough valuation the amount would be’ approximately five lakhs  and that the final valuation would be settled after the  company -had  furnished  a  detailed  history  of  the  plants   and machineries.   The  company  declined to  give  any  further details  and  stated that time was of the  essence  of  the. contract and it would be extended from 28th January, to 15th February,  1950  On 6th April, 1950,  the  Chief  Electrical Engineer  intimated  that  the ’valuation  amounted  to  Rs. 6,56,221.   No  reply to this letter was  received  and  the State Government intimated to the company that as difference and dispute had arisen relating to valuation, Mr. M. S. Rao, I.C.S. -was being appointed as sole arbitrator to decide the dispute. On  28th September, 1950, the company instituted  the  suit, the   subject-matter   the  application  for   stay,   after necessary  notice  under  section 80 of the  Code  of  Civil Procedure.  In the plaint it was alleged ,that as the  State Government had failed and neglected to make its valuation or to make payment to the 576 company  by -the 15th March, 1950, it committed a breach  of the agreement and by reason of this breach  the company  had rescinded  the agreement and had forfeited the sum  of  five lakhs  paid  as advance by the State.   The  company  prayed inter  alia  for  the  reliefs  of  declaration  that   the, electrical  undertaking belonged to them, for  damages,  for

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appointment  of  receiver and for injunction.   On  the  9th October, 1950, the State Government filed the present appli- cation under section 34, of the Indian Arbitration Act.   It was  stated therein that the company had with  a,  dishonest and  mala fide motive and with a view to avoid the  decision of the matter in dispute in arbitration instituted the  suit on  incorrect  and false allegations. that  the  arbitration agreement was still subsisting and valid and binding on  the parties  and could not be taken as having been rescinded  as alleged by the company, that the cause of action as  alleged in  the  plaint being noncompliance with the  agreement  the suit  arose  out  of and related to the  agreement  and  was covered  by  the  arbitration  clause  and  that  the  State Government was ready and willing to have the dispute settled by arbitration.  The company denied the allegations of  mala fides and pleaded that the arbitration clause was no  longer in  existence and that even assuming it to be in  existence, the  suit was in no way connected with the ’same and it  was contended that the suit should not  be stayed. The  subordinate judge held that the suit was no in  respect of any matter agreed to be referred, and that the court  had no’ jurisdiction to stay the proceedings.    In  the  result the  stay application was dismissed. Against this order  the State Government appealed     to  the High Court.  The  High Court held that     the  dispute in the suit was  one  which arose out of or was in respect of the agreement and that the question  in the suit was directly within the scope  of  the arbitration  clause.  By an order of this court  dated  22nd May,  1951,  the company was granted  special  leave’  under article 136(1) of the Constitution. ’                577 Section 34 of, the Indian Arbitration Act runs thus - "Where  any party to an arbitration comment Cost  any  legal proceedings  against  any other party to  the  agreement  in respect  of any matter agreed to be ,referred, any party  to such legal proceedings may, apply to the judicial  authority before  which  the  proceedings  are  pending  to  stay  the proceedings,  and if satisfied that there is  no  sufficient reason  why the matter should not be referred in  accordance with  the arbitration agreement and that the applicant  was, at ,the time when the proceedings were commenced, and  still remains, ready and willing to do all things necessary to the proper conduct of ’the arbitration, such authority may  make an order staying the proceedings." From the language of the section it is quite clear that  the legal  proceeding  which is sought to be stayed must  be  in respect  of a matter which the parties have agreed to  refer and  which  comes  within  the  ambit  of  the   arbitration agreement.   Where,  however, a suit is commenced  as  to  a matter which lies outside the submission, the court is bound to refuse a stay.  In the words of Viscount Simona L. C.  in Heyman  v.  Daruins  Ltd’ (1). the answer  to  the  question whether  a dispute falls within an arbitration clause  in  a contract  must  depend on (a) what is the dispute,  and  (b) what  disputes  the  arbitration  clause  covers.   If   the arbitration   agreement  is  broad  and  comprehensive   and embraces any dispute between the parties "in respect of" the agreement, or  in respect of any provision in the agreement, or in respect of anything arising out of it, and one of  the parties  seeks  to  avoid  the  contract,  the  dispute   is referable  to arbitration if the avoidance of  the  contract arises  out  of the terms of the  contract  itself.’  Where, however,  the party soaks to avoid the contract for  reasons dehors  it, the arbitration clause cannot be resorted to  as it  goes along with other terms of the contract.   In  other

