http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 61  

PETITIONER: RENUSAGAR POWER COMPANY LTD.

       Vs.

RESPONDENT: GENERAL ELECTRIC COMPANY AND ANR.

DATE OF JUDGMENT16/08/1984

BENCH: TULZAPURKAR, V.D. BENCH: TULZAPURKAR, V.D. PATHAK, R.S.

CITATION:  1985 AIR 1156            1985 SCR  (1) 432  1984 SCC  (4) 679        1984 SCALE  (2)321  CITATOR INFO :  F          1989 SC 839  (16)  R          1989 SC2198  (8)  R          1992 SC 232  (29)

ACT:      Foreign Awards  (Recognition and Enforcement) Act, 1961 Section 3, scope of-Whether an earlier suit in the nature of a petition  under section  33 of the Indian Arbitration Act, 1940 could  be stayed  on a  petition under section 3 of the Foreign Awards  Act, (a  petition the  nature of  a petition under section 34 of the Indian Arbitration Act).      Interpretation of  Statutes-Foreign Awards (Recognition and Enforcement)  Act, 1961-Interpretation of Act calculated and  designed   to  subserve   the  cause   of  facilitating international  trade  and  promotion  and  providing  speedy settlement of  disputes arising in such trade-Any expression or phrase  in the   Act must receive an liberal construction consistent with its liberal and grammatical sense.      Scope purview  of the  Arbitral Clause in Article XVIII in the  contract-Jurisdiction of an Arbitrator to decide the limits of  his own  jurisdiction-Whether a dispute inclusive of the  arbitrators’ jurisdiction  comes within the scope of purview of  Arbitration clause,  primarily  depends  on  the terms of the Arbitration clause.      Issuance of  promissory notes further supported by Bank guarantee by  the buyer towards the purchase price under the contract itself and not by way of separate contract, whether discharges the obligation to pay the purchase price-Whether, the claims  for the  "Unpaid  Regular  Interest,  Delinquent Interest and  Compensatory  Damages"  be  said  to  be  "not arising out  of the  contract" and, therefore, not referable to Arbitration.      Words and  phrases-"Arising out  of", in  relation to", "in  consequence   of",  "concerning",  "relating  to",  are expressions of widest amplitude and content and include even questions as  to existence,  validity scope  and  effect  of Arbitration agreement.      Negotiable instruments-Negotiable  instruments taken on account of  debt whether  operates as  absolute discharge or not is a question of intention of parties-Bill or Promissory notes can  never go  in  discharge  of  debt  unless  it  is specified as a part of contract that it shall be so.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 61  

HEADNOTE:      The  first  respondents  General  Electric  Company,  a company incor- 433 porated under  the laws  of the State of New York, USA, on a contract in  writing dated August 24, 1964 agreed to sell to the appellant  Renusagar Power Company Ltd., equipment for a thermal electric  generating plant to be erected at Renukoot on the  terms and  conditions set  out therein.  Work to  be performed under  the contract  included supply  of equipment spare parts  and services  for which  a sum of $ 13, 195,000 being the  total purchase  price and  otherwise  called  the "Contract Base  Price" was  payable by  Renusagar in  lawful currency  of  the  USA  in  the  manner  stipulated  in  the contract.  Under   the  contract,   the   parties   intended completion of  (a) the  delivery of  the equipment and spare parts etc.  within 15  months of the Contract Effective Date (December 31,  1964) i.e.  upto  March  30,  1966;  (b)  the erection of  the plant  within 16th to 30th month (i.e. from April 1, 1966 to June 30, 1967); so that (c) the plant would be fully  operational by  the end  of 30th  month  from  the Contract Effective Date i.e. by July 1, 1977.      The parties,  therefore, agreed  (a)  that  substantial payment of  the purchase  price by Renusagar should commence when the  plant became  operational i.e.  June 30, 1967; (b) that no  interest  would  be  payable  during  the  delivery period; (c)  that interest shall be paid during the erection period and  thereafter till  payment but the interest during the erection  period would  be   capitalised and added on to the principal;  (d) that initially ten per cent of the total Contract Base Price ($ 1, 319, 500) should be paid either in cash or by means of a Letter of Credit within 30 days of the Contract Effective  Date and  that the balance of 90% of the purchase price  plus interest  at 6 1/2% per annum from 16th to 30th month aggregating to US $ 12, 776,058,75 ($ 11, 875, 500 for  principal plus $ 900, 558, 75 being the capitalised interest at  the aforesaid  rate for  the aforesaid  period) should be  paid in  accordance with the schedule of payments set out in the contract. The schedule for the payment of the said balance  of 90%  of the  purchase  price  provided  for payment to  be made  in sixteen  six monthly  instalments of U.S. $ 798,503.68 each, the first of such  instalments being payable on  30.6.1967 and the last instalment falling due on 31.12.1974. The  obligation to  make such  payment was to be evidenced by  four  series  (A-B-C-D)  of  16  unconditional negotiable promissory  notes to  be  executed  by  Renusagar (Vide Article  III); (e)  that in  case of  first respondent receiving an  exemption from  the Government  of India  from payment of  income tax  on interests  received  by  it  from Renusagar then  the interest  for that portion of the period shall be  computed at 6% instead of 61/2% per annum and that the  concerned   promissory  notes   would  be  replaced  or substituted  by  fresh  one  reflecting  the  adjustment  in payment  of  interest  necessitated  by  the  grant  of  tax exemption; (f)  that should  GEC’s application for exemption be denied  the appellants may withhold the Indian Income Tax applicable to any payments of interest but shall furnish the first respondents  with tax receipts of all withheld amounts paid to  the Government  of India  so  as  to  enable  first respondents to  obtain corresponding  credit for  the sum in their US  tax assessment  (Vide Article XIV-B); (g) that the appellants shall  furnish guarantee of the United Commercial Bank for payment of the full amount of promissory notes; (h) that the  rights and  obligation of  the  parties  would  be

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 61  

governed in  all respects  by the  laws of  the State of New York, U.  S. A.  (Vide Article  XIX-A)  and  that  (j)  "Any disagreement arising  out of  or related  to  this  contract which  the   parties  are   unable  to  resolve  by  sincere negotiation shall be finally settled in 434 accordance with  the Arbitration  Rules of the International Chamber of  Commerce. As  provided in  the said  Rules, each party  shall  appoint  one  Arbitrator,  and  the  Court  of Arbitration of  the International  Chamber of Commerce shall appoint the  third Arbitrator. Arbitration proceedings shall be conducted  at  such  time  and  place  as  the  Court  of Arbitration shall  decide. Judgment  upon an  award  may  be entered; in  any court  of  competent  jurisdiction."  (Vide Arbitration Clause in Article XVII).      Pursuant to  the said Contract the appellants fulfilled all preliminary  conditions of  the contract,  including the furnishing  of   a  guarantee   executed  by  the  UCO  Bank irrevocably guaranteeing to the first respondents and to any subsequent holder  in due  course of  the notes the full and prompt payment  of the  principal and interest on the notes. Subsequently  on   an  agreement   recorded  in   the  first respondents letter  dated June  11, 1965  and as approved by the Central  Government, the  1964 Contract  (IGE-9584)  was extended to  include the  supply of  unfabricated structural steel to  Renusagar for  approximately U.S. $ 300,000 on the same  conditions   including  the   Arbitration  Clause   as contained in  the original  1964 (IGE-9584) Contract, except that the  appellants agreed  and issued  a fifth  series, (E series) of  sixteen promissory  notes  bearing  interest  at 61/2%  per   annum  evidencing  90%  of  the  price  of  the structural steel;  and the  payments dates thereof being the same dates  as the  corresponding promissory  notes  of  the earlier four series.      During the  implementation of  the contract  two events occurred giving  rise to  the GEC’s three claims against the appellants that  are sought to be referred to arbitration of International Chamber  of Commerce,  namely,  (i)  grant  of exemption by  the Government of India to G. E. C. in respect of interests  on purchase  price receivable  by it  from the appellants  and   the  revocation   thereof,   leading   the appellants to  file a civil writ petition No. 179 of 1970 in the Delhi  High Court  and  getting  the  revocation  orders quashed and  (ii) re-scheduling dates of payment of purchase price agreed  to by  the parties  but not  approved  by  the Reserve Bank of India and the Government of India.      The three  claims of  G. E.  C.  were  (i)  the  Unpaid Regular interest  to the tune of 2.1 million dollars (U. S.) wrongly  deducted   and  wrongly  with-held  and  kept  with themselves by the appellants from 1970 onwards denying G. E. C. of  the benefit  of getting  the corresponding  credit in their U.S.  tax assessment  from 1970  onwards.  The  amount represented the difference between U. S. $ 24,12,680.20 (73% of the  interest payable  calculated on  the basis  of 61/2% subject to tax) and U. S. $ 21, 30, 785.52 (calculated on 6% tax free  basis); (ii)  Liability for Delinquent Interest on account of  the delays  in payment  of four  instalments  of purchase price together with interest, due to the failure to have re-scheduling  of payments approved by Reserve Bank and Government of  India, to  the tune  of U.  S. $  7,84,151.84 (calculated on  the basis  of 6%  tax free basis); and (iii) The Compensatory  Damages arising  out of non-payment of the aforesaid  two   claims  of   Unpaid  Regular  Interest  and Delinquent Interest for over twelve years, the quantum being calculated by way of interest on those amounts at the market

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 61  

rate of 435 18% per  annum amounting  to U.S.  $ 41,  610,  534.88  upto 31.3.1982 (to  be extended till the date of actual payment). According to  G.E.C. the  appellants for a long period of 12 years had  illegally and  wrongfully retained on one pretext or the other these two funds with itself and had enjoyed the use  thereof   for  its   own  private   advantage  and  had correspondingly totally  deprived G.E.C.  of their  use  for which the appellants must compensate by way of damages in as much  as  they  must  be  regarded  as  a  stake  holder  or constructive trustee  of those  funds from the various dates on which  the payments  became due and payable and under the common law  jurisdiction restitution  was payable by a stake holder to  the party  ultimately determined to be a rightful beneficiary owner of the funds.      By a  notice of  intention to  arbitrate dated March 1, 1982  G.E.C.   called  upon  the  appellants  to  remit  the aforesaid sums  and also  addressed a  letter dated March 2, 1982  to   the  Secretariat  court  of  Arbitration  of  ICC containing a  request for arbitration being undertaken by it seeking reliefs  as set out in the notice to the appellants. After ICC  took cognizance of the request for arbitration by G.E.C.  it  called  upon  the  appellants  to  nominate  its Arbitrator, file  its reply  and remit  certain sums towards the administrative expense and arbitration fees.      Thereupon, the  appellants on  June 11, 1982 filed suit No. 832/82  in the  Bombay High  Court on  its original side against G.E.C. and ICC seeking a declaration that the claims referred to the arbitration of ICC by G.E.C. were beyond the scope/purview of  the  arbitration  agreement  contained  in Article XVII  of contract IGE-9584 dated August 24, 1964 and that G.E.C.  was not  entitled to  refer  the  same  to  the arbitration  with   consequential  prayers  for  injunctions restraining G.E.C.  and ICC from proceeding further with the reference  and   restraining  I.C.C.   from  requiring   the appellants to  make the   appellants  to  make  any  deposit towards administrative  expenses and  Arbitration  fees  and obtained an  ex-parte ad-interim  relief. On August 11, 1982 G.E.C. filed  Arbitration Petition  No.  96  of  1982  under section  3   of  the   Foreign   Awards   (Recognition   and Enforcement) Act,  1961 seeking stay of suit No. 832 of 1982 and all  proceedings therein  with a prayer for vacating the ad-interim ex-parte  reliefs obtained  by the  appellants in the said Suit.      Both the  matters, G.E.C.’s stay petition under section 3 and  the appellants’  Notice of Motion for confirmation of ad-interim reliefs  were heard  together  and  by  a  common judgment and  order dated  April  19,20,  1983  the  learned Single Judge  allowed the  Arbitration Petition  96 of 1982, granted the  stay of  Suit No.  832  of  1982  and  all  the proceedings therein  since all  the ingredients of section 3 of the  Foreign Awards  (Recognition and  Enforcement)  Act, 1961 had  been satisfied and vacated all the interim reliefs granted earlier.  The  learned  Judge  held:  (a)  that  the Arbitration Clause  in the  original 1964  Contract could be availed of  by G.E.C. in as much as not only had the October 1968 Amendment  kept alive all other terms and conditions of the 1964  Contract including  Arbitration Clause  but it had fallen through for lack of Government’s approval; (b) though 436 the first two claims sought to be referred to arbitration by G.E.C. were  based  on  the  promissory  notes  towards  the purchase price  was provided  under the Contracts itself and these were  not  by  way  of  any  independent  or  separate

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 61  

Contracts in discharge of the obligation to pay the purchase price under  the contract  and since  the Arbitration Clause covered all  the disputes  arising out of the contract those claims fall  within the Arbitration Clause and; (c) that the liability to  pay the  compensatory  damages  arose  out  of failure to  carry  out  the  terms  and  conditions  of  the contract in  regard to  payment of  purchase price  and that even assuming  that the  said claim  was one  in tort it was directly and  inextricably  connected  with  the  terms  and conditions of  the contract and certainly "arose out of" the contract of was "in relation to" the contract and therefore, could be entertained by the Arbitrators.      Renusagar preferred two appeals being civil Appeal Nos. 404-405 of  1983 and  contended: (a)  An Arbitrator  had  no jurisdiction to  decide the  limits of  his own jurisdiction and since  in the  case  of  International  Arbitration  the jurisdiction of  the Arbitrator  had to be decided according to the Law of the Forum where the question is raised (in the instant case  being the  Indian Law) the jurisdiction of the Arbitrator, according  to that Law, had to be decided by the Court and  not by  the Arbitral  Tribunal; (b)  the  dispute sought to be referred related substantially to the claim for interest and  that claim  was (and  it was  so stated in the notice of  intention to arbitrate) founded on the promissory notes which  were independent  contracts by  themselves  and therefore, the  claim did not arise out of the suit contract and hence  could not  be the  subject matter of Arbitration; (c) that  claim for compensatory interest was really a claim for damages  arising out of tort and such a claim was in any case not  case by  the suit  contract and  fell outside  the scope of  the Arbitration  Clause;  and  (d)  in  any  event Renusagar had  made out  a prima  facie against  by  raising serious triable issues in the suit which should enable it to claim an injunction restraining the arbitration proceedings.      The Court  of appeal  negatived all the contentions and ultimately  confirmed   the  trial   Judge’s  order  whereby Renusagar’s suit  was stayed and the interim reliefs granted to it  were vacated  and hence  the appeal by certificate by Renusagar.      Arguments for the appellants:-      (1) The  Arbitration Petition under section 3 (which is really in  the nature  of a Petition under section 34 of the Indian Arbitration  Act, 1940,  is totally  misconceived and liable to  be dismissed  because the Suit No. 832/1982 filed by the appellants is merely for a declaration that the three claims sought  to be  referred to arbitration are beyond the scope/purview of  arbitration clause  and no other relief on the merits  of those  claims is  sought, and the Suit, being really in  the nature  of a petition under section 33 of the Indian Arbitration Act, 1940, in as much as it seeks to have the effect  (scope) of the arbitration agreement determined, can never  by stayed  under section  3 of the Foreign Awards Act. 437      (2) The suit filed by the appellants is not "in respect of any  matter agreed  to be  referred  to  arbitration"  as required by section 3, and therefore, the stay sought for by G.E.C. should be refused;      (3) The  Court acting  under section  3 (like the Court acting under section 33 of the Indian Arbitration Act) being a  court   of  limited  Jurisdiction  cannot  determine  the question  of  the  existence,  validity  or  effect  of  the arbitration agreement  (which is  the only issue to be tried in the  appellants’ suit) and it is for the court trying the suit  to  decide  the  question  raised  in  the  suit,  and

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 61  

therefore, a  stay, if  granted under  section 3 application would finally  determine the  suit or  render it almost dead for all  practical purposes  and therefore, no relief on the said petition can be granted which will have such effect;      (4) The  question raised  in the  suit relating  to the effect (scope  of the  Arbitration Agreement,  which is  the same as  the question  relating to the existence thereof, is such as  is incapable  of being  finally determined  by  the Arbitrators and  hence such  a suit  cannot be  stayed under section 3 of the Foreign Awards Act;      (5) The  underlying commercial  contract (IGE-9584) for sale of goods and services contains no obligation to pay any interest after June 30, 1967 (i.e. after the 30th month from the contract  effective date)  (whether six  and a  half per cent or  six per  cent) but  that  such  obligation  to  pay interest after  June 30,  1967 is  only to  be found  in the promissory notes and the two claims of G.E.C., namely, first claim of  2.1 million  U.S. dollars and the second claim for U.S.  $  78,151.84  towards  approximately  80%  for  Unpaid Regular Interest and Delinquent Interest respectively, being dues after  June 30,  1967, preferred before the arbitrators do not "arise out of" the contract nor are they "in relation to" thereto  but arise  under the promissory notes and hence fall outside the scope of arbitration agreement;      (6) The  promissory notes  executed by  the  appellants were in complete discharge of the obligation to pay purchase price and  interest thereon  under the  contract  and  these notes  constitute  independent  and  separate  contracts  by themselves,  and   therefore,  the   liability  arising  out thereunder  cannot  be  regarded  as  "any  arising  of  the contract" or  "in relation  thereto" and  what is more these claims have  been described by the G.E.C. in their notice of intention to  arbitrate as  "arising  under  the  promissory notes";      (7)  The   claim  for   compensatory  damages  being  a liability arising  in tort,  for wrongful  detention of  the first two funds and since it was being enforced on the basis of appellants’  status as  a stake  holder  or  constructive trustee the  same  is  clearly  outside  the  scope  of  the arbitration agreement; and      (8) Since  the issue  of arbitrarily of these claims is raised in  the appellants’  suit it  is but proper that till the issue  raised in  the suit  is finally  decided  by  the Court, the arbitration proceedings should be injuncted. 438      Arguments for respondent company:      (1) The  schemes of  the Foreign  Awards  Act  and  the Indian Arbitration  Act, 1940 being not identical, there are various material  differences which  have a  bearing on  the issue whether  a suit  seeking determination  of the  effect (scope) of  an arbitration agreement can or cannot be stayed in a  petition under section 3 of the Foreign Awards Act and that answer  to it  depends upon  proper construction  to be placed on  the section  in the  light of  the scheme of that Act;      (2) Since  all the  ingredients of  section 3 have been satisfied the stay of Renusagar’s suit will be obligatory;      (3) Alternatively,  the legal  position  is  that  both under English  Law and Indian Law, it is open to the parties to have  an arbitration agreement incorporating words of the widest amplitude  so as to embrace even the questions of its existence, validity  or effect  (scope) but  an enquiry into the scope  and effect  of an  arbitration  agreement  and  a challenge to  the  existence or validity thereof are not the same but  fundamentally different  in as  much as  the first

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 61  

pre-supposes that  the arbitration  agreement exists in fact and in  law and the enquiry then is limited to the scope and effect thereof;      (4) Whenever  it is  said  that  an  arbitrator  cannot decide the  question of  his own  jurisdiction all  that  is intended is  that he cannot determine- that too finally, the question of  the existence (factual) or validity (i.e. legal existence) of the arbitration agreement, if contained in the underlying commercial  contract and this must be so, for, if the existence  or  validity  of  the  underlying  commercial contract is  successfully challenged  the arbitration clause which is the part and parcel thereof must perish with it and therefore, the  Arbitrator  will  have  no  jurisdiction  to decide the  issue  of  the  existence  or  validity  of  the agreement but  even here  if the  arbitration  agreement  so widely  worded   if  separate   and  independent   from  the commercial contract the arbitrator will have jurisdiction to decide the  questions about  existence or  validity  of  the commercial  contract;   but   these   principles   have   no application whatsoever  to a case where the issue relates to the scope  and effect of the arbitration agreement contained in the  underlying commercial  contract and  the arbitration agreement is  wide enough  to include such an issue, for, in such a  case the Arbitrator will have Jurisdiction to decide that  issue.  Therefore,  since  in  the  instant  case  the Arbitration Clause  contained in  the underlying  commercial contract IGE-9584 is of the widest amplitude it is the Court of Arbitration  of I.C.C.  which will  have jurisdiction  to adjudicate not  merely three  claims of G.E.C. on merits but also  the   issue  whether  those  claims  fall  within  the Arbitration Clause or not;      (5) The issue pertaining to the scope and effect of the arbitration agreement,  if raised  in an  application  under section 34  of the  Indian Arbitration Act, the Court has to decide it and the Courts’ decision thereof 439 will naturally be binding on the Arbitrators even though the issue was  within the  competence of the Arbitrators because of the  wide wording  of the Arbitration Clause. Here, since the Court  has decided  the issue  whether the  three claims "arise  out   of"  or   are  "related   to"   the   contract affirmatively it will be binding on the Court of Arbitration of  I.C.C.   and  it  will  be  futile  for  that  court  of Arbitration to go into that question again;      (6) The  commercial contract (IGE-9584) does contain an obligation on  the part  of Renusagar  to  pay  interest  on unpaid purchase price after June 30, 1967 (and not merely in the promissory  notes), which could be readily inferred from Art. III  (a) 3(c) read with Article XIV-B and therefore the first two  claims for Unpaid Regular Interest and Delinquent Interest due  after  June  30,  1967  preferred  before  the Arbitrators not  merely "arise  out  of"  but  really  arise "under" the contact;      (7) The  third claim  for  Compensatory  Damages  which flows by  way of  corollary from  wrongful detention  of the first two  funds which  ought to  have been  paid under  the Contract is  so closely  connected with the contract that it is clearly "in relation to it";      (8) The promissory notes executed by Renusagar were not and are  not in discharge of the obligation to pay the price and interest  thereon under the contract; nor do these notes constitute independents and separate contract by themselves. These are  a part  of  the  contract  and  the  two  are  so inseverably  and   inextricably  bound   together  that  the obligation under  the  contract  can  never  be  deemed  nor

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 8 of 61  

intended to  have been  completely discharged  by  the  mere execution of  the notes.  The  real  nature  of  the  claims preferred before the arbitrators and not the nomenclature or description thereof  by any  party  would  be  relevant  and decisive  Alternatively,   even  assuming   (a)   that   the promissory notes  are not  an inseverable  and  inextricable part of  the Contract, (b) that the obligation arising under the Notes  is totally  different from  the one arising under the contract  and (c)  that the Notes re in discharge of the obligation to  make payment under the Contract (all of which are strongly  denied),  the  three  claims  would  still  be covered by  the Arbitration  Clause which  is of  the widest amplitude, for  it would be erroneous to determine whether a claim arises  out of  or in  relation  to  the  Contract  by looking at the cause of action on which the claim is based.      (9) The  Court of Appeal was justified in coming to the conclusion  that   no  prima   facie  case   for  injunction restraining arbitration  proceedings had  been made  out  by Renusagar and  it had,  therefore, rightly  vacated the  ad- interim injunction and stayed Renusagar’s suit.      Dismissing the appeals, the Court, ^      HELD: 1.1  The question, whether under section 3 of the Foreign Award (Recognition and Enforcement) Act, 1961 having regard to  its scope,  a suit  in the  nature of  a petition under section  33 of  the Arbitration  Act,  1940  could  be stayed must necessarily depend upon a correct construction 440 of the  said section  3, by  keeping in  mind the  objective sought to  be achieved by that Act and its scheme and not on the basis  of similar or analogous provisions that are to be found in  the Arbitration  Act, 1940  or the manner in which such similar  or analogous provisions have been construed by Indian Courts. [491F-G; 492A-B]      1.2 The Statement of Objects and reasons shows that the Foreign Awards (Recognition and Enforcement) Act, 1961 seeks to  achieve  speedy  settlement  of  disputes  arising  from international  trade   through  arbitration.   The  Act,   a successor to  the Arbitration (Protocol and Convention) Act, 1937  was   enacted  to   give  effect   to  the   New  York International Convention  on the Recognition and Enforcement of Arbitral  Awards adopted  on 10th June, 1958 and to which India  is  a  party.  Section  2  of  the  Act  defines  the expression  "Foreign   Awards",  and   closely  follows  the language of  Article II of the convention which provides for recognition by  contracting States  of agreements, including arbitral clauses  in writing  by which  the parties  to  the agreement undertake  to submit  to arbitration  all  or  any difference which have arisen or which may arise between them in  respect   of   defined   legal   relationship,   whether contractual or  not, concerning  a subject matter capable of settlement by arbitration. [492B; D;G]      1.3  Since  the  Act  is  calculated  and  designed  to subserve the  cause of  facilitating international trade and promotion thereof  by providing  for  speedy  settlement  of disputes arising  in such  trade  through  arbitration,  any expression or  phrase occurring  therein should,  therefore, receive consistent with its literal and grammatical sense, a liberal  construction.   An  examination   of  the  relevant provisions of the Foreign Awards Act and the Arbitration Act of 1940  show that  the schemes  of the  two  Acts  are  not identical and  there are  various differences  which have  a material bearing  on the question under consideration and as such decisions  on similar or analogous provisions contained in the  Arbitration Act  cannot help  in deciding  the issue

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 9 of 61  

arising under  the Foreign  Awards Act  because just  as the Arbitration Act, 1940 is a consolidating enactment governing all domestic  awards the  Foreign Awards  Act constitutes  a complete  code   by  itself   providing  for   all  possible contingencies in relation to Foreign Awards made pursuant to agreements to  which Article  II of  the Convention Applies. [492G; 493A-B]      1.4 On  a plain  reading of  Section 3  of the  Foreign Awards Act  two things  become very  clear, namely,  (i) the section opens  with a non obstante clause giving over riding effect to  the provisions  contained therein  and making  it prevail over  anything to  the  contrary  contained  in  the Arbitration Act,  1940 or the Code of Civil Procedure, 1908; and (ii)  unlike section  34 of  the Arbitration  Act  which confers a  discretion upon  the Court,  the section uses the mandatory expression  "shall" and  makes it  obligatory upon the Court  to pass  the order  staying the legal proceedings commenced by  a party  to the  agreement if  the  conditions specified therein are fulfilled. [494A-B]      The conditions  required to  be fulfilled  for invoking section 3 of the Foreign Awards act are: 441      (1) there  must be  an agreement to which Article II of the Convention set forth in the Schedule applies. (It is not disputed that this is so in the instant case); [494C]      (2) a  party to  that  agreement  must  commence  legal proceedings against  another party thereto; (it is again not disputed that  Renusagar and  G.E.C. are  the two parties to the arbitration  agreement an  that Renusagar  has commenced legal proceedings  against G.E.C.  by filing Suit No. 832 of 1982); [494D]      (3) the  legal proceedings  must be  "in respect of any matter agreed  to  be  referred  to  arbitration"  "in  such agreement; (the question whether this condition is fulfilled here needs to be decided), [494E]      (4) the application for stay must be made before filing the written  statement or taking any other step in the legal proceedings;  (admittedly   this  condition  is  fulfilled); [494F]      (5) The Court has to be satisfied that the agreement is valid,  operative  and  capable  of  being  performed;  this relates to  the satisfaction  about ’existence and validity’ of the  arbitration agreement;  (in the  instant case  these questions do not arise); and [494G]      (6) the  Court has  to  be  satisfied  that  there  are disputes between  the parties  with regard  to  the  matters agreed to be referred; this relates to effect (scope) of the arbitration   agreement    touching   the   issue   of   the arbitrability of  the claims  (it will have to be dealt with while considering the satisfaction of condition (3). [494H]      (In the instant case, the parties were thus at issue as to the  fulfilment of  conditions (3) and (6) only and it is on the  fulfilment of these that the obligation of the court to stay the suit of Renusagar will arise.) [495A]      1.5 The  scheme of the two Acts (Foreign Awards Act and Arbitration Act) materially differ on several aspects having a bearing on the points at issue I as seen by an examination of  section   3,  4,  7,  of  the  Foreign  Awards  Act,  in juxtaposition with sections 32, 33 and 34 of the Arbitration Act. Under  section 32  of  the  Arbitration  Act  suits  no challenge  the  existence  or  validity  of  an  arbitration agreement or  award as also suits to have the effect (scope) of an  arbitration agreement  determined are barred and such questions can be raised only by an application under section 33 of  the Act whereas under the Foreign Awards Act there is

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 10 of 61  

no provision similar or akin to sections 32 and 33 (and that is why  a suit  of the  nature filed  by Renusagar  qua  the arbitration  agreement   covered  by   the   Convention   is maintainable) but  by virtue  of sections  3 and  7 the same purpose is  served though by different procedure. Sections 3 and 7  read together  disclose  a  scheme  that  so  far  as questions of  existence, validity  and effect (scope) of the arbitration  agreement   are  concerned,  the  determination thereof by  the arbitrators  is also subject to the decision of the Court and this 442 decision  of   the  court  can  be  had  either  before  the arbitration proceedings  commence or  during their pendency, if the  matter is  decided by  the  Court  in  a  section  3 petition, as  in the  present case,  or  can  be  had  under section 7  after the  award is  filed in  the court  and  is sought to  be enforced  under section  6. True  section 4(2) declares that  a foreign  award shall  be filled  treated as binding ’for  all purposes’ on persons as between when it is made  but   that  is   subject  to  section  7  where  under enforceability thereof  is made  dependent upon satisfaction of certain  conditions specified therein; for example, under section  7(1)   (a)  (iii)   one  of   such  conditions  for enforceability is  that  the  award  should  not  deal  with questions not  referred nor  should it  contain decisions on matters beyond  the  scope  of  the  agreement.  In  effect, section 3  of the  Foreign Awards  Act so to say combines in its own  ambit both  sections 33  and 34  of the Arbitration Act; in  other words,  questions  regarding  the  existence, validity or  effect (scope)  of  the  arbitration  agreement which can be decided under section 33 of the Arbitration Act are required  to be  decided under  section 3 of the Foreign Awards Act  be fore a stay of legal proceedings contemplated therein could  be  granted  and  the  right  to  have  legal proceedings  stayed   contained  in   section  34   of   the Arbitration Act  is also  to be found in the same section 3. Further the  Foreign Awards Act has also taken cognizance of the possibility  that there  may not be a Section 3 petition at all  the  matter  being  directly  proceeded  before  the arbitrators and  the possibility of the arbitrators giving a decision  on   an  issue  not  within  their  competence  or jurisdiction  and   in  such  cases  section  7  contains  a safeguard which  prevents any  such award  from  being  made enforceable. Such  being the scheme under the Foreign Awards Act the  decisions  of  the  Indian  Courts  on  similar  or analogous provisions  contained in the Arbitration Act would not be  of any  help to  decide questions  arising under the Foreign Awards Act. [495B-H; 496A-C]      Balabux Agarwalla  v. Shree  Luchminarain Manufacturing Co. ILR  1948 Calcutta page 265; Gaya Electric Supply Co. v. State  of   Bihar,  [1953]   SCR  572  at  579-580  held  in applicable.      1.6 Conditions  (3) and (6) which are inter related and in substance  bear upon  the same aspects and also satisfied since, firstly,  the language  of the  Arbitration Clause is wide enough  to embrace  the issue  of arbitrability  of the claims and  secondly, the phrase in section 3 of the Foreign Awards Act,  namely. in  respect of  any matter agreed to be referred to  the  arbitration"  cannot  be  given  a  narrow construction, because  (a) there  is nothing  in the section warranting the  same. What matters are agreed to be referred to arbitration will depend upon what language is employed by the parties  to  the  arbitration  agreement  and  there  is nothing in  law or  equity which  prevents the  parties from referring even  the  questions  of  existence,  validity  or

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 11 of 61  

effect (scope)  of the  arbitration agreement  itself to the arbitrators (in  fact; Lord  Porters’ observations in Heymen v. Darwins Ltd. and DAs J’s view in Balabux Aggarwala’s case show that  the parties  can do  it), and  (b) the  scheme of sections 3 and 7 of the Foreign Awards Act, clearly suggests that the  relevant phrase  would include  even questions  of existence, validity  and effect  (scope) of  the arbitration agreement.                                                [496H;497A-F]      Shiva Jute  Bailing Ltd.  v. Hindley  Co, [1960]  1 SCR 509, Khardah  Company Ltd. v. Raymon and Co. (India) Private Ltd., [1963] 3 SCR 183 443 Waverly Jute  Mills Co.  v. Raymonand Co., [1963] 3 SCR 209; M/s. R.N.  Ganekar and  Co. v. Hindustan Wires Ltd. AIR 1974 SC 203=[1974]1  SCC 309 at 313-314 distinguished and held in applicable.      2.1 Apart  from the  fact that  the relevant  rules  of I.C.C. (particularly  Rules 8.3  and 8.4)  in  terms  confer jurisdiction upon the Arbitrations to decide questions as to the existence  or  validity  of  the  Arbitration  agreement contained in  the commercial  contract, in the instant case, since the parties to the underlying commercial contract have used the  expressions "arising  out of"  or "related to this contract" in  the Arbitration  Clause XVII  contained in the contract, the  parties clearly  intended to  refer the issue pertaining  to   the  effect   (scope)  of  the  Arbitration Agreement to  the  Court  of  Arbitration  of  International Chamber of  Commerce, in  other words  the issue  about  the arbitrability of  the three  claims under reference has been referred. [465E-F; 471G-H; 472A]      2.2 Four  propositions emerge  very  clearly  from  the authorities decided by the Indian Courts; [470F]      (a)  Whether   a  given   dispute  inclusive   of   the arbitrator’s jurisdiction  comes within the scope or purview of an  arbitration clause  or not primarily depends upon the terms of  the clause  itself; it  is a  question of what the parties intend  to provide  and what  language they  employ; [470G-H]      (b) Expressions such as "arising out of" or "in respect of"  or   "in  connection  with"  or  "in  relation  to"  or "inconsequence of"  or "concerning"  or  "relating  to"  the contract are of the widest amplitude and content and include even questions  as to  the existence,  validity  and  effect (scope) of the arbitration agreement; [471A-B]      (c) Ordinarily  as a  rule an  arbitrator cannot clothe himself with  power to  decide  the  questions  of  his  own jurisdiction (and  it will  be for the Court to decide those questions) but  there is nothing to prevent the parties from investing him  with power  to decide those questions, as for instance, by  a collateral  or separate agreement which will be effective and operative; [471C]      (d) If,  however, the  arbitration  clause,  so  widely worded as  to include  within its  scope  questions  of  its existence, validity  and effect (scope). is contained in the underlying commercial  contract then decided cases have made a distinction  between questions  as to the existence and or validity of  the agreement  on the  one hand  and its effect (scope) on  the other  and have  held that  in the  case  of former those  questions cannot be decided by the arbitrator, as by  sheer logic  the arbitration  clause must  fall along with underlying  commercial contract  which is  either  non- existent or  illegal while in the case of the latter it will ordinarily be  for the  arbitrator to  decide the  effect or scope of  the arbitration agreement, i.e to decide the issue

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 12 of 61  

of arbitrability of the claim preferred before him. [471D-F] 444      Government of Gibralter v. Kenney and Anr. [1956] 3 All E. R. 22; Heyman v. Darwins Ltd, [1942] AC 356; Wilesford v. Watson, [1873] L R. 8 Ch. Appeals 473 quoted with approval.      Dhanrajmal Gobindram  v. Shamji Kalidas and Co., [1961] 3 SCR  1020; Khardah  Company Ltd. v. Raymon and Co. (India) Private Limited,  [1963] 3  SCR 183;  Jawahar Lal  Burman v. Union of  India, [1962] 3 SCR 769; Waverly Jute Mills Co. v. Raymon and  Co. [1963]  3 SCR 209; Balabux Agarwalla v. Sree Luchminarain  Manufacturing  Co.,  ILR  [1948]  1  Cal.  265 referred to.      2.3 All  the three  claims referred  by G.E.C.  to  the Court of  Arbitration of  I.C.C. do  "arise out  of" and are "related to"  the commercial contract (in fact the first two claims arise  "under the contract") and squarely fall within the  widely   worded  arbitration  clause  being  Art.  XVII contained in  the commercial  contract. The  third claim for compensatory damages  is directly,  closely and inextricably connected with  the terms and conditions of the contract the payments to  be made thereunder and the breaches thereof and since for  adjudication thereof  recourse  to  the  contract would be necessary it is a claim "arising out of" and in any event "related  to the  contract".  The  Arbitration  Clause embraces even  the question of its effect (scope) that is to say it  embraces the issue of the arbitrability of the three issues.                                             [488D-E, 489A-B]      2.4 The  contract does  contain the  obligation to  pay future interests  on the unpaid purchase price from June 30, 1967 onwards  till payment  and the  two claims  of GEC  for Unpaid Regular  Interest and  Delinquent Interest  have been correctly preferred  before the  Court of Arbitration of ICC as arising  not merely  "out of"  but "under  the contract". [478D-E]      A combined  reading of  the provisions in sub-clause a, b,c, of  clause 3  of Article-III  and XIV-B of the contract (IGE-9584) clearly  shows that  the promissory notes are not the sole  and exclusive  repository of  GEC’s right to claim and receive  further interest on unpaid price after June 30, 1967  but   that  the   contract  itself  provides  for  the obligation  to  pay  such  interest  after  that  date  till payment. [476C-D, E-G]      Admittedly, interest  on  the  purchase  price  at  the agreed rate  upto June 30, 1967 was capitalised and included in  the   principal  amount   of  each  of  the  instalments represented by the concerned promissory note as mentioned in the schedule of payments given in Article III-A, 3(b) of the Contract. The  form  of  the  promissory  note  attached  as Exhibit ’B’  to the  contract as  also the  promissory notes that were  actually executed  clearly contain a recital that Renusagar "promises  to pay to GEC interest thereon (i.e. on the capitalised  principal) from  June 30,1967 semi-annually at the  rate of  6.5 per  annum on  the last  date of June & December in each year until paid. The recital in each of the Promissory Note  bas to  be in  terms of  the  provision  in Article III-A  3 (c)  of  the  commercial  contract  itself. Further Article  XIV-B clearly shows that the parties to the contract were contemplating to obtain from the Government of India Income  Tax exemption on the interest income which GEC was going  to receive  from Renusagar under the contract and the provision  is that  the "interest  income" on  which tax exemption was being 445 sought, is said to include capitalised interest and interest