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words, a party cannot rely on a term of the contract (1)  [1942] A.C. 356,                            578 to repudiate it and still say the arbitration clause  should not  apply.  If he relies upon a contract, be must, rely  on it for all purposes .  Where, however, an arbitration clause is  not  so comprehensive and is not drafted  in  the  broad language which was, used in the House of Lords,case, namely’ "in  respect of" any agreement, or in respect of  something, arising  out  of it", that proposition does not  hold  good. The arbitration clause is a written submission agreed to  by the parties in a contract and like -every written submission to arbitration must be considered according to its  language and in the light of the circumstances in which it is made. Now as regards the first question, viz., what is the present dispute about, the answer is to be gathered from  paragraphs 14  to  17 of the plaint.  It is averred  therein  that  the Government  of Bihar committed breach of the  agreement  and failed to make any, valuation of the undertaking or pay  the balance  of the compensation money, that time being  of  the essence of the contract, the defendant failed and  neglected to  complete the valuation within the time originally  fixed or  the extended time, and that by reason of the  breach  of contract the plaintiff rescinded the agreement and forfeited the  sum  of rupees five lakhs and that it  is  entitled  to compensation for the wrongful deprivation of the use of  its property.   No  claim has been made in the  plaint  for  the valuation  of  the  undertaking or for the  payment  of  any compensation  for  the undertaking; on the other  hand,  the claim  in  the  suit is founded on  the  rescission  of  the agreement containing the arbitration clause and on a  breach of that agreement.  These are matters which may well be said to arise out of the agreement and if the arbitration  clause was broadly worded and stated that all disputes arising  out of the agreement would be referred to arbitration, it  could then probably have been said that the scope of the suit  was within  the ambit of the arbitration clause, but the  clause here is differently worded. The clause here is that if any difference. or dispute arises between the parties over the payment of the 579 balance which may be found due after valuation such  dispute shall  be  submitted  to the sole arbitration  of  a  single arbitrator.   The  scheme  of  the  agreement  is  that  the Government  was  to make a valuation as laid’  down  in  the Indian  Electricity Act within three, months of taking  over the  undertaking and any balance of money found due  to  the company  as per Government valuation was to be paid  by  the Government, and in case of over-payment, the excess paid  to the company on account of the "on account payment" of rupees five  lakhs mentioned in paragraph 1 had to be  refunded  to government.   In  the  case of any  difference  between  the parties  over the valuation as arrived at by the  Government and  that  arrived  at by the company,  such  difference  or dispute, including the claim for additional compensation  of twenty per cent. had to be referred to arbitration   a scope of  it is arbitration clause is a very narrow one.  It  only confers  jurisdiction on the arbitrator on the  question  of valuation  of the undertaking pure and simple and  does  not say  that  all disputes arising out of the agreement  or  in respect  of  it will be decided by  arbitration.   Questions relating  to  the breach of contract or its  rescission  are outside  the reach of this clause.  The arbitrator  has  not been conferred the power by this clause to pronounce on  the issue  whether the plaintiff was justified in claiming  that

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time  was  of the essence of the contract  and  whether  the State  Government committed a breach of the contract by  not making  a valuation within the time specified.  This  clause is therefore no answer to the company’s querry "Show me that I have agreed to refer the subject-matter of the suit to  an arbitrator."  Besides this clause in the agreement there  is nothing else which can deprive the court of its jurisdiction to decide the plaintiff’s suit as brought. Ramaswami  J., with whom Rai J. concurred, held that upon  a perusal   of  the  term,;  of  the  contract  and   of   the correspondence  it was obvious that no stipulation was  made that the compensation money 75 580 should  be paid within the period of three months,  that  on the  contrary,  the  intention  of  the  parties  that   the Government would pay compensation money only after the award had been made by the arbitrator.  Now this is the very point which would be in issue in the suit itself, and the  learned Judge was in error in considering and deciding this point in this  enquiry  under  section  34.   The  validity  of   the plaintiff’s  contention in the suit cannot be gone  into  by that court exercising jurisdiction under this section as its function  is  a very limited one.  The only  point  in  such cases  to be decided is whether the claim which is  brought- whether  it  is good, bad or indifferent  comes  within  the submission to arbitration.  It may be that there are grounds upon which the defendant would be able to satisfy the proper tribunal  that  the  plaintiff’s  claim  was  frivolous  and vexatious, but those considerations, as pointed out by Banks L. J in Monro v. Bognor Urban Council (1), are material only if  the question to be considered is whether the  case  made was  a frivolous and vexatious one and ought to have had  no weight  at  all upon the question of  what  the  plaintiff’s claim  in fact was and one can only find out what his  claim is by looking at the plaint. The  learned Judges in the High Court seem to  have  thought that  the arbitration clause here had been  drafted  broadly and  that all "disputes arising out of or in respect of  the agreements were referable to arbitration.  Their reliance on the  decision of the Calcutta High Court in Harinagar  Sugar Mills Ltd. v. Skoda India Ltd.(") in support of the decision indicates  the error.  In that case the  arbitration  clause was  drafted in a comprehensive language and stated  that  a dispute  arising out of the agreement had to be referred  to arbitration.   Their  reference  to the  case  of  Governor- General  in  Council v. Associated Livestock Farm  Ltd.  (3) also   shows  that  they  were  under  the  same   erroneous impression.   In  this case the arbitration  clause  was  in these terms :- (1)  [1915] 3 K.B. i67. (2)  (1937) 41 C.W.N. 563. (3) A.I.R. 1948 Cal, 230, 581 "Any dispute or difference arising out of the contract shall be  referred to the arbitration of the  officer  sanctioning the contract whose decision shall be final and binding." It  is obvious that these decisions could have no  relevance to  the arbitration clause as drawn up in the present  case. If the nature of the claim is as we have indicated above, it seems  plain that it does not come within the scope  of  the submission. In  our  judgment, therefore, the decision  of  the  learned Subordinate Judge was right and the Judges of the High Court were  in  error  in reversing it.  In the  result  the  only

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course  open to us is to allow the appeal with costs and  to say  that the plaintiff’s claim is not within the  scope  of the  submission and that the petition under section  34  was rightly dismissed by the Subordinate Judge. Appeal  allowed. Agent for the appellants Rajinder Narain. Agent for the respondent P. K. Chatterji.