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 13 of 61  

thereon that  is to  say interest  on  the  amounts  of  the promissory  notes  (which  included  capitalised  interest), which  obviously   means  further  interest  on  outstanding principal balance  under the  notes from  June 30, 1967 till payment.                                       [475F-H, 476A, 477A-F]      2.5   The contention  that if  Renusagar had  failed to execute promissory notes as required under the contract, GEC would not  have become entitled to receive or claim interest after June  30, 1967 but would have had only a right to call upon Renusagar  to  execute  such  pro-notes  and  to  claim damages for failure to fulfil contractual obligations cannot be accepted.  The question is not what rights GEC would have had on  Renusagar’s failure to execute that promissory notes as required  but the  question is whit the contract provides for. Sub-clause  (c) of  clause 3  of Article III-A provides for not  merely the  execution of  promissory notes but that the promissory notes would also bear interest after June 30, 1967. Further the very fact that the failure of Renusagar to execute promissory  notes  of  course  as  required  by  the contract would  have conferred  a right  of GEC to call upon Renusagar  to   execute  such  notes  also  shows  that  the obligation to  pay interest after June 30, 1967 till payment has been provided for by the contract. [476D-H]      Commissioner of  Income Tax  v. M/s.  Ogale Glass Works Ltd, AIR  (1954) SC 429=[1955] 1 SCR 185; H.P. Gupta v. Hira Lal, [1970]  3 SCR  788; Bihari-Diwan Singh v. Jaffe & Sons, AIR 1922 Lahore 353; Dhiraj Lal v. Sir Jacob Behrens & Sons, AIR 1933  Allahabad 74; M/s. Vasavani Navji v. KPC Spinners, AIR 1983  Madras 31; Ghewarchand v. Spinnerei, Baillng Ltd., AIR  1950  Calcutta  568;  NOVA    (Jersey)  Knit  Ltd.,  v. Spinnerei, [1977]  2 All England Report 463; Monro v. Bognor Urban District Council, [1914-15] Reprint All England Report 523 referred to.      2.6 Neither  the fact  that the bank guarantee endorsed on each promissory note is restricted only to the payment of principal and interest on the note as per its terms and does not extend  to or  cover any  residuary  payment  obligation contained in  the contract,  dehors the  promissory note nor the fact  that GEC  has filed a Suit No. 786 of 1982 against UCO Bank  in the  Calcutta High Court to recover the million dollars for  the interest  as being due under the promissory notes read  with guarantee,  lead to  an inference  that the cause of  action arose only out of pro-notes. Since the Bank guarantee  is   in  connection  with  and  endorsed  on  the promissory notes it would ordinarily refer to the obligation arising there  under and not to any obligation arising under any other  document and  the question  whether the  contract contains such  obligation to pay future interest must depend upon its  contents and  not upon  what is not to be found in the bank  guarantee. Again  the suit against the UCO Bank is necessarily to  be on the pro-notes read with the guarantee, the contract  not being  a document  to which  UCO Bank is a party. [477F-H, 478A-B]      Similarly,  it  is  the  substance  of  GEC’s  pleading (notice of  intention to arbitrate) that matters and not the description of the claims. Though at one place in the Notice of Intention  to arbitrate  the two claims are (in fact only the first  claim of  2.1 million U.S. dollars is) said to be "on the  promissory notes",  yet at the commencement of that notice the subject matter thereof is 446 aptly stated  as "Reg:  Interest under the contract No. IGI- 9584 between  GEC and  Renusagar" and  the substance  of the entire pleading  shows how  the first two claims have arisen

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 14 of 61  

under the  contract and  how under  the terms thereof and in the correspondence their amounts got adjusted and quantified at certain figures and that reference the contract is not by way of  any antecedent  or historical  fact. Viewed from any angle the  two claims  cannot be  said to  arise  under  the Promissory Notes. [478B-E]      2.7 Whether a negotiable instrument taken on account of debt operates  as absolute  discharge of  the debt or not is always a  question  of  intention  of  the  parties  to  the commercial contract.  Here, the  promissory  notes,  on  the terms of  the Contract  cannot be  regarded as  amounting to payment in  discharge of  the obligation  arising under  the Contract on  the ground that since it is one of the modes of payment indicated in the Contract the execution of the notes should be  held to  be payments  by way  of discharging  the obligation under the contract, because there is yet one mode of payment  indicated the  contract namely  the opening of a Letter of  Credit and  the mere fact of the Letter of Credit having been  opened by Renusagar in a bank in New york valid for 18  months will  have to  be regarded  as actual payment which is  hardly arguable.  Further, a  Bill or a promissory note can  never go in the discharge of a debt unless it is a part of a contract that it shall be so.[478F-H,481E-F]      Commissioner  of  Income  Tax  v.  Kameshwar  Singh  of Darbhanga, AIR  [1933] P.C.  108; Keshav  Mills Co.  Ltd. v. Commissioner of  Income Tax,  AIR [1950]  Bombay 166, quoted with approval.      Commissioner of  Income Tax  v. M/s.  Ogale Glass Works Ltd., AIR [1954] SC 429=1955 (1) SCR 185; H.P. Gupta v. Hira Lal [1970] 3 SCR 788 discussed and distinguished.      2.8 The  terms of  the contract,  far from showing that these were  payments in discharge of the original obligation clearly indicate  that the  parties had  intended that these were to operate as conditional payments. [481F-G]      If Article  III of  the contract  which deals  with the topic of payment of price for the sale of goods and services is carefully  analysed, the  following factors  emerge  very clearly; (a)  that the  pro-notes area  not expressed  to be payments; in  fact it  is in  terms stated  that the  "total contract purchase  price shall  be paid  by the purchaser in lawful money  of the  USA" (Article  III-A)  and  promissory notes are  not "lawful  money of  USA"; (b) that because the Contract so provides even the pro-notes also recite that the principal and  interest there-under  are "payable  in lawful money of  the USA;  (c) that  Article III-A  (3) which deals with pro-notes  provides for payment of the remaining 90% of the price  "in accordance  with the  following  Schedule  of Payments" and  expressly states that "the obligation to make such  payments   is  to  be  evidenced  by  four  series  of purchaser’s unconditional negotiable promissory notes" which clearly shows  that the  pro-notes are  not payments but are intended merely  to be the evidence of the obligation to pay the price;  (d) that  though stated to be "unconditional and negotiable" (perhaps  so between  the drawer  and subsequent assigness in case of negotiation), as between the seller and the purchaser these have been made 447 subject  to  several  conditions  such  as-(i)  the  amounts thereof were payable  only on the assumption that deliveries of items  of equipment  were completed  within 15  months of Contract Effective Date and interest at the rate of 6.5% was to become  6% on receipt of income Tax exemption (Art. III-A (3) (b)  (ii) these  were to  lie in Escrow Agreements to be released  to   the  seller  synchronizing  with  the  stated progress of  supply of  goods according to certain formulate

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 15 of 61  

(Art. III-D), (iii) these were to be replaced by fresh Notes depending on receipt of income-tax exemption (Art. III-A (3) (f) or  price  modification  (Art.  III.D);  (iv)  each  one contains a default clause saying "upon default in the prompt and full payment of the principal or of the interest on this Note when  due, all  of the  notes in each and every series, together  with  interest  to  the  date  of  payment,  shall immediately become  due and  be payable  at the  option  and demand of the holder thereof". [481G-H; 482A-H]      These factors  and circumstances  and particularly  the fact that  these notes  were as  between the  seller and the purchaser subject to several conditions leading to variation and  adjustment  and  replacement  and  the  default  clause contained in  each, clearly  indicate that  these  were  not intended to  constitute independent or separate contracts by themselves but  that they  were a  part and  parcel  of  one integrated transaction embodied in the contract and that the promissory notes  were and  are meant  to be governed at all times by  various other  terms of  the Contract and could be modified and  substituted under  given conditions as set out in the  Contract. Therefore,  a dispute  of  non-payment  of interest on the instalments-whether regular of delinquent-is a dispute  "relating to  the Contract,"  In fact,  both  the claims-2.1 million U.S. dollars and U.S. $ 7,84,151.84-arise "under the  contract" and  have been preferred by GEC before the Court  of Arbitration  of I.C.C. expressly on that basis and not under the promissory notes. [483A.E]      [The Court  in view  of the above, adopted "Non-liquet" on the  submission for  the appellant based on the so-called factors of  unconditional nature  and negotiability  of  the promissory notes  as destroying  the  arbitrability  of  the claims thereunder  and also  the alternative  submission for G.E.C. that  the two claims would still fall within the wide expressions occurring in the contract even on the assumption that the  promissory notes  are severable from the Contract, that the obligation arising thereunder is different from the one under  the Contract  and that these promissory notes are in payment  of the  obligation to  pay the  price under  the contract] [483E-G]      2.9 As regards the third claim of compensatory damages, the mere  fact that  Renusagar is  being saddled  with  this liability  as   tort-feaser,   a   stake-holder   and/or   a constructive  trustee,   by  itself   will  not   justify  a conclusion that  the same  is not covered by the arbitration clause because the question is not whether the claim lies in tort but  the question is whether even though it has lain in tort it  "arises out  of" or  is "related  to" the Contract, that is  to say,  whether it  arises out of the terms of the Contract or is consequential upon any breach thereof. [483G- H; 484A]      The third  claim is  based on and is consequential upon and by  way of  corollary to  the  non-payment  of  the  two detained amounts  by Renusagar to GEC in breach of the terms of the  contract. Therefore,  before adjudicating  upon this claim  the   adjudicating  authority   will  have  first  to adjudicate 448 upon the first two claims preferred by G.E.C. and only if it is found  that GEC  is entitled  to receive  the  first  two amounts which ought to have been paid by the appellant under the terms  of the contract but which Renusagar had failed to pay that  this third  claim could,  if at  all be allowed to GEC. In  the real  sense, therefore,  this  third  claim  is directly, closely  and inextricably connected with the terms and conditions  of the  Contract, the  payments to  be  made

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 16 of 61  

thereunder and the breaches thereof and as such will have to be regarded  as a claim "arising out of" or "related to" the contract. [484A-C]      Woolf v.  Collis Removal  Service, [1947]  2 All. E. R. 260;  Astro  Vencedor  Compania  Naviera  SA  of  Panama  v. Mabanaft G  M b.  h, [1971]  2 All.  E.  R.  130]  Govt.  of Gibralter v.  Kenney &  Anr. [1956]  3 All.  E. R. 22 quoted with approval.      Alliance Jute  Mills Co.  Ltd. v. Lal Chand Dharanchand and Another,  AIR 1978  Cal. 19,  Union of  India v. Salweeh Timber Construction  (India, &  Ors. [1969]  2 SCR 224. Ruby General Insurance  Co. Ltd.  v. Peary  Lal Kumar  [1952] SCR 501, referred to.      Monro  v.   Bognor  Urban  District  Council  [1914-15] Reprint All.  R. 523; Ghewarchand v. Shiva Jute Bailing Ltd, AIR 1950 Cal. 568 distinguished.      The question  as to  whether a claim based on tort is a claim de  hors the  contract which  contains the arbitration clause or  is directly  or inextricably  connected with  the contract has to be decided on the facts of each case and the language used in the arbitration clause. [488G-H]      3.1   The    contention   that   even   assuming   that arbitrability of  the three  claims falls  within  the  wide ambit  of   the  arbitration   clause  and   that  therefore Renusagar’s suit  is in  respect of  a matter  agreed to  be referred to the arbitration within the meaning of section 3, in law,  that is,  under the  law of Forum (being the Indian law, in  the instant  case) the  issue of  arbitrability  of claim cannot  be finally  determined by  the arbitrators but must rest  with the  court and,  therefore Renusagar’s  suit cannot be stayed under section 3, cannot be accepted, in the face of  the scheme  envisaged in  the Foreign  Awards  Act. [498C-D]      3.2 The  scheme that  emerges on  a combined reading of sections  3   and  7  of  the  Foreign  Awards  Act  clearly contemplates that questions of existence, validity or effect (scope) of  the arbitration agreement itself, in cases where such agreement  itself, in  cases where  such agreement wide enough to  include within  its ambit  such questions, may be decided by the arbitrators initially but their determination is subject to the decision of the court and such decision of the  court   can  be   had  either  before  the  arbitration proceedings commence or during their pendency, if the matter is decided  in a  section-3 petition  or can  be  had  under section 7 after the award is made and filed in the Court and is sought  to be  enforced by  a party thereto. All that the condition (3)  of section  3  requires  is  that  the  legal proceedings must be in respect of 449 a matter  "agreed to  be referred  to the  arbitration"  and there is  no warrant to add further words namely, "agreed to be referred  to the  arbitration for  final  determination." [500H; 501A;D]      3.3 There  is nothing in the general law of arbitration either English  or Indian  which prevents the arbitrators or on umpire  from deciding questions of their own jurisdiction provisionally or  tentatively and  to proceed  to make their awards on that basis, though their own jurisdiction would be subject to  the final  determination by the court and if the court takes  a contrary  view their  award will not be given effectto and  this is  exactly the  scheme  of  the  Foreign Awards Act. [502E-F]      Attorney General for Manitoba v. Kelly and Ors., [1922] 1 AC  268 at  275; Dalmia  Dairy Industries  Ltd v. National Bank of  Pakistan [1978]  2 Lioyed  LR 223  at page 292-293;

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 17 of 61  

Becker Auto  Radio’s case [1978] 585 Federal 2nd series page 39; R.  Prince and  Co. v.  Governor-General-in Council, AIR 1955 p.  240 at  page 242;  Municipal Board  v. Eastern U.P. Electricity Supply  Co. Ltd.  and Ors.  AIR 1958  see 506 at page 510;  M/s. Jagan Nath Phool Chand v. Union of India and Ors AIR  1982 Delhi  93 at  page 97 and 98; Vallabh Pitti v. Narsinpdas, 65 Bombay L.R. 20 held in applicable.      3.4.  Further,   the  statement   that  many   national arbitration laws  allow the arbitrator to give a provisional ruling  on   his  competence  in  order  not  to  delay  the arbitration and to alleviate dilatory tactics by obstructing respondents is  borne out  in regard  to the  general law of arbitration both  English and  Indian-by several  decisions. Similarly, there  is no  difference between  English law and Indian law  on the point that an arbitration agreement which empowers  an  arbitrator  to  decide  the  question  of  its existence, validity or effect (scope) is neither invalid nor void. [502G-H; 504 A]      Dalmia  Dairy  Industries  Ltd.  v.  National  Bank  of Pakistan [1978] 2 Lloyed L.R. 223 at page 292, 293; Brown v. Oesterreichischer Walbesitzer  R. Gmbh  [1954] 1  QB  P.  8; Lunada Exportadora  and Ors.  v. Tamari  and Sons  and  Ors. [1967] 2 Llyod’s Rep. 353; 364; Vallabh Pitti v. Narsingdas, 65 Bombay.  L.R. 20;  Pannallal Sagoremull  v.  Fatey  Chand Muralidhar, [1951]  88 CLJ  34;  Fertilizer  Corporation  of India v.  Chemical Construction  Corporation 75  Bombay  Law Reporter 335 referred to.      3.5. However,  in cases  where the  arbitration  clause contained in the underlying commercial Contract is so widely worded as  to include  within its  scope the questions cases have made  a distinction  between questions  as to  the  its existence or  validity of  the agreement on the one hand and its effect  (scope) on  the other  and have held that in the case of the former those questions can not be decided by the arbitrators, as  by sheer  logic the arbitration clause must fall along  with the underlying commercial contract which is either non-existent  or illegal,  while in  the case  of the latter it  will ordinarily  be for the arbitrators to decide the effect  (scope) of  the arbitration  agreement, for  the reasons that  (a) conceptually challenge to the existence of validity of the arbitration agreement con- 450 tained   in    an   underlaying   commercial   contract   is fundamentally different  from an  inquiry into the scope and effect of  such agreement  in as  much as the former goes to the root  of the  arbitration agreement  whereas the  latter presuppose that the arbitration agreement exists in fact and in law  and the  inquiry is  then undertaken  as to its true scope and  effect; (b) whenever the question of arbitrators’ jurisdiction depended  upon the  scope  and  effect  of  the agreement, courts  have readily  directed the  parties to go before the arbitrators. [504H; 505A-B; D-F]      Heyman v.  Darwin Ltd.[1942] AC 356; Jawahar Lal Burman v. Union  of India  [1962] 3  SCR 769;  Water Supply Service India (P)  Ltd. v.  The Union of India and Ors., AIR 1971 SC 2083 at  2085; Willesford  v. Watson  [1873] L.R. 8 Ch. App. 473; referred to.      3.6 A  stay of  the suit  either under section 3 of the Foreign Awards  Act or  under section  34 of the Arbitration Act, 1940  may have  the effect  of finally disposing of the suit for  all practical  purpose. But  that is no reason why the relief  of stay  should be  refused by  the Court if the concerned legal provision requires the Court to do so. Here, section 3  itself indicates  that the  proper stage at which the Court  has to  be fully satisfied about these conditions

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 18 of 61  

is before  granting the  relief  of  stay  in  a  section  3 petition and  there is  no question  of  the  court  getting satisfied about  these conditions on any prima facie view or a pro tanto finding thereon Parties have to put their entire material before the Court on these issues (which ever may be raised) and  the Court  has to  record its  finding  thereon after considering such material. [507D-G]      Though section  34 of the Arbitration Act, 1940 confers a discretion  upon the  Court in the matter of granting stay of  legal   proceedings  where   there  is   an  arbitration agreement, before granting the stay the court has to satisfy itself  that  arbitration  agreement  exists  factually  and legally and  that the  disputes between  the parties  are in regard to  the matters  agreed to be referred to arbitration (these aspects  fall within  the phrase  ’if satisfied  that there is  no reason  why the matter should not be referred,’ occurring therein).  The Court under section 34 must finally decide these issues before granting stay. [507H; 508A-B]      Where on  an application  made under  section 34 of the Arbitration Act for stay of a suit, an issue is raised as to the  formation,   existence  or  validity  of  the  contract containing the arbitration clause, the Court is not bound to refuse a  stay but may in its discretion, on the application for stay,  decide the issue as to the existence  or validity of the  arbitration agreement  even though  it  may  involve incidentally a  decision as  to the validity or existence of the parent  contract. If  this is the position under section 34 of  the Arbitration Act which confers discretionary power upon the  court, a fortiori the Court acting under section 3 of the  Foreign Awards  Act must  decide such issues at that stage when  the grant  of stay  is obligatory. [1975] 2 All. E.R. 549; Anderson Wright Ltd. v. Moran and Co. [1955] 1 SCR 862; Khushiram  v. Hantumal  [1948] 53  CWN 505  at page 518 referred to. [510B-C]      In  the  instant  case,  the  issue  pertained  to  the arbitrability of  the three  claims  under  the  Arbitration clause in the contract and depended 451 upon the  proper construction  thereof in  the light  of the conduct of  the parties  an surrounding circumstances and no prejudice  was   caused  to  any  of  the  parties  as  both Renusagar’s  application   for  injunction  and  GEC’s  stay petition under section 3 were heard together and parties did put before  the court-Trial court, the Appeal court and even Supreme Court-the  entire material  such as  each wanted  to rely upon  and sought  a decision on the concerned issue and therefore, the prayer for injunction restraining arbitration sought by  Renusagar was  rightly refused. The triable issue raised in  the suit having been found upon against Renusagar no question of balance of convenience survives. [510E-F]      (The Court  directed that  the  decision  of  issue  of arbitrability of  three claims  will have  to be regarded as final, conclusive and binding and that issue would not arise before the  Court of arbitration of I.C.C. and even if it is raised it would be purely academic.) [510G-H]

JUDGMENT:          CIVIL APPELLATE JURISDICTION: Civil Appeal                     No. 2434-35 of 1984      Appeals by  Special leave  from the  Judgment and Order dated the  19th to  21st day  of October, 1983 of the Bombay High Court in Appeal Nos. 404 & 405 of 1983.      F.S.  Nariman,   S.S.  Ray,   I.M.Chagla,  P.L.  Dubey,

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 19 of 61  

A.P.Chinoy, E.B.  Desai, N.P.  Bharucha, N.R.  Khaitan, Anil Kumar Sharma & Praveen Kumar for the appellants.      N.A. Palkhivala,  K.S. Cooper,  S.F. Dastur  & Dr. Y.S. Chitale, S.S.  Shroff, S.A.  Shroff &  Mrs. P.S.  Shroff for Respondents in CA. No. 1488 of 1984.      K.S. Cooper,  J.J. Bhatt,  Amit Desai,  S.A. Shroff and Mrs. P.S. Shroff for the Respondent in CA. No. 1489 of 1984.      The Judgment of the Court was delivered by      TULZAPURKAR, J.  These two  appeals raise the following two questions for our determination:      1.    Whether  under  sec.  3  of  the  Foreign  Awards           (Recognition and  Enforcement) Act,  1961,  having           regard 452           to its  scope, a  suit in the nature of a petition           under sec.  33 of  the Arbitration Act, 1940 could           be stayed  ? If,  so whether  the Ist  Respondents           have made  out a  case for staying the Appellants’           suit No. 832 of 1982 ?      2.    Whether  the three  claims referred  by  the  Ist           Respondents to the Court of Arbitration of the 2nd           Respondents  are   beyond   the   scope   of   the           Arbitration Clause being Article XVII contained in           the Contract  dated August  24, 1964  or they  are           "arising out of or related to" the said Contract ?      The facts  giving rise  to the  aforesaid two questions may be  stated.  The  Appellants,  Renusagar  Power  Company Limited (for  short ’Renusagar’)  are a company incorporated under the Companies Act, 1956 having their Registered Office at Renukoot,  District Mirzapur  in Uttar  Pradesh. The  Ist Respondents, General  Electric Company  (for short ’G.E.C.’) are a  company incorporated  under the  laws of the State of New York  and carry  on their  business inter  alia at  570, Lexington Avenue,  New York,  U.S.A. The 2nd Respondents are the   International,   Chamber   of   Commerce   (Court   of Arbitration) (for  short ’I.C.C.’)  having their  registered office in Paris, France.      By a Contract in writing dated August 24, 1964 (bearing Ref.  IGE.   9584)  G.E.C.  agreed’  to  sell  to  Renusagar equipment for  a thermal  electric generating  plant  to  be erected at  Renukoot on  the terms  and conditions  set  out therein.  The  work  to  be  performed  under  the  contract included the  supply of  equipment, spare-parts and services in  accordance  with  the  ’Proposed  Specification’s  dated November 12,  1963 and  contained in  G.E.C.’s letter  dated October 14,  1963 together  with the attached Minutes of the Meeting of  October 10,  1963.  The  total  purchase  price’ called the  ’contract Base  Price, for  all the  work was  $ 13,195,000 payable  by Renusagar  in lawful  currency of the U.S.A. in  the manner stipulated in the Contract. It appears that the parties intended that delivery of the equipment and spare-parts etc.  would be completed within 15 months of the Contract Effective  Date (which was December 31, 1964), i.e. up to  March 30,  1966 and  that the  erection of  the plant would be  completed within  16th to  30th Month  (i.e.  from April 1, 1966 to June 30, 1967) and that the plant would 453 be fully  operational by  the end  of 30th  Month  from  the Contract Effective  Date. The parties therefore, agreed that substantial payment  of  the  purchase  price  by  Renusagar should commence  when the  plant became operational, i.e. by June 30,  1967; it was also agreed that no interest would be payable  by  Renusagar  during  the  delivery  period,  that interest shall be paid during the erection period (i.e. 16th to 30th  Month) and thereafter till payment but the interest

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 20 of 61  

during the erection period would be capitalised and added on to the  principal. Accordingly,  Art. III  of  the  Contract stipulated that  initially 10%  of the  total Contract  Base price (the amount coming to U.S. $ 1,319,500) should be paid either in  cash or  by means of a Letter of Credit within 30 days of  the Contract Effective Date and that the balance of 90% of  the purchase price plus interest at 6-1/2% per annum from 16th  to 30th Month aggregating to U.S. $ 12,776,058,75 ($ 11,875,500.  for principal  plus $  900,558,75 being  the capitalised interest at the aforesaid rate for the aforesaid period) should  be paid  in accordance  with the schedule of payments set  out therein.  The schedule  for the payment of the said  balance of  90% of the purchase price provided for payment to  be made  in sixteen  six-monthly instalments  of U.S. $  798,503.68 each, the first of such instalments being payable on 30-6-1967, the second on 31-12-1967, the third on 30-6-1968, the  fourth on 31-12-1968 and so on with the last instalment falling due on 31-12-1974. The obligation to make such payment was to be evidenced by 4-series (A-B-C-D) of 16 unconditional negotiable  promissory notes to be executed by Renusagar.  It  was  further  agreed  that  in  case  G.E.C. received an  exemption from  the Government  of  India  from payment of  Income-Tax on  interest receivable  by  it  from Renusagar then  the interest  for that portion of the period shall be  computed at  6% instead of 6.5% per annum and that the  concerned   promissory  notes   would  be  replaced  or substituted by fresh promissory notes for amounts reflecting the adjustment  in payment  of interest  necessitated by the grant of  tax exemption. The Contract further provided under Art. XIV-B that should G.E.C.’s application for exemption be denied  Renusagar   may  withhold   the  Indian   Income-tax applicable to  any payments  of interest  but shall  furnish G.E.C with tax receipts on all with held amounts paid to the Government of  India. Such provision was obviously made with a view  to enable  G.E.C. to obtain corresponding credit for the sum  in their  U.S. Tax  Assessment. The  Contract  also required  Renusagar  to  furnish  guarantee  of  the  United Commercial Bank for payment of the full amount of pro- 454 missory notes: the form of the promissory notes and the Deed of Guarantee  were annexed to the Contract. Under Art. XIX-A it was  provided that  the rights  and  obligations  of  the parties would be governed in all respects by the laws of the State  of   New  York,  U.S.A.  The  Contract  contained  an Arbitration Clause in Art. XVII the relevant portion whereof runs thus:      "Any disagreement  arising out  or of  related to  this      contract which  the parties  are unable  to resolve  by      sincere  negotiation   shall  be   finally  settled  in      accordance  with   the   Arbitration   Rules   of   the      International Chamber  of Commerce.  As provided in the      said Rules,  each party  shall appoint  one Arbitrator.      and the  Court  of  Arbitration  of  the  International      Chamber   of   Commerce   shall   appoint   the   third      Arbitrator.......  Arbitration   proceedings  shall  be      conducted at  such time  and  place  as  the  Court  of      Arbitration shall decide. Judgment upon an award may be      entered in any court of competent jurisdiction."      Pursuant  of  the  said  Contract  Renusagar  made  the initial payment  10% of  the Contract  Base price  and  also issued in  all 64  promissory notes  (16 in each of the four series) all  dated 31-12-1964  but with due dates of payment synchronizing with  the dates  indicated in  the Schedule of payments and  forwarded the  same to  the Escrow Agent under the Escrow Arrangement mentioned in Art.III-B whereunder the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 21 of 61  

Notes were  to be  released to  G.E.C. in numerical sequence and in  amounts determined  by the Escrow Agents by applying certain (rather  complicated)  formulae  specified  in  sub- clauses (a)  to (e)  of Clause-B. Renusagar also furnished a guarantee executed  by the UCO Bank irrevocably guaranteeing to G.E.C.  and to any subsequent holder in due course of the Notes the  full and  prompt payment  of  the  principal  and interest on the Notes. Subsequently by an agreement recorded in G.E.C.’s  letter dt. June 11, 1965 and as approved by the Central Government  the said  1964-Contract  (IGE-9584)  was extended to  include the  supply of  unfabricated structural steel to  Renusagar for  approximately U.S. $ 300,000 on the same conditions  in regard  to payment  as contained  in the original 1964  Contract. It  was agreed that Renusagar would issue a  fifth series  (E-series)  of  16  promissory  notes bearing interest  at 6.5%  per annum  evidencing 90%  of the price of the structural steel; the instalments under the 5th series were payable on the same dates as the corres- 455 ponding promissory  notes of the earlier four series. It was expressly clarified  in the  letter of  June 11.  1965  that except for  the modifications made by it all other terms and conditions of  the Contract  IGE 9584  shall apply; in other words the  Arbitration Clause  of the  1964 Contract  became applicable to the said supply of structural steel.      During the  implementation of  the Contract  two events occurred  giving  rise  to  G.E.C.’s  three  claims  against Renusagar that  are sought  to be referred to arbitration of I.C.C namely.  (1) grant  of tax exemption by the Government of India  to G.E.C. in respect of interest on purchase price receivable by  it from  Renusagar and the revocation thereof and (2)  re-scheduling of dates of payment of purchase price agreed to  by the  parties but  not approved  by the Reserve Bank and the Government of India.      As regards  the former,  it appears  that by two orders dated September  3, 1965  and June  7, 1967  passed under s. 10(15) (iv)  (c) of  the Indian  Income  Tax  Act  1961  the Government of India granted exemption to G.E.C. from payment of Indian  income-tax on  the interest receivable by it from Renusagar with  the result  that G.E.C.  became entitled  to receive the  interest on  the unpaid  purchase price  at the rate of 6% tax free instead at 6.5% subject to tax. However, by its  subsequent  order  dated  September  11,  1969,  the Government of  India purported  to retrospectively cancel or revoke the  said tax  exemption, whereupon  in or  about May 1970 Renusagar  filed a writ petition (Civil writ No. 179 of 1970)  in   the  Delhi   High  Court  challenging  the  said cancellation or  revocation of  tax  exemption  and  further sought an  injunction restraining  the Government  of  India from implementing  the said  cancellation or  revocation. On May 18, 1970 Renusagar obtained an order from the Delhi High Court that on its furnishing security for Rs. four lakhs the cancellation or  revocation of exemption shall be stayed and the Government  of India and its officers were restrained by an interim  injunction from  enforcing or  implementing  the impugned order  dated September  11, 1969; in other words on furnishing security  of Rs. four lakhs (which Renusagar did) the tax  exemption continued  with the result that there was no necessity  to deduct  any amount from interest payable to G.E.C. nor  to deposit  the same  as  tax  with  the  Indian Government. Even  so, Renusagar by its letter dated June 30, 1970 informed  G.E.C. that  it would  continue to  calculate interest  at   6.5%  and   make  payment   to  G.E.C.  after withholding and  keeping in reserve the tax liability out of the amount due to it. The amount so withheld came

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 22 of 61  

456 to 73%  of interest  payable to G.E.C. on the instalments of purchase price after 1970 and Renusagar only made payment of interest to  the tune  of 7%  to  G.E.C.  Surprisingly,  the interest at 73% which represented the tax deducted at source was not even made over by Renusagar to the Indian Government which resulted in depriving G.E.C. of the benefit of getting the corresponding  credit in  their U.  S. Tax  Assessments. Ultimately the  Delhi High  Court by  its judgment and order dated November  17, 1980  allowed Renusagar’s  writ petition and quashed  the impugned  order dt. Sept. 11, 1969 revoking the  tax   exemption.  In  the  correspondence  that  ensued Renusagar  not   merely  acknowledged  that  the  amount  so withheld and  credited to  reserve was  U.S. $ 24,12, 680.20 (calculated on  the basis  of 6.5%  subject  to  tax)  (vide letter dt.  25.3.76 together  with Statement  attached)  but also sought  from the  Commissioner  of  Income  Tax  a  no- objection certificate and from the Reserve Bank its approval (vide  Two   Letters  both  dt.  3-6-1981)  for  making  the remittance to  G.E.C. of  U.S. $ 21,30,785.52 (calculated on 6% tax  free basis  to which  G.E.C. became  entitled  as  a result of  Delhi High  Court’s decision).  It is this sum of 2.1 Million Dollars (U.S) being the Unpaid Regular Interest, wrongly  deducted   and  wrongly   withheld  and  kept  with themselves by Renusagar from 1970 onwards which is the first claim referred by G.E.C. to the arbitration of I.C.C.      As regards  the latter it may be stated that on account of the  alleged delays in the shipment and erection schedule Renusagar requested  G.E.C to grant deferment in the payment schedule and  as a  result of  the negotiations that ensued, Renusagar and  G.E.C., inter  alia, purported  to amend  the dates of  payment of  the purchase  price evidenced  by  the promissory notes  and certain decisions in that be half were recorded in a Memorandum dated December 30, 1966 and letters dated January  5, 1967, October 4, 1967 and October 9, 1967; this purported  re-scheduling of the dates of payment of the purchase price  as arrived at by the aforesaid documents was sought to  be reflected  by the parties in the said Contract I.G.E. 9584 by executing a formal Amendment dated October 1, 1968 thereto.  This Amendment  expressly provided  that  all other terms  and conditions  of the  original contract shall remain in  full force  and effect.  Renusagar executed fresh promissory notes  as per  the Amendment  dt. Oct. 1, 1968 as also having  regard to  tax exemption  granted as  above and sent them  to the  Escrow Agents. The October 1968 Amendment was, however,  subject to  the approval  of the Reserve Bank and the Central Government. It appears that in December 1968 the parties once 457 again attempted to re-schedule the payment of instalments of purchase price.  In July  1969 Renusagar  sought the Central Government’s approval  to the  re-scheduling of the dates of payment as embodied in October 1968 Amendment as also in the Memorandum of  the Meeting  held in  December  1968  but  by letters dated  August 1, 1969 and August 4, 1969 the Central Government declined  to approve  the  re-scheduling  of  the dates of  payment on  the ground  that it  would  result  in larger out-flow of foreign exchange and advised Renusagar to effect payments  as  per  the  original  schedule  including instalments which  had since fallen due. The result was that the original  schedule of  payment  remained  operative  and there was delay on the part of the Renusagar to make payment of certain instalments on due dates. Such delays occurred in respect  of   four  instalments,  namely,  instalments  No.1 evidenced by  promissory note  No.1 was payable on 30.6.1967

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 23 of 61  

but was  paid (in instalments) by July 1970; instalment No.2 evidenced by  promissory note No.2 was payable on 31.12.1967 but the  same was  paid (in  instalments) by  December 1972; instalment  No.4  evidenced  by  promissory  note  No.4  was payable  on  31.12.68  but  was  paid  (in  instalments)  by December  1973;   and  instalment   No.  5   represented  by promissory note  No. 5  was payable on 30.6.1969 but was, in fact, paid  (in instalment)  by February 1976. On account of the delays  in the  payment of instalments of purchase price together  with  interest  Renusagar  became  liable  to  pay delinquent interest  to G.E.C.  In the correspondence on the subject  Renusagar   accepted  the  liability  to  pay  such delinquent  interest   and  made   annual   acknowledgements thereof. In its telex message dated March 25, 1976 Renusagar in terms  acknowledged its  liability to pay such delinquent interest amounting  to U.S. $ 8,48,010 52 (calculated on the basis of  6.5% subject to tax) to G.E.C., which liability if calculated on  6% tax  free basis,  to which  G.E.C.  became entitled as  a result  of the  Delhi High  Court’s decision, comes to  US. $  7,84,151.84. This  liability for Delinquent Interest is  the second  claim  referred  by  G.E.C  to  the arbitration of I.C.C.      The third  claim for  Compensatory Damages which G.E.C. has made  against  Renusagar  and  which  is  sought  to  be referred to  arbitration arises  out of  non-payment of  the aforesaid  two   claims  of   Unpaid  Regular  Interest  and Delinquent Interest  for over  12 years,  the quantum  being calculated by  way of  interest on  those two amounts at the market  rate   of  18%   per  annum   amounting  to  U.S.  $ 4,160,534.88 up  to 31  3.1982 (to  be extended till date of actual payment). According to G.E.C. for a long period of 12 years Renu 458 sagar has  illegally and wrongfully retained these two funds with itself  and has  enjoyed the  use thereof  for its  own private  advantage   has  correspondingly  totally  deprived G.E.C. of  their use  for which  Renusagar must  compensate. G.E.C. has  also asserted that such compensatory damages are due to it from Renusagar because Renu sagar must be regarded as stake-holder  or constructive trustee of those funds from the various  dates on  which they became due and payable but Renusagar has  managed to  retain them  with itself  on  one pretext or  the other and under the common law jurisprudence shared equally  by Indian  and American  law, restitution is payable by a stake-holder to the party ultimately determined to be rightful beneficiary and owner of the funds.      It may  be stated  that though  in  the  correspondence indicated above  Renusagar accepted its liability to pay the Unpaid Regular  Interest (2.1  million U.S. Dollars) and the Delinquent Interest  (U.S. $  784, 151.84),  by  its  letter dated September  21,  1981  Renusagar  put  forward  certain counter-claims and  in a  statement attached  to that letter enlisted about  6 or  7 matters giving rise to such counter- claims against  G.E.C. By a notice of intention to arbitrate dated March  1, 1982,  G.E.C. called upon Renusagar to remit the aforesaid three claims, failing which steps to refer the disputes to  the Court of arbitration of I.C.C. in pursuance of Art.  XVII of  the Contract  were threatened and this was followed by  a letter  dated March  2, 1982 addressed to the Secretariat, Court  of Arbitration  of I.C.C.  containing  a Request for  Arbitration  being  undertaken  by  it  seeking reliefs as  set out in the notice to Renusagar. After I.C.C. took cognizance  of the Request for Arbitration by G.E.C. it called upon  Renusagar to  nominate its Arbitrator, file its reply and  remit certain  sums  towards  the  administrative

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 24 of 61  

expenses and arbitration fees.      On June  11, 1982, Renusagar filed suit No. 832/1982 in the Bombay  High Court  on its  Original Side against G.E.C. and I.C.C. seeking a declaration that the claims referred to the arbitration  of I.C.C.  by G.E.C.  were beyond the scope purview of  the arbitration agreement contained in Art. XVII of Contract  I.G.E. 9584  dated August  24,  1964  and  that G.E.C.  was   not  entitled   to  refer   the  same  to  the arbitration;   a   consequential   prayer   for   injunction restraining G.E.C.  and I.C.C.  from proceeding further with the reference was also made and an injuction was also sought against I.C.C.  restraining it  from requiring  Renusagar to make  any   deposit  towards   administrative  expenses  and arbitration fees. On the some day on a notice 459 of Motion  an ex-parte  ad interim  relief in  the aforesaid terms was  obtained by  Renusagar. On August 11, 1982 G.E.C. filed Arbitration  Petition No. 96 of 1982 under s. 3 of the Foreign Awards  (Recognitation and  Enforcement)  Act,  1961 seeking stay  of suit  No. 832  of 1982  and all proceedings therein and  a prayer  for vacating  the ad  interim reliefs obtained by Renusagar was also made.      Both the matters, G.E.C’s. stay petition under s. 3 and Renusagar, Notice  of Motion  for confirmation of ad interim reliefs were  heard together  and disposed of by Mr. Justice Pendse by  a common  judgment and  order dated  April 19-20, 1983. On  a consideration of the rival contentions that were urged before  him the  learned Judge  negatived  Renusagar’s contention that  the Arbitration Clause in the original 1964 Contract could  not be  availed of  by  G.E.C.  as  a  fresh agreement creating  new rights and liabilities had come into existence by  reason of  Oct. 1968  Amendment which  did not provide for  arbitration on two grounds namely that the Oct. 1968 Amendment had kept alive all other terms and conditions of the 1964 Contract including Arbitration Clause and in any case the  Oct. 1968 Amendment had fallen through for lack of Government’s approval; he also took the view that though the first two  claims sought  to be  referred to  arbitration by G.E.C. were  based  on  the  promissory  notes  executed  by Renusagar the  issuance of  the promissory notes towards the purchase price  was provided  under the  Contract itself and these were  not  by  way  of  any  independent  or  separate contracts in discharge of the obligation to pay the purchase price under  the contract  and since  the Arbitration Clause covered all  disputes arising  out  of  the  Contract  those claims fell  within the  Arbitration Clause;  and as regards the third  claim for  compensatory damages  he took the view that the  liability to  pay the same arose due to failure to carry out the terms and conditions of the Contract in regard to payment of purchase price and that even assuming that the said claim  was one in tort it was directly and inextricably connected with  the terms and conditions of the Contract and certainly "  arose out of" the Contract or was " in relation to" the  Contract and  therefore could be entertained by the Arbitrators. As  regards the  prayer for  stay of  suit  the learned Judge held that since all the ingredients of s. 3 of the Foreign  Awards (Recognition  and Enforcement) Act, 1961 had been  satisfied it was obligatory upon the Court to stay the  suit  and  G.E.C.  was  entitled  to  that  relief.  He therefore, allowed the Arbitration Petition 96/1982, granted the stay of suit and all the proceedings therein and 460 vacated all  the interim  reliefs which were granted earlier by the  ad interim  order. Renusagar  preferred two  appeals being Civil  Appeal Nos.  404-405 of 1983. At the hearing of

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 25 of 61  

the appeals  Counsel for  Renusagar raised  four contention: firsts, according  to him  an Arbitrator had no jurisdiction to decide  the limits  of his  own jurisdiction and since in the case  of international  arbitration the  jurisdiction of the Arbitrator had to be decided according to the law of the Forum where the question is raised in the instant case being the  Indian   Law)  the   jurisdiction  of  the  Arbitrator, according to  that law,  had to  be decided by the Court and not by  the Arbitral  Tribunal; secondly, the dispute sought to be  referred  related  substantially  to  the  claim  for interest and  that claim had to be (and was so stated in the Notice of  intention to arbitrate) founded on the promissory notes which  were independent  contracts by  themselves  and therefore, the  claim did not arise out of the suit Contract and hence  could not  be the subject of arbitration; thirdly the claim  for compensatory  interest was really a claim for damages arising out of tort and such a claim was in any case not covered  by the suit Contract and fell outside the scope of the  Arbitration Clause;  and  fourthly,  in  any  event, Renusagar had made out a prima facie case by raising serious triable issues  in the  suit which should enable it to claim an injuction restraining the arbitration proceedings. Though G.E.C. had  raised a  contention that  the question  of  the Arbitrator’s jurisdiction  had to  be decided  according  to American Law  counsel for  G.E.C. made a concession that for the purposes  of the appeals the Court should proceed on the basis that   question  was to be decided according to Indian Law. Proceeding  on that basis the court of Appeal negatived all the  contentions  and  ultimately  confirmed  the  trial Judge’s order whereby Renusagar’s suit was stayed and the ad interim reliefs were vacated.      In support  of  these  appeals  preferred  against  the judgment and  order of the Court of appeal dated October 19- 20-21, 1983  Counsel for Renusagar have basically raised two contentions: (1)  that  under  s.3  of  the  Foreign  Awards (Recognition and  Enforcement) Act,  1961  (for  short  ’the Foreign Awards  Act), having  regard to its scope, a suit in the nature  of a  petition under s.33 of the Arbitration Act 1940. cannot be stayed and that no case has been made out by G.E.C. for staying Renusagar’s suit No. 832/1982 which is of that nature and (2) that on merits the three claims referred by G.E  C. to  the Court of Arbitration of I.C.C. are beyond the scope/purview of the Arbitra- 461 tion Clause being Art. XVII contained in the Contract I.G.E. 9584 as these do not "arise out of" nor "relate to" the said Contract.      By way  of elaborating  the  first  contention  Counsel pointed out  that suit  No. 832/1982  filed by  Renusagar is merely for  a declaration that the three claims sought to be referred to  arbitration are beyond the scope and purview of the Arbitration  Clause and no other relief on the merits of those claims  is sought,  that such  a suit is really in the nature of  a petition  under s.33  of the  Arbitration  Act, 1940, inasmuch as it seeks to have the effect (scope) of the arbitration agreement determined, that such a suit can never be stayed  under s.3  of the  Foreign Awards  Act and  that, therefore, the  petition under  s.3 (which  is really in the nature of  s.34 application under the Arbitration Act, 1940) is totally  misconceived and liable to be dismissed; Counsel further submitted  that the  suit filed  by Renusagar is not "in  respect   of  any  matter  agreed  to  be  referred  to arbitration" as  required by  s.3 and,  therefore, the  stay sought for  by G.E.C.  should be  refused;  Counsel  further urged that the Court acting under s.3 (like the Court acting

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 26 of 61  

under s.34  of the Arbitration Act) being a Court of limited jurisdiction cannot determine the question of the existence, validity or  effect of  the arbitration  agreement (which is the only  issue to  be tried  in Ranusagar’s suit) and it is for the  Court trying the suit to decide the question raised in the  suit and,  therefore, a  stay, if granted under s.3, would finally  determine the  suit or  render it almost dead for all  practical purposes and, therefore, no relief on the stay petition  can be  granted which  will have such effect; Counsel finally  submitted that  the question  raised in the suit relating  to the  effect  (scope)  of  the  arbitration agreement, which is the same as the question relating to the existence thereof,  is such as is incapable of being finally determined by  the Arbitrators  and hence such a suit cannot be stayed  under s.3 of the Foreign Awards Act. According to Counsel the  aforesaid submissions  are founded on the well- settled position in law-English and Indian that questions or issues which  pertain to  the existence,  validity or effect (scope)  of   an  arbitration  agreement  contained  in  the underlying commercial  Contract are  matters which relate to the jurisdiction  of the  Arbitrator and  are not within the competence of  the  Arbitrator  however  widely  worded  the Arbitration agreement may be but these have to be decided by the Court in an application under s.33 or in a suit which is of that  nature as  is the  case here.  On  the  other  hand Counsel for G.E.C. contended that the schemes of the Foreign Awards Act and the Indian Arbitration Act 1940 are 462 not identical,  that there  are various material differences which have  a bearing  on the  issue whether  a suit seeking determination  of  the  effect  (scope)  of  an  arbitration agreement can or cannot be stayed in a petition under s.3 of the Foreign  Awards Act  and that  the answer  to  the  said question will  depend upon  proper construction to be placed on s.3 in the light of the scheme of that Act; Counsel urged that since  all the  ingredients of  s.3 have been satisfied the  stay   of  Renusagar’s   suit   will   be   obligatory. Alternatively, Counsel  contended that  the  legal  position both under  English and  Indian  Law  is  not  as  has  been submitted by Counsel for Renusagar; Counsel urged both under English law  and Indian  law it  is well  settled that it is open  to  the  parties  to  have  an  arbitration  agreement incorporating words of the widest amplitude so as to embrace even the  questions of  its existence,  validity  or  effect (scope) but  according to  him an enquiry into the scope and effect of  an arbitration  agreement and  a challenge to the existence  or   validity  thereof   are  not  the  same  but fundamentally different  inasmuch as  the first pre-supposes that the arbitration agreement exists in fact and in law and the enquiry then is limited to the scope and effect thereof; counsel further  contended that  whenever it is said that an arbitrator  cannot   decide  the   question   of   his   own jurisdiction  all   that  is  intended  is  that  he  cannot determine-that too  finally, the  question of  the existence (factual)  or   validity  (i.e.   legal  existence)  of  the arbitration  agreement   if  contained   in  the  underlying commercial Contract  and  this  must  be  so,  for,  if  the existence or  validity of the underlying commercial Contract is successfully  challenged the  arbitration clause which is the  part  and  parcel  thereof  must  perish  with  it  and therefore the Arbitrator will have no jurisdiction to decide the issue of the existence or validity of the agreement; but even here  it  is  well  settled  that  if  the  arbitration agreement so  widely worded is separate and independent from the   commercial   Contract   the   arbitrator   will   have

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 27 of 61  

jurisdiction to  decide the questions about the existence or validity of  the commercial contract; but Counsel urged that these principles  have no  application whatsoever  to a case where the  issue relates  to the  scope and  effect  of  the arbitration agreement contained in the underlying commercial contract and  the arbitration  agreement is  wide enough  to include such  an issue,  for, in  such a case the Arbitrator will have  jurisdiction to decide that issue. This being the well settled  legal position Counsel urged that since in the instant  case   the  Arbitration  Clause  contained  in  the underlying commercial  Contract IGE  9584 is  of the  widest amplitude it  is the  Court of  Arbitration of  I.C.C. which will have jurisdiction to 463 adjudicate not  merely three  claims of G.E.C. on merits but also  the   issue  whether  those  claims  fall  within  the Arbitration  Clause   or  not.   However,  Counsel   further contended that  the issue pertaining to the scope and effect of the  arbitration agreement,  if raised  in an application under sec. 34 of the Arbitration Act the Court has to decide it and  the  Court’s  decision  thereof  will  naturally  be binding on  the Arbitrators even though the issue was within the competence  of  the  Arbitrators  because  of  the  wide wording of  the Arbitration Clause and that is why the Court of Appeal  has rightly  expressed the view that since it has decided the issue whether the three claims "arise out of" or are "related  to" the  contract  affirmatively  it  will  be binding on the Court of Arbitration of I.C.C. and it will be futile for  that  court  of  Arbitration  to  go  into  that question again.      By way  of elaborating  the second  contention  Counsel submitted that  the under-lying  commercial Contract (I.G.E. 9584) for  supply and sale of goods and services contains no obligation to  pay any  interest after  June 30,  1967 (i.e. after the  30th month  from  the  Contract  Effective  Date) whether at  6-1/2% or  6% but  that such  obligation to  pay interest after  June 30,  1967 is  only to  be found  in the promissory notes  and G.E.C.’s  first claim  of 2.1  million U.S. Dollars is essentially (approx. 80%) for unpaid regular interest due  after June  30, 1967  and the second claim for U.S. $  78,151.84 is  entirely for  delinquent interest  due after June  30, 1967 and, therefore, substantially these two claims preferred  before the  Arbitrators do  not "arise out of" the  Contract nor  are they  "in relation"  thereto  but arise under  the promissory notes and hence fall outside the scope of arbitration agreement; according to counsel further the promissory  notes executed by Ranusagar were in complete discharge of  the  obligation  to  pay  price  and  interest thereon  under  the  Contract  and  these  notes  constitute independent  and   separate  contracts  by  themselves  and, therefore,  the   liability  arising  thereunder  cannot  be regarded as  any arising  out of the contract or in relation thereto and what is more these claims have been described by G.E.C. in  their Notice of intention to arbitrate as arising under  the  promissory  notes;  as  regards  the  claim  for compensatory damages,  it being  a liability arising in tort for wrongful  retention of  the first two funds and since it was being  enforced on  the basis of Renusagar’s status as a stakeholder or  constructive trustee  the  same  is  clearly outside the  scope of  the arbitration agreement. Such being the precise  nature of  the  three  claims  that  have  been referred by  G.E.C. to arbitration, counsel urged that since the issue of arbitrability of these claims is being raised 464 in Renusagar’s  suit it  is but  proper that  till the issue

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 28 of 61  

raised in  the suit  is finally  decided by  the  Court  the arbitration proceedings  should be  injuncted. On  the other hand  Counsel   for  G.E.C.  vehemently  disputed  that  the Commercial Contract (IGE 9584) contains no obligation to pay any interest  on unpaid purchase after June 30, 1967 or that such obligation  to pay  interest after that date is only to be found  in the  promissory notes; he pointed out that such obligation is  to be  found in the Contract itself and could be readily inferred from Art. III(A)3(c) read with Art.XIV-B and as such the first two claims for Unpaid Regular Interest and Delinquent  Interest due  after June 30, 1967, preferred before the  arbitrators not merely "arise out of" but really arise "under"  the Contract;  further the  third  claim  for Compensatory Damages  which flows  by way  of corollary from wrongful detention  of the  first two  funds which  ought to have been  paid under  the Contract  is so closely connected with the  contract that  it is  clearly "in relation to it"; all the  three claims  thus fall  within the  scope  of  the Arbitration Clause.  Counsel  seriously  disputed  that  the promissory notes  executed  by  Renusagar  were  or  are  in discharge of  the obligation  to pay  the price and interest thereon under  the Contract  or that  these notes constitute independent  and   separate  contracts   by  themselves  but contended that  these are a part of the Contract and the two are so in severable and inextricably bound together that the obligation under  the  Contract  can  never  be  deemed  nor intended to  have been  completely discharged  by  the  mere execution of  the notes  and in  support of  this contention several aspects  of  and  circumstances  emerging  from  the Contract were  relied upon  by him.  Counsel urged that real nature of  the claims  preferred before  the Arbitrators and not the  nomenclature or  description thereof  by any  party would be  relevant and decisive and in this behalf was quick to point  out that  Renusagar, though  it now  contends that such  interest  arises  "under  the  promissory  notes"  has described it  as payable  "under the  contract" in para 4 of its writ petition No. 179 of 1970 filed in Delhi High Court. Alternatively, Counsel contended that even assuming (a) that the  promissory   notes  are   not  an   in  severable   and inextricable part  of the  Contract, (b) that the obligation arising under  the notes  is totally  different from the one arising under  the Contract  and (c)  that the  notes are in discharge of  the  obligation  to  make  payment  under  the Contract (all  of which  are  strongly  denied),  the  three claims would  still be  covered by  the  Arbitration  Clause which is  of the  widest amplitude,  for according to him it would be  erroneous to  determine whether a claim arises out of or in relation to the Contract by looking at the 465 cause of  action on which the claim is based. That being the position Counsel  submitted that  the Court  of  Appeal  was justified in  coming to  the conclusion  that no prima facie case for  injunction restraining arbitration proceedings had been made  out by  Renusagar and  it had  therefore  rightly vacated the  ad interim  injunction and  stay ed Renusagar’s suit.      It will  be convenient to deal with the second question raised by counsel for the appellants in these appeals first, namely, whether  on merits  the  three  claims  referred  by G.E.C. to  the Court of Arbitration of I.C.C. are beyond the scope/purview of  the arbitration  clause being Article XVII contained in  the Commercial  Contract IGE 9584 ? The answer to this  question must  depend upon  (a) what  disputes  are covered by  the arbitration  agreement and  (b) what  is the real nature  of these claims under the reference. Aspect (a)

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 29 of 61  

Obviously depends  upon the language used in the arbitration agreement whose  construction would be relevant for deciding both the questions (i) whether it embraces even questions of its existence, validity and effect (scope) (particularly the last which  bears on  the arbitrability of the three claims) and (ii)  whether the  three claims fall within its scope or purview; in  other words, is the language of the arbitration agreement wide  enough to  cover either  of the questions or both. The  arbitration clause in the Commercial Contract has already been  set out  in extenso in the earlier part of the judgment  and   the  relevant   words  thereof  are  :  "any disagreement arising  out of  or related  to this  contract" shall be  finally settled in accordance with the Arbitration Rules of  the International  Chamber of  Commerce. It may be stated  that   though   the   relevant   rules   of   I.C.C. (particularly  Rules   8.3  and   8.4)   in   terms   confer jurisdiction upon the arbitrations to decide questions as to the existence  or  validity  of  the  arbitration  agreement contained in  the commercial  contract, Counsel  for  G.E.C. principally relied  upon the  language used in the aforesaid arbitration clause  contained in  the  Contract  itself  for contending that  it was  of widest amplitude and would cover both the  questions (i)  and (ii).  According  to  him,  the English Courts  as well  as this  Court have  held that  the words "under  the contract"  are wide but the words ’arising out of" the contract are still wider and the words "relating to" or  "in relation  to" "in  respect of" or "in connection with" or  "concerning" the contract have the widest possible content. In  view  of  the  authorities  to  which  we  were referred, we  find considerable  force in this contention of Counsel for G.E.C. 466      In  Govt.   of  Gibralter   v.  Kenney  &  Anr(1),  the arbitration clause covered:           ".... any  dispute or difference which shall arise      or occur  between the parties hereto in relation to any      thing or      matter arising out of or under this agreement..." and Sellers,  J. has  observed at page 26 of the Report that "the  distinction  between  matters  "arising  out  of"  and "under" the agreement is referred to in most of the speeches in Heyman  v. Darwins  Ltd.  and  it  is  quite  clear  that "arising out  of"  is  very  much  wider  that  "under"  the agreement.      In Heyman  v.  Darwins  Ltd.(2)  a  contract  for  sole selling  agency  contained  an  arbitration  clause  in  the following terms:      "If any  dispute shall arise between the parties hereto      in respect  of this  agreement or any of the provisions      herein contained  or anything  arising hereout the same      shall be  referred for  arbitration in  accordance with      the provisions of the Arbitration Act, 1889." Though the  main point  decided by the House of Lords in the case was  that where  the parties were one in asserting that they had  entered  into  a  binding  contract  a  subsequent repudiation thereof  by one  of them did not have the effect of  annulling   the  arbitration  clause  contained  in  the contract, each one of the law Lords dealt with the aspect of the wide  language that  had been  used in  the  arbitration clause (words  being "in  respect of")  and the  distinction between matters  "arising out  of" and "under the agreement" has been  put in  the clearest  terms by Lord Porter at page 399 of the Report thus :-      "In such  a case  (case of repudiation) the question of      damage has  still to  be determined  and  the  question

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 30 of 61  

    whether there  has been  repudiation may  be  still  in      issue. Are  these disputes under the contract-I use the      word  "under"   advisedly  since  expressions  such  as      "arising out of" or "concerning" have a wider meaning ?      I think they are." Incidentally, while  laying down  the ratio  in the  case as indicated 467 above, Viscount  Simon L.C.  also stated  the law  as to the circumstances  under   which  an  arbitration  clause  in  a commercial contract would become unenforceable thus :-      "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."      In Dhanrajmal Gobindram v. Shamji Kalidas & Co.(1) this Court has  clearly taken  the view  that all questions which could be  decided in an application filed under s. 20 of the Arbitration Act,  1940 (and  such questions  involve dealing with objections  to the  existence, validity or effect (i.e. scope) of  the agreement  itself) would  be encompassed by a clause which  contains the  words "arising  out of"  or  "in relation to"  the contract. The relevant observations at pp. 1040-41 of the Report run thus :      "We may  dispose of  here a supplementary argument that      the dispute  till now  is about  the legal existence of      the agreement  including the  arbitration  clause,  and      that this  is not  a dispute  arising  out  of,  or  in      relation to a cotton transaction. Reference was made to      certain observations  in Heyman  v. Darwins Ltd. In our      opinion, the words of the Bye-law "arising out of or in      relation  to   contracts"  are   sufficiently  wide  to      comprehend matters,  which can legitimately arise under      s. 20. The argument is that, when a party questions the      very existence of a contract, no dispute can be said to      arise out  of it.  We think  that this not correct, and      even if it were, the further words "in relation to" are      sufficiently wide to comprehend even such a case."      In Khardah Company Ltd. v. Raymon & Co. (India) Private Ltd.(2) this Court, though ultimately it held that a dispute as to  the validity  of the  underlying commercial  contract containing an arbitration 468 clause was  not one  which the arbitrators were competent to decide and  that when the contract was invalid every part of it including  the arbitration  clause was  also invalid,  on question of  construction of  the expressions  used  in  the arbitration clause  did hold  that the expressions used were wide enough  to cover  a dispute  as to  the validity of the contract. Act  page 188  of the  report Justice  Venkatarama Aiyer has observed thus:      "It cannot  be disputed  that the  expressions "arising      out of"  or "concerning" or "in connection with" or ’in      consequence  of"   in  "relating   to  this   contract"      occurring in  clause 14  are of sufficient amplitude to      take in  a dispute  as to the validity of the agreement      dated September 7, 1955".      As observed  by Lord  Porter in  Heyman v. Darwins Ltd. (supra) although  as a  rule the  arbitrator  cannot  clothe

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 31 of 61  

himself with  jurisdiction the  question of his jurisdiction must ultimately  depend on  the wording  of the  Arbitration Clause. At  page 392  of the Report the learned law Lord has observed thus:      "I think  it essential  to remember  that the  question      whether a  given dispute comes within the provisions of      an arbitration  clause or  not primarily depends on the      terms of  the clause  itself. If two parties purport to      enter into a contract and a dispute arises whether they      have done so or not, or whether the alleged contract is      binding on  them, I  see no  reason why they should not      submit that  dispute to  arbitration. Equally  I see no      reason why,  if at  the time  when they purport to make      the contract  they foresee  the possibility  of such  a      dispute  arising,   they  should  not  provide  in  the      contract itself  for the submission to arbitration of a      dispute  whether   the  contract  ever  bound  them  or      continues to do so. They might, for instance, stipulate      that, if  a dispute should arise whether there had been      such fraud,  misrepresentation or  concealment  in  the      negotiations  between  them  as  to  make  an  apparent      contract voidable,  that dispute should be submitted to      arbitration. It  may require  very  clear  language  to      effect this result, and it may be true to say that such      a  contract  is  really  collateral  to  the  agreement      supposed to  have been  made, but  I do  not see why it      should not be done." 469      As an  instance of  a clause  held to be wide enough to include a  determination of  the ambit  of the  arbitrator’s authority  the  learned  law  Lord  cited  the  decision  in Willesford  v.  Watson(1).  In  that  case  a  mining  lease contained an  agreement to  refer the  disputes between  the lessors and  lessees to  arbitrators or their umpire and the arbitration clause  was very  widely worded so as to include inter alia  any dispute  "touching  these  presents  or  any clause or  matter or  the  thing  herein  contained  or  the construction hereof",  in other  words a dispute between the parties as  to whether the instrument, according to its true construction did or did not warrant a particular thing to be done thereunder,  was referable  to and within the scope and authority of  the arbitrators  and at page 477 of the Report Lord Selborne,  L.C. observed  (which observations have been quoted with the approval by Lord Porter in Heyman v. Darwins Ltd.) thus:      "It struck  me throughout  that the  endeavour  of  the      Appellants has  been to  require this  Court to  do the      very thing which the arbitrators ought to do-that is to      say, to  look into  the whole  matter, to  construe the      instrument, and  to decide  whether the  thing which is      complained of its inside or outside of the agreement." Finally, the  Court of  Appeal held that the Court would not decide but  would leave  it to  the  arbitrators  to  decide whether the matter in dispute between the parties was within the agreement to refer and stayed the suit.      In Jawahar  Lal  Burman  v.  Union  of  India(1)  while dealing with the scheme of ss. 31, 32 and 33 and as also the scope of  the s.  33 of  the Arbitration Act 1940 this Court has  noted   and  recognised  the  distinction  between  the existence or  validity of  the arbitration  agreement on the one hand  and its  effect (scope  on the  other,  though  in ss.31(2), 32  and 33  all the  three clubbed  or  spoken  of together.  At   page  777   of  the  Report  the  Court  has specifically  said   that  the   effect  of  an  arbitration agreement is  treated as  distinct from the existence of the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 32 of 61  

agreement" and  has further observed that "an application to have the effect of an arbitration agreement (determined) can be made  provided the  existence of  the agreement is not in dispute." It  is true  that this  distinction been has noted for purposes  of procedural  aspects arising under the three sections but the several 470 authorities discussed  above. Particularly Heyman v. Darwins Ltd. and  Willesford v.  Watson (which has been digested and annotated at  two places  in Russel  on Arbitration at pp.91 and 171) have made the distinction substantively.      In Balabux  Agarwalla v.  Sree Luchminarain Mfg. Co.(1) Das, J. has clearly envisaged the possibility of disputes as to the  existence, validity  or  effect  of  an  arbitration agreement being  properly referred  to the arbitration of an arbitrator by  means of a collateral or subsequent agreement between the  parties and  the learned  Judge has pointed out that there  was nothing  in the scheme of ss.31 or 33 of the Arbitration Act,  1940 to  indicate that  such disputes  can never form the subject matter of an arbitration agreement or must always  be decided  by  the  Court  as  opposed  to  an arbitrator.      In Waverly  Jute Mills  Co. v. Raymon & Co.(2) at p.224 of the Report the following statement of law appears:           "A dispute  as to the validity of a contract could      be the subject-matter of an agreement of arbitration in      the same  manner as  a dispute relating to a claim made      under the  contract. But  such an  agreement  would  be      effective and  operative only  when it is separate from      and independent  of the  contract which  is impugned as      illegal. Where,  however, it  is a  term  of  the  very      contract whose validity is in question, it has, as held      by us  in Kharda Co. Ltd. case, no existence apart from      the impugned contract and must perish with it."      Four  propositions   emerge  very   clearly  from   the authorities discussed above:      1.       Whether  a  given  dispute  inclusive  of  the           arbitrator’s jurisdiction  comes within  the scope           or  purview   of  an  arbitration  clause  or  not           primarily depends  upon the  terms of  the  clause           itself; it  is a  question  of  what  the  parties           intend to provide and what language they employ, 471      2.    Expressions  such as  ’arising  out  of"  or  "in           respect  of"   or  "in  connection  with"  or  "in           relation   to"   or   "in   consequence   of"   or           "concerning" or  "relating to" the contract are of           the widest  amplitude and content and include even           questions as to the existence, validity and effect           (scope) of the arbitration agreement.      3.    Ordinarily  as a rule an arbitrator cannot clothe           himself with  power to decide the questions of his           own jurisdiction  (and it will be for the Court to           decide those  questions) but  there is  nothing to           prevent the  parties from investing him with power           to decide  those questions,  as for instance, by a           collateral or  separate agreement  which  will  be           effective and operative.      4.    If,  however, the  arbitration clause,  so widely           worded as to include within its scope questions of           its existence  validity  and  effect  (scope),  is           contained in  the underlying  commercial  contract           then decided cases have made a distinction between           question as  to the  existence and  or validity of           the agreement  on the  one  hand  and  its  effect

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 33 of 61  

         (scope) on  the other  and have  held that  in the           case of  former those  questions cannot be decided           by  the   arbitrator,  as   by  sheer   logic  the           arbitration clause must fall along with underlying           commercial contract  which is  either non-existent           or illegal while in the case of the latter it will           ordinarily be  for the  arbitrator to  decide  the           effect or  scope of the arbitration agreement i.e.           to decide the issue of arbitrability of the claims           preferred before him.      At this  stage, however, we are concerned with only the first three  propositions mentioned  above  about  which  no serious dispute  was raised by Counsel for Renusagar. We are conscious that  Counsel for Renusagar have strongly disputed the correctness  of proposition  No. 4 above, but we propose to deal  with their  caveat against  it  together  with  the authorities relied upon by them in support thereof later. At this stage it will suffice to observe that since the parties to the  underlying Commercial  Contract here  have used  the expressions "arising  out of"  or "related to this contract" in the  arbitration clause  contained in the Contract, there can be  no doubt  that the parties clearly intended to refer the issue pertaining 472 to the  effect (scope)  of the  arbitration agreement to the Court of  Arbitration of  I.C.C. in  other words,  the issue about arbitrability  of the three claims under reference has been referred.      Turning to  aspect (b)  which is really the crux of the matter on  merits, we  shall have  to ascertain  the precise nature of  the three  claims in  order to  determine whether they  fall   within  the   arbitration  clause   which  uses expressions of  the widest  possible amplitude  and content. While narrating the chronological events in the earlier part of our  judgment we  have indicated  what these three claims are and  how they have arisen. The three claims are: (a) 2.1 million U.S.  dollars being the Unpaid Regular Interest, (b) U.S. $ 7,84,151.84 being the Delinquent Interest and (c) 4.1 million U.S.  dollars being  the  Compensatory  Damages.  As explained earlier  the first claim represents the quantum of 73% of  the regular  interest which was wrongly deducted and wrongly withheld and retained by Renusagar from 1970 onwards allegedly for  payment  of  income-tax  notwithstanding  the Delhi  High   Court’s  judgment  in  effect  retrospectively restoring the tax exemption granted in favour of G.E.C.; the second  claim  represents  interest  claimed  by  G.E.C.  on account of  the delay  that occurred  in the payment of four instalments of  purchase price  together  with  interest  on their due  dates as  per the  original Schedule  of Payment, while  the  third  claim  is  by  way  of  compensation  for illegally and  wrongfully retaining  and enjoying the use of the first  two funds  by Renusagar  and depriving G.E.C. the use  thereof  for  12  long  years.  Whereas  Renusagar  has contended that none of these claims falls within the purview of the  arbitration clause  G.E.C. has  claimed that  all of them do within the wide language of that clause.      As regards  the first  two claims Counsel for Renusagar have  pointed   out  that   admittedly   the   first   claim substantially (approx.  80%) and  the second  claim entirely are for  interest due  after June  30, 1967 (i.e. after 30th month from  the Contract  Effective Date)  and according  to Counsel since  the underlying Commercial Contract (IGE 9584) for supply  and sale  of  goods  and  services  contains  no obligation to  pay any interest after June 30 1967 and since only the  promissory  notes  provide  for  payment  of  such

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 34 of 61  

interest after June 30, 1967, these two claims do not "arise out of" the contract, nor are they "in relation thereto" but arise under  the promissory notes and hence fall outside the scope of  arbitration clause. Counsel further urged that the promissory notes  executed by  Renusagar  were  in  complete discharge of obligation to pay price and interest 473 thereon under  the Contract and since these notes constitute independent  and   separate  contracts   by  themselves  the liability arising  thereunder  cannot  be  regarded  as  any arising out  of the  Contract or  in relation thereto and in this behalf  strong reliance  was placed  by Counsel  on the fact that in its Notice of intention to arbitrate G.E.C. has described these  claims as  arising  "under  the  promissory notes". Counsel pointed out that Article III of the Contract provides for  payment of  the total  purchase price in three modes, the  third mode  being by  executing promissory notes and urged  that since  the requisite  promissory notes  were executed by Renusagar these notes must be regarded as having been executed  in the complete discharge and satisfaction of the  obligation   under  the  Contract  and  that  the  sole obligation which  survives since  after the execution of the notes is the one which arises under the notes. In support of this contention  counsel relied  upon two  decisions of this Court, namely,  (1) M/s.  Ogale Glass  Works Ltd. case where the posting  of cheques  by a  purchaser by way of remitting the bills  payable to  the seller  was  held  to  amount  to payment (that  is, in discharge of the obligation to pay the price for  goods purchased)  and (2)  H.P. Gupta v. Hira Lal where the  posting of  a  dividend  warrant  (cheque)  by  a company at  Delhi for despatching it to a shareholder at his registered address (which was Meerut) as per Art. 132 of the Articles  of  Association  was  deemed  as  payment  to  the shareholder in  discharge of  the company’s obligation and a criminal complaint  for the alleged failure to discharge the obligation against  the company properly lay in the Court of Delhi Magistrate.  Counsel  also  relied  on  two  important factors (a)  unconditional nature  and (b)  negotiability of the promissory  notes-both requirements  of Art. III (3) (a) of the  Contract, as  destroying the  arbitrability  of  the claims thereunder,  the contention  being  that  if  parties agreed that  the balance  price of  90% should  be  paid  by executing "unconditional  negotiable promissory  notes"  the parties could  never  intend  to  make  the  claims  arising thereunder arbitrable. In support of this contention Counsel strongly relied  on certain observations of Lord Wilberforce in NOVA  (Jersey) Knit  Ltd. v.  Kammgarn Spinnerei  to  the effect  that  if  bills  of  exchange  were  to  contain  an arbitration clause they would not be valid bills, as also on Byles on  Bills of  Exchange: 25th  Edn. at  p. 10 where the above observation  in that case has been digested. Reference was also made to Albert Jan Van Den Berg’s treatise New York Convention of 474 1958-Towards a  Uniform Judicial  Interpretation’ wherein at pp. 147-148  the learned author has made a reference to this Nova (Jersey) case with his own comments on how the Court of Appeal and  the House of Lords have differed on the question whether there  can be  said to  be an  arbitrable dispute in regard to  a bill of exchange, the former holding that there was in  the case  a dispute as to the liability on the bills of exchange,  the dispute  being whether  or not  the  bills should be  paid having  regard  to  the  cross-claim  to  be decided in arbitration and the latter holding that there was none as  English law  clearly  did  not  allow  reliance  on

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 35 of 61  

unliquidated cross  claims to  set-off a  claim on a bill of exchange and  on that  basis the  House of Lords by majority held that  the action on the bills of exchange should not be stayed. Reliance was also placed on three decisions of Asian High Courts in Bihari-Diwan Singh v. Jaffe & Sons Dhiraj Lal v. Sir  Jacob Behrans  & Sons and M/s Vasanji Navj v. K.P.C. Spinners in all of which more of less the same view has been taken that  when a suit on a negotiable instrument issued in payment of price of goods sold under a contract and accepted by the  seller is  brought the  action should  not be stayed because of  the arbitration clause contained in the original commercial contract;  in the last case the Madras High Court has observed  that even  if  the  suit  was  traced  to  the original contract  and the  plaint  referred  to  antecedent facts which  gave arise  to the  issue of the cheques by the defendant in  favour of the plaintiff the arbitration clause could not  come into  play as  the suit  was  on  dishonored cheques and  there was  no dispute as regards the quality of the goods  or quantum  of  the  sale  consideration.  It  is obvious that this last part of Counsel’s submission may hold good only if these two claims are held to arise solely under the promissory  notes and  that the  notes are held to be in complete discharge  of the  obligation under  the Commercial Contract and  constitute independent  and separate contracts by themselves but not otherwise.      As regards  the third  claim Counsel  urged a  two-fold contention. First,  that the  claim obviously arises in tort out of  wrongful retention  of monies  under the  first  two claims for long 12 years and Renusagar is being saddled with this liability  in its  capacity as  a  tort-feaser,  stake- holder or constructive trustee and hence is not 475 covered by  the arbitration clause; and secondly that if the first two  claims are  not covered by the arbitration clause this claim  would also  fall outside  its  purview.  It  was pointed out  that it  cannot be  said to  be any  incidental claim for  interest because  compensation is  claimed at the market rate  of 18  per cent.  In support of this contention Counsel relied  upon two  decisions, namely;  (1)  Monro  v. Bognor Urban District Council where the Court of Appeal took the view  that where  the action brought was for damages for fraudulent mis-representation and referred to matters wholly outside the powers of the arbitrator with which he could not possibly deal,  the defendants  could  not  get  the  action stayed because  it could  not be  said that  the dispute was upon or  in relation  to or  in connection with the contract and (2)  Ghewarchand v.  Shiva Jute  Bailing Ltd.  where the Calcutta High  Court has held that where the suit was wholly based on  tort, then that action was not to be considered to be in  relation to  or in  connection with a contract merely because it  was shown  that had  there been ever no contract there would  not have  been any cause of action and what the Court had  to look into was what the substance of the plaint was and not how the claim was framed.      For the  reasons which  we shall  presently indicate we are unable  to accept  any of the above submissions urged by Counsel for  Renusagar. As  regards the first two claims, in the first  place  it  is  not  possible  to  hold  that  the Commercial Contract  does not  contain any obligation to pay interest on the unpaid purchase price after June 30, 1967 or that the  obligation to pay such interest after that date is to be  found  only  in  the  promissory  notes.  Admittedly, interest on the purchase price at the agreed rate up to June 30, 1967  was capitalized  and  included  in  the  principal amount  of  each  of  the  instalments  represented  by  the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 36 of 61  

concerned promissory  note as  mentioned in  the Schedule of Payments given  in Art.  III-A 3 (b) of the Contract and the question is  whether the  obligation to pay further interest after that  date till  payment is  provided for  only in the promissory notes  or also  in the  contract. Undoubtedly the form of  the promissory  note attached as Exhibit ’B’ to the Contract as  also the  promissory notes  that were  actually executed clearly  contain a recital that Renusagar "Promises to pay  to G.E.C.  interest thereon (i.e. on the capitalized principal) from June 30, 1967 semi-annually at the rate of 6 1/2 % per annum on the last day of June and 476 December in  each year  until paid".  But Counsel for G.E.C. has in our opinion rightly relied upon two provisions in the Contract which  clearly show that the obligation to pay such interest after  June 30, 1967 till payment has been provided for by the Contract.      Article III-A 3 (c) (relevant portion) runs thus:           "The notes  shall be prepared substantially in the      form  shown   in  the  attached  ’Exhibit  B’  entitled      ’Promissory Note’  and shall bear interest, at the rate      of 6  1/2%  per  annum  on  the  outstanding  principal      balance, commencing  thirty(30  months  after  Contract      Effective Date............." It is  no doubt  true that  the promissory notes executed by Renusagar recited  the obligation  to  pay  future  interest after  June   30,  1967   till  payment  but  obviously  the promissory  notes   incorporated  such   obligation  therein because of  the aforesaid provision in Art. III-A 3 (c). The aforesaid sub-clause  in the  Contract itself  says that the notes shall  bear interest  at the  rate  specified  on  the outstanding principal  balance after June 30, 1967; in other words it  is the  Contract which provides for interest being payable on  the outstanding principal balance after June 30, 1967.  Counsel  for  Renusagar,  however,  argued  that  the contract  and   aforesaid  clause  merely  provide  for  the execution of  promissory notes  which, it  is provided shall bear interest after June 30, 1967 and the argument proceeded further to  say that  if Renusagar  had failed  to executive promissory notes  as required  (i.e. bearing  interest after June 30,  1967) G.E.C.  would not  have become  entitled  to receive or claim interest after June 30, 1967 but would have had only a right to call upon Renusagar to execute such pro- notes  and  or  two  claim  damage  for  failure  to  fulfil contractual obligations.  It is  impossible to  accept  this argument. The  question is not what rights G.E.C. would have had on  Renusagar’s failure  to execute the promissory notes as required  but the  question is what the contract provides for. It  cannot be disputed that the aforesaid sub-clause in the Contract  provides  for  not  merely  the  execution  of promissory notes  but that  the promissory  notes would also bear interest  after June  30, 1967.  Further the  very fact that the failure of Renusagar to execute promissory notes as required,... of  course as  required by  the Contract, would have conferred  a right  on G.E.C. to call upon Renusagar to execute such  notes also  shows that  the obligation  to pay interest after  June 30, 1967 till payment has been provided for by the contract. 477      Article XIV-B, (which deals with the topic of taxes and proposed exemption from income-tax to be obtained by G.E.C.) (relevant portion) runs thus:           "Seller intends to apply to the Central Government      of India  for exemption from income tax on the interest      income (including  capitalized  interest  and  interest

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 37 of 61  

    thereon) received by seller on the principal amounts of      the promissory  notes. Purchaser  will assist Seller in      expediting Seller’s  application for exemption and will      furnish such  information in  support thereof as may be      required  by   Seller  or  the  Central  Government  of      India......." The above  provision clearly  shows that  the parties to the contract were contemplating to obtain from the Government of India income  tax exemption  on the  interest  income  which G.E.C.  was  going  to  receive  from  Renusagar  under  the Contract and  the clause indicates the things each party was required to  do in  that connection but the important aspect of the  provision is that the interest income’, on which tax exemption was  being sought,  is said to include capitalized interest and interest thereon that is to say interest on the amounts of  the promissory notes (which included capitalized interest),  which   obviously  means   further  interest  on outstanding principal  balance under the notes from June 30, 1967 onwards  till payment.  In our  view  these  provisions which are  to be found in the contract clearly show that the promissory notes  are not  sole and  exclusive repository of GEC’s right  to claim  and receive future interest on unpaid price after  June 30,  1967 but  that  the  contract  itself provides for  the obligation to pay such interest after that date till payment.      Reference was  made to the fact that the Bank Guarantee endorsed on  each promissory  note is restricted only to the payment of  principal and  interest on  the note  as per its terms and  does not extend to or cover any residuary payment obligation  contained   in  the   Contract,  de   hours  the promissory-note. But this is as it normally should be. Since the bank guarantee is in connection with and endorsed on the promissory note it would ordinarily refer to the obligations arising thereunder  and not  to any obligation arising under any other  document and  the question  whether the  Contract contains such  obligation to pay future interest must depend upon its  contents and  not upon  what is not to be found in the bank  guarantee. Similarly,  counsel for  Renusagar also referred to the fact that G.E.C. 478 has filed a suit (Suit no. 786/1982) against the UCO Bank in the Calcutta  High Court to recover 2.1 million U.S. Dollars for the  interest as  being due  under the  promissory notes read with the guarantee. But here again that fact is neither here nor there, because the suit against the UCO Bank has to be on the promotes read with the guarantee, the Contract not being a  document to  which UCO  Bank is a party. But things will have  to be  seen in  different perspective when claims are made  by G.E.C.  against Renusagar and in that behalf it is the  substance of  G.E.C.’s pleading (Notice of Intention to Arbitrate  that will  have to  be looked into and not how the claims  described therein.  True, at  one place  in  the Notice of  Intention to  Arbitrate the  two  claims  are-(in fact, only  the first  claim of 2.1 million U.S. Dollars is) said to be "on the promissory notes" but much cannot be made of that  fact because at the commencement of that Notice the subject-matter thereof  is stated  as: "Re: Interest payable under the  Contract No.  IGE 9584 between GEC and Renusagar" and  the  substance  of  the  entire  pleading,  on  careful scrutiny, shows  how the  first two claims have arisen under the Contract  and how  under the  terms thereof  and in  the correspondence their  amounts got adjusted and quantified at certain figures  and it  is also clear that the reference to the Contract  is not  way of  any antecedent  or  historical fact. It is, therefore, clear that the Contract contains the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 38 of 61  

obligation to pay future interest from June 30, 1967 onwards till payment  and that  these two claims have been preferred by G.E.C.  before the  Court of  Arbitration  of  I.C.C.  as arising not merely "out of" but under the Contract.      Secondly, the  promissory notes,  on the  terms of  the Contract, cannot  be regarded  as amounting  to  payment  in discharge of  the obligation  arising under the Contract. It was submitted  that since  it is one of the modes of payment indicated in  the Contract the execution of the notes should be held  to be payments by way of discharging the obligation under the  Contract. The  snap answer  to this submission is that since  the Contract  also indicates  the opening  of  a Letter of  Credit as  yet another  mode of payment, the mere fact of the Letter of Credit having been opened by Renusagar in a  Bank in New York City valid for 18 months will have to be regarded  as actual payment which is hardly arguable. But the real  answer to  the submission  is that  it is always a question of  intention of  the parties  whether a negotiable instrument taken  on  account  of  a  debt  operates  as  an absolute discharge of the debt or not. In Bhashyam & Adiga’s treatise on  the Negotiable  Instruments Act (14th Edn.) the law on 479 this aspect  has, in  our view, been correctly summarised at page 774 thus:      "It is  always  a  question  of  intention  of  parties      whether a  bill or  a promissory note or a cheque taken      on account of a debt, operates as an absolute discharge      of the  debt, or  only as  a conditional payment of it.      Generally speaking,  a bill  or note  can never  go  in      discharge of a debt unless it is a part of the contract      that it  shall be so: for, a mere promise to pay cannot      be regarded  as an  effective payment.......  This rule      may also  be based on the general principle of law that      one  simple  executory  contract  does  not  ordinarily      extinguish another,  the presumption  in such  cases is      that the  bill or  promissory note  is taken  only as a      conditional payment."      In Commissioner  of Income-Tax  v. Kameshwar  Singh  of Darbhanga  the   Privy  Council  has  enunciated  the  legal principle very clearly at page 115 of the Report thus:      "A debtor  who gives his creditor a promissory note for      the sum  he owes  can in  no sense  be said  to pay his      creditor; he  merely gives him a document or voucher of      debt possessing  certain legal  attributes. So far then      as  this  item  of  Rs.  17,34,596  (represented  by  a      promissory note given to the assessee by his debtor) is      concerned the  assessee did  not receive payment of any      taxable income from his debtor or indeed any payment at      all."      The aforesaid  statement of  law  enunciated  by  privy Council has  been quoted  with approval  by the  Bombay High Court in  Keshav Mills  Co. Ltd.  v. Commissioner  of Income Tax. It  was a  case where cheques and hundis were issued in payment of  price for  goods  sold  and  delivered  and  the question was  whether such  cheques and  hundis amounted  to payments  resulting   in  unconditional   discharge  of  the liability to  pay the price, and the Division Bench speaking through Chagla, C.J. observed thus:-      "Now, I should have thought that ordinarily the payment      of debt  by a  cheque never results in the discharge of      the 480      debt. The  cheque merely  represents an  order  by  the      drawer of the cheque to his banker to pay the amount to

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 39 of 61  

    the person  named in  the cheque, and till that payment      is made  the debt  is not  discharged.  Therefore,  the      sending of  the cheque, as I said before, ordinarily is      not an  unconditional discharge  of the  liability. The      same would  be the  position with regard to the hundis.      But I  can well  imagine a  case where  there may be an      arrangement between  a creditor  and a  debtor that the      receipt of a cheque or a hundi by a creditor may result      in an  unconditional discharge  of the debt, and in the      event of  the cheque  or hundi  not being  honoured the      creditor would  have no  right to  sue on  the original      cause of  action but  only on  the cheque or the hundi.      That would  be a  pure  question  of  fact.  The  Privy      Council has  taken the same view of the law as is to be      found in Commissioner of Income Tax v Kameshwar Singh."      (supra)      It may be stated here that even in the two decisions of this Court  on  which  Counsel  for  Renusagar  have  placed reliance the  aforesaid principle  of law  has been accepted but all  that has  happened is  that each case turned on its own facts  and special  circumstances on  the basis of which this Court  held that the parties had intended to and agreed to accept  and treat the posting of the instruments (cheques in one  case and  dividend warrant  in the  other) as actual payment  in   discharge  of  the  original  obligation.  For instance in Ogale Glass Works Ltd. case (supra) the question that arose  for determination  on this  aspect of the matter was whether  the assessee  (seller) could  be said  to  have received income (sale proceeds) in British Indian within the meaning of  sec.4(1)(a) of  the Indian  Income-Tax Act, 1922 when the  Government of  India (the  purchaser of goods) had sent the  sale proceeds by means of cheques drawn and posted in Delhi  but received  by the  assessee in  Aundhan  Indian State ? The answer to the question depended upon whether the posting of  cheques in  Delhi amounted  to  payment  to  the assessee and the Court held that it did by relying upon four or five  special circumstances  that obtained  in the  case. Apart from  the fact  that clause  15 of the Contract itself provided for  payment of  the sale  proceeds by cheques, the Court noticed  (a) that in the bills submitted by him to the Government the  assessee has  expressly asked for payment by cheques, (b) that as per the normal course of business usage parties intended  that remittances  should be  by post,  (c) that 481 the  assessee  had  by  making  a  request  in  that  behalf constituted the  post office his agent, (d) that accordingly the Govt.  had sent cheques in payment of the bills by post, (e) that  the assessee had sent formal stamped receipts only after the  receipt of  the cheques  and not in advance along with the bills submitted by him and (f) very importantly the drawer of  the cheques  was the  Government of India and the drawer was  the Reserve  Bank of  India for  whose  solvency there could  be no  apprehension at  all in  the mind of the assessee. It  was in these circumstances that the Court came to the conclusion that the parties had intended to treat the posting of  cheques as  payment. In  H.P. Gupta  v.  Hiralal (supra) the  question was  whether the posting of a dividend warrant cheque by the Company at Delhi (where its Registered Office was  situated) for  dispatching it to the shareholder at his  registered address  (which was  Meerut) amounted  to payment to  the shareholder  in discharge  of the  Company’s obligation to  pay the declared dividend and this Court held that it  did in view of sec. 205 (5) of the Indian Companies Act. 1956 and Art. 132 of the Articles of Association of the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 40 of 61  

Company as  both the said provisions entitled the Company to pay the  dividend either  in cash  or by posting a cheque or warrant at  the registered  address of  a  shareholder.  The Court  pointed   out  that  Art.132,  which  constituted  an agreement between  the Company  and its  shareholder had the effect that  if the warrant (cheque) was sent by post at the latter’s registered  address  that  will  be  equivalent  to payment.      Bearing the  aforesaid general principle in mind that a bill or a promissory note can never go in the discharge of a debt unless  it is a part of a contract that it shall be so, it will  have  to  be  seen  whether  the  promissory  notes executed by  Renusagar in this case were intended to operate as payments  by way  of absolute discharge of the obligation under the  Contract or  only as conditional payments. In our view the  terms of the Contract, far from showing that these were payments  in  discharge  of  the  original  obligation, clearly indicate  that the  parties had  intended that these were to  operate as conditional payments. If Art. III of the Contract, which deals with the topic of Payment of price for the sale  of goods  and services,  is carefully analysed the following factors emerge very clearly:      (a)  that  the   pro-notes  are  not  expressed  to  be           payments: in  fact, it is in terms stated that the           "total  contract  base  price  shall  be  paid  by           purchaser in lawful money of the USA" (Art. III-A)           and surely promissory notes are not "lawful money"           of USA: 482      (b)  that because  the Contract  so provides  even  the           pro-notes  also  recite  that  the  principal  and           interest thereunder  are "payable  in lawful money           of the USA";      (c)  that Art.  III-A (3)  which deals  with  pro-notes provides for  payment of  the remaining 90% of the price "in accordance with  the following  Schedule  of  Payments"  and expressly states  that "the obligation to make such payments is  to   be  evidenced   by  four   series  of   purchaser’s unconditional negotiable  promissory notes",  which  clearly shows that  the pro-notes  are not payments but are intended merely to  be the  evidence of  the obligation  to  pay  the price;      (d)  that  though   stated  to  be  "unconditional  and negotiable" (perhaps  so between  the drawer  and subsequent assignees in case of negotiation), as between the seller and the purchaser  these  have  been  made  subject  to  several conditions such as-(1) the amounts thereof were payable only on the assumption that deliveries of items of equipment were completed within  15 months  of Contract  Effective Date and interest at  the rate  of 6 1/2% was to become 6% on receipt of income-tax exemption (Art. III-A(3) (b),      (ii) these were  to lie  in Escrow  Arrangement  to  be released  to   the  seller  synchronizing  with  the  stated progress of  supply of  goods according  to certain formulae (Art. III-D).     (iii) these were to be replaced by fresh Notes depending on receipt of income-tax exemption (Art.III-A(3)(f) or price modification (Art.III-D)  : (iv) each one-contains a default clause saying  "upon default  in the prompt and full payment the principal  or of the interest on this Note when due, all of the  notes  in  each  and  every  series,  together  with interest to  the date  of payment,  shall immediately become due and  be payable  and the option and demand of the holder thereof."      Having regard to the aforesaid factors that emerge from

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 41 of 61  

the various  terms specified above it is very clear that the execution of  the promissory  notes was  not intended to nor did  it   amount  to  payment  by  way  of  discharging  the obligation under  the contract  but the  notes were  clearly intended to operate as conditional payments.      Thirdly the  very factors  and circumstances enumerated above 483 in connection with the promissory notes and particulary, the fact that  these notes  were as  between the  seller and the purchaser subject to several conditions leading to variation and  adjustment  and  replacement  and  the  default  clause contained in  each, clearly  indicate that  these  were  not intended to  constitute or  separate contracts by themselves but that  they were  a part  and parcel  of  one  integrated transaction embodied  in the  contract; in  fact the aspects mentioned in  (d) above  clearly show  that  the  promissory notes were  and are  meant to  be governed  at all  times by various other  terms of  the Contract  and could be modified and substituted  under given  conditions as  set out  in the Contract.  Hence   it  is   impossible  to   accede  to  the proposition that  a dispute of nonpayment of interest on the instalments whether  regular or  delinquent-is not a dispute "relating to the Contract." In fact, as stated earlier, both the claims-2.1  million U.S.  dollars and U.S. $7,84,151.84- arise "under the Contract" and have been preferred by G.E.C. before the  Court of Arbitration of I.C.C. expressly on that basis and  not under  the promissory  notes. In view of this conclusion of  ours it  is  unnecessary  to  deal  with  the further submission of Counsel for Renusagar based on the so- called factors  of unconditional nature and negotiability of the promissory  notes as destroying the arbitrability of the claims thereunder  as also  the  case  law  relied  upon  in support thereof.  Similarly this  conclusion  of  ours  also makes it  unnecessary for  us to  deal with  the alternative submission made  by counsel  for G.E.C.  that  these  claims would still  fall within  the wide  expressions occurring in the Contract  even on  the assumption  that  the  promissory notes are  severable from  the Contract, that the obligation arising thereunder  is different  from  the  one  under  the Contract  and  that  these  notes  are  in  payment  of  the obligation to pay the price under the Contract.      As regards  the third  claim of compensatory damages it is true  that Renusagar is being saddled with this liability as  tort-feaser,   a  stake-holder   and/or  a  constructive trustee, but,  in our  view, that  aspect by itself will not justify a  conclusion that  the same  is not  covered by the arbitration clause  because the  question is not whether the claim lies  in tort  but the question is whether even though it has  lain in  tort it  "arises out of" or is "related to" the Contract,  that is  to say, whether it arises out of the terms of  the Contract  or is  consequential upon any breach thereof. As explained earlier, this claim is based on and is consequential upon  and by  way of  corollary  to  the  non- payment of  the two  detained amounts by Renusagar to G.E.C. in breach  of the  terms of the Contract. In other words, it is 484 clear  that   before  adjudicating   upon  this   claim  the adjudicating  authority   will  have  first  necessarily  to adjudicate upon  first two  claims preferred  by G.E.C.  and only if  it is found that G.E.C. is entitled to receive that first two amounts which ought to have been paid by Renusagar under the  terms of  the Contract  but which  Renusagar  had failed to  pay that  this third  claim could,  if at all, be

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 42 of 61  

allowed to  G.E.C. In  the real sense, therefore, this claim is directly,  closely and  inextricably connected  with  the terms and  conditions of  the Contract,  the payments  to be made thereunder  and the  breaches thereof  and as such will have to  be regarded  as   a  claim  :‘arising  out  of"  or "related to"  the Contract.  As we shall point out presently Court in  one of  its decisions  has laid  down the test for determining the  question in  such cases  and  the  test  is whether recourse  to the contract, by which both the parties are bound, would be necessary for the purpose of determining whether the claim in question was justified or otherwise and this test,  as indicated  above, is  clearly satisfied  with regard to the third claim in the instant case.      We may,  at this stage, refer to a passage in Russel on Arbitration and  a  few  decided  cases  which  fortify  our aforesaid conclusion.  In Russel  on Arbitration (20th Edn.) the following statement of law occurs at page 90:      "Claims in  tort may  be so intimately connected with a contract  that   a  clause  of  appropriate  width  designed primarily  to  make  contractual  disputes  arbitrable  will nevertheless render such claims in tort arbitrable as well."      In Woolf  v. Collis  Removal Service (1) the defendants had contracted  to remove  plaintiff’s furniture and effects from London  to their  store in  Marlow and  there safely to keep and take care of them, but, according to the plaintiff, the defendants  had, in  breach of the Contract, removed the goods to  a different  destination where  some were lost and others damaged. Alternatively the plaintiff claimed that the goods were  lost and  damaged owing to the negligence of the defendants in  using an  unsuitable place  in which to store them and  guarding them  inefficiently. The clause providing for arbitration  ran: "If the customer makes any claims upon or counterclaim  to any  claim made  by the contractors" the same  shall   be  referred   to  the  decision  of  the  two arbitrators. The  question was whether the claim for damages was covered by this clause. The Court 485 of Appeal  held that  even if  the claim in negligence was a claim in  tort and  not under  the contract  yet there was a sufficient close  connection  between  that  claim  and  the transaction  to  bring  the  claim  within  the  arbitration clause. This  authority clearly  shows that  even  though  a claim may  not  directly  arise  under  the  contract  which contains an  arbitration clause,  if  there  was  sufficient close connection  between that  claim  and  the  transaction under the  contract it  will be  covered by  the arbitration clause.      In Astro  Vencedor Compania  Naviera SA  of  Panama  v. Mabanaft G  m b  H(1) the  arbitration clause contained in a Contract of  charter-party ran:  "any dispute arising during the execution  of this charterparty" shall be settled by two arbitrators, one to be appointed by the Owners and the other by the  charterers.  The  relevant  charterers  ordered  the vessel to  a Dutch  port not  named in  the bill  of  lading whereby satisfactory  bills of  lading were not available in time and  disputes arose  as to  unloading. By action of the relevant charterers  the vessel was arrested and released on a bank  guarantee. Later,  under a charter quite unconnected with the relevant charterers the vessel happened to be again in a  Dutch port  and was  arrested again  as  a  result  of disputes as  to the satisfactory nature of the original bank guarantee. The  owners arbitrated  a claim  for  damages  in respect of  each of  the two  arrests  of  the  vessel.  The charterers argued that these were claims in tort and outside the  arbitrator’s   jurisdiction.  The   Court   held   that

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 43 of 61  

arbitrator had  jurisdiction (1) over the first arrest as it was closely  connected with  the dispute under the contract, and was  indeed a  direct consequence  of a claim for damage under the contract, and (2) over the second arrest as it was part and parcel of the original arrest.      The decision  of Sellers, J. in Government of Gibralter v. Kenney  and Another  (supra) has already been referred by us in the earlier part of our judgment in the context of the distinction made between matters "arising out of" and "under the agreement"  and the learned Judge’s view that the former expression is  wider than  the latter  but that  decision is relevant to  the question  which is now under consideration. In that case disputes arose concerning the first defendant’s remuneration receivable  from the plaintiff under a contract for services  and one of the claims put forward by the first defendant was  for a  sum of  money on a quantum merit basis for services  rendered, it  being alleged that the agreement had ceased  to have  any application  to those services. The disputes were 486 referred to  the arbitration  of second  defendant  under  a clause which  was very  wide and  covered "  any dispute  or difference which  shall arise  or occur  between the parties hereto in  relation to  anything or matter arising out of or under this  agreement". A  question arose  as to  whether  a claim  based   on  quantum   merit  would  fall  within  the arbitration  clause   and  Sellers,  J.  held  that  it  did observating as under :           "It is  true that  a quantum  merit  is  a  quasi- contract and  arises, in a sense, on an implied contract and not on  any express  agreement, but,  in  my  view,  in  the circumstances of  this case  (although it  may not be in all cases) the  quantum merit is an incident which arises out of the contract.  It is  not a  remedy for breach or arising on frustration, but  it is  an incident, in my view, which does arise as  a consequence  of the contract or ‘arising out of’ it. One  has only to look at the pleadings, at the points of claim, and  to visualise what is involved in the arbitration to see  the close  association between  the written contract and the claim advanced in this way on a quantum merit."      In  Alliance   Jute  Mills   Co.  Ltd.   v.  Lal  Chand Dharanchand and Another(1) disputes between the parties to a commercial contract  were arbitrable  under the  bye-laws of the East  India Jute  & Hessian Exchange Association and the relevant  bye-law   ran  thus  :  "All  matters,  questions, disputes, difference  and/or claims  arising out  of  and/or concerning and/or  in connection  with and/or in consequence of or  relating  to  this  contract  shall  be  referred  to arbitration...................."   Under    the   commercial Contract Respondent  No.  1  had  sold,  through  a  broker, certain quantities  of fibre to the appellant-mill and after effecting  delivery  of  the  goods  Respondent  No.  1  had submitted bills  to the  appellant-mill  again  through  the broker ;  the appellant-mill,  however, claimed reduction in price on  account of shortage in weight and submitted claims in that  respect. Since  the price  was not paid, Respondent No. 1  referred the  claim  to  the  arbitration  of  Bengal Chamber  of   Commerce  and   Industry.  The  appellant-mill informed the  Chamber of  Commerce and  Industry that it had filed a  suit upon  the whole  of the  subject matter of the reference and served a Notice under s. 35 of the Arbitration Act. In  suit so  filed against  Respondent No.  1  and  the broker apart from 487 the declaration sought that the broker had no claims against

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 44 of 61  

the appellant-mill  in respect of the Contract or in respect of the  bills submitted by the broker for the price of goods sold and  delivered the  appellant-mill had  also claimed  a decree for  Rs. 50,000  as damages  for  the  alleged  libel published  by  respondent  No.  1  and  the  broker.  In  an application for  stay  of  the  suit  under  s.  34  of  the Arbitration Act.  1940, one  of  the  questions  raised  was whether the  arbitration clause  was wide  enough to include the claim  for damages for the alleged libel. The High Court held that the claim in damages for defamation arose "out of" and "in  connection with"  the non-payment  of the  bills of respondent No.  1 and in going into the question of tort the Court would  necessarily have  to  go  into  the  terms  and conditions of  the Contract relating to payment and that the claim in  tort was  directly and inextricably connected with the terms  and conditions  of the  Contract and as such came within the  scope of  the arbitration  clause which was wide enough to  cover the  same. In this view of the matter Court stayed the suit under s.34 of the Arbitration Act.      Lastly, we would refer to the decision of this Court in Union  of  India  v.  Salween  Timber  Construction  (India) Ors.(1)  where   the  Court  has  laid  down  the  test  for determining the  question whether the arbitrators would have jurisdiction to  adjudicate upon  a claim made by one of the parties to  a Contract,  though not strictly arising "under" it. In  that case  a dispute  arose  between  the  appellant (Union of  India) and the respondent regarding the supply of timber made  by the  respondent under a contract between the parties. 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 have been returned by the  appellant with  compensation for  deterioration,  or that payment  should be  made for it as the market rate. The appellant contended  that the  terms  of  contract  did  not require the respondent to tender for inspection any quantity in excess  of the contracted quantity, that the claim was in detinue 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 contractor in connection with the contract. Arbitration  Clause in  the contract  covered  any question or  dispute  arising  under  the  contract  or  ‘in connection with  the Contract’.  On the question whether the arbitrators had  jurisdiction to  adjudicate upon that claim this Court, 488 relying upon  its earlier decision in Ruby General Insurance Co. Ltd.  v. Peary  Lal Kumar(1)  held, that  the  test  for determining the question is whether recourse to the contract by which  both the  parties are bound, was necessary for the purpose of  determining whether  the claim of the respondent was justified or otherwise and since it was necessary in the case 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.      As  stated   earlier  since   this  third   claim   for compensatory damages  is directly,  closely and inextricably connected with the terms and conditions of the Contract, the payments to  be made thereunder and the breaches thereof and since for  adjudication thereof  recourse  to  the  Contract would be  necessary it  will have  to be  held that  it is a claim "arising  out of"  and in  any event  "related to" the Contract.      As regards  the two  decisions, Monro  v. Bognor  Urban

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 45 of 61  

District Council  (supra) and  Ghewarchand Rampuria v. Shiva Jute  Bailing  Ltd.  (supra)  relied  upon  by  Counsel  for Renusagar  we   would  like  to  point  out  that  both  are distinguishable and  each turned  on its  own facts.  In the former case  the contractor  had filed  a  suit  to  recover damages for the fraudulent misrepresentation as also to have the contract  declared void  on the  ground that his consent thereto had  been obtained  by fraudulent  misrepresentation and in  effect the  Court of  Appeal held  that the  alleged fraudulent misrepresentation  was not  a dispute "upon or in relation  to   or  in  connection  with  the  Contract  and, therefore, the  suit was  not liable  to stayed  nor was the dispute liable  to be referred to arbitration. In the latter case the  suit was  based wholly  on tort and tort alone and the action  complained of  was totally  unconnected with the Contract; the  High Court  actually recorded  a finding that the cause  of action in the suit had no connection direct or indirect with  the Contract  itself and the reference to the Contract was  only a link in the story to show how the goods came to be in the possession of the defendants and the claim was not  based in  any way  on or  related to  the  contract itself. In  the final  analysis the question as to whether a claim based  on tort  is a  claim de hors the contract which contains  the   arbitration  clause   or  is   directly   or inextricably connected  with the  contract has to be decided on the  facts of  each case  and the  language used  in  the arbitration clause 489      Having  regard  to  the  aforesaid  discussion  we  are clearly of  the view  that all  the three claims referred by G.E.C. to  the Court  of Arbitration of I.C.C. do "arise out of" and  are "related  to" the  Commercial Contract (in fact the  first  two  claims  arise  "under  the  Contract")  and squarely fall  within the  widely worded  arbitration clause being Art.  XVII contained in the Commercial Contract. It is also clear  that the  arbitration clause  embraces even  the question of  its effect (scope), that is to say, it embraces the  issue   of  the  arbitrability  of  the  three  claims. Questions whether  in law, namely, the law of the Forum, the arbitrators will  have jurisdiction  and power to decide the arbitrability of  the claims  or not and whether Renusagar’s suit is  liable to be stayed or not will be considered by us next but  at this  stage we are categorically negativing the contentions of  Counsel for  Renusagar that  on  merits  the three  claims  are  beyond  the  scope  or  purview  of  the arbitration clause or that the arbitration clause on its own language does  not embrace the issue of arbitrability of the three claims.      We shall  now deal  with the principal legal contention raised in  support of these appeals by Counsel for Renusagar that under  s. 3  of the  Foreign Awards  Act, 1961,  having regard to  its scope,  a suit  in the  nature of  a petition under s.  33 of  the Arbitration  Act,  1940  can  never  be stayed, that  G.E.C.’s Arbitration Petition (No. 96 of 1982) in that behalf is totally mis-conceived and that no case has been made  out for  staying Renusagar’s suit which is in the nature of  a petition under s. 33 of the Arbitration Act. In this behalf submissions of Counsel may be analysed thus :      (a)  That two  decisions -  one of  the  Calcutta  High Court in  Balabux Agarwalla’s  case (supra) and the other of this Court  in  Gaya  Electric  Supply  Co’s  case(1),  have settled the legal position under Arbitration Act 1940 that a Court acting  under s. 34 is a Court of limited jurisdiction performing a  limited function  and that a petition under s. 33 (which raises issues regarding the existence, validity or

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 46 of 61  

effect of  an arbitration  agreement) cannot  be  stayed  by invoking s.  34 of  that  Act,  unless,  there  be  a  fresh arbitration agreement  to refer  those very issues in regard to the  previous arbitration  agreement and,  therefore,  it should similarly  be held  that s.  3 of  the Foreign Awards Act, (which  is similar  to s.  34 of  the Arbitration  Act) cannot be 490           invoked to  stay a  suit which is in the nature of as. 33  petition and  Counsel pointed  out that  Renusagar’s suit is  precisely a suit of that nature, wherein the effect (scope)  of   the  arbitration   clause  contained   in  the commercial contract only has been put in issue and no relief on the merits of these claims is sought.      (b)  That Renusagar’s suit is not a suit "in respect of any matter agreed to be referred to arbitration" as required by s.  3 of  the Foreign Awards Act and, therefore, the stay sought by  G.E.C. should be refused; in other words, Counsel urged that  the phrase "in respect of my matter agreed to be referred arbitration"  occurring in s. 3 should be construed to cover  only disputes  or claims on merits referred to the arbitrators and  not issues as to the existence, validity or effect of  the arbitration  agreed, (particularly  its scope that is  the arbitrability  of the  claims) and  for placing such narrow construction on the relevant phrase occurring in s. 3  Counsel mainly  relied on  a decision of this Court in Shiva Jute  Baling Ltd.  v. Hindley Co.(1) where this Court, while construing  s. 35 in the context of s. 33 and s. 34 of the Arbitration  Act, has on the facts in the case held that there could  be no  identity of  the  subject  matter  under reference to  the arbitrator  and the subject matter of a s. 33 petition,  that is  to say,  the issues  and prayers that from the  basis of  an application  under s. 33 could not be subject-matter of the reference to the arbitrators ; Counsel also relied  upon three  more decisions  of  this  Court  in Khardah Company’s  case (supra),  Waverly Jute  Mills’  case (supra)  and   M/s.  R.N.  Ganekar  &  Co’s(2)  case  where, according to Counsel, observations supporting the above view have been made.      (c)  That even  of the assumption that arbitrability of the three  claims is  factually covered by the wide language of the arbitration clause in question here and that the suit is ‘in  respect of  a matter  agreed to  be referred  to the arbitration’, in  law, that  is to say, under the law of the Forum (being  the Indian  Law in the instant case) the issue of arbitrability  of the claims raised in the suit cannot be finally determined by the arbitrators but must rest with the 491           Court and,  therefore, Renusagar’s  suit cannot be stayed under  s. 3  ; in this behalf Counsel urged that both English Law  as well  as Indian  Law is the same (the latter being the law of Forum here) and does not allow questions of arbitrators’ own  jurisdiction  to  rest  finally  with  the arbitrators and  in support  reliance was placed on a number of decisions  English,  American  and  Indian  (particularly decision  in   Attorney-General  for  Manitoba  v.  Kally  & Ors.(1), Dalmia  Dairy(2) case,  Backer Auto  Radio(3) case, Municipal Board  v. Eastern  U.P. Electric  Supply Co. Ltd & Ors(4), M/s.  Jagan Nath  Phool Chand  v. Union  of India  & Ors.,(5) R.  Prince & Co. v. Governor General in Council(6), Vallabh Pitti  v. Narsingdas(7)  as well as certain passages in Russell  on Arbitration 20th Edn. at pages 91-92 and 111- 112 and  Albert Jan  Van Dan  Berg’s Treatise  on  New  York Convention at pages 311-312.      (d)  That a stay, if granted as sought by G.E.C., would

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 47 of 61  

render Renusagar’s  suit dead  for all  practical  purposes, and, therefore,  no such relief should be granted which will have the  effect of finally determining the suit merely on a prima facie  view or  a pro  tanto finding  on the  issue of arbitrability of  the claims  and in  support  reliance  was placed on Strauss & Co’s.(8) case. We shall  examine each  one of these submissions put forward to strengthen the main legal contention urged in the support of these appeals presently.      At the out set we would like to observe that the answer to the  question whether  Renusagar’s suit  which is  in the nature of  a petition  under s.  33 of  the Arbitration  Act could be  stayed under  s. 3  of the Foreign Awards Act must necessarily depend  upon a  correct construction of the said s. 3 and it is obvious that the provisions of 492 that section  will have  to be  construed by keeping in mind the objective  sought to  be achieved  by that  Act and  its scheme  and  not  on  the  basis  of  similar  or  analogous provisions that are to be found in the Arbitration Act, 1940 or the  manner in which such similar or analogous provisions have been  construed by our Courts. The Statement of Objects and Reasons  shows that  the Act  seeks  to  achieve  speedy settlement of  disputes  arising  from  international  trade through  arbitration.   The  Act   is  a  successor  to  the Arbitration (Protocol  & Convention)  Act, 1937. The earlier Act was  intended  to  effectuate  the  purposes  of  Geneva Convention of  1927 ;  it was, however, felt that the Geneva Convention  hampered   the  speedy  settlement  of  disputes through arbitration and hence no longer met the requirements of the  international trade  due  to  certain  defects  and, therefore, in  order to remedy, inter-alia, those defects, a craft Convention  was prepared  by the International Chamber of Commerce,  which was  considered by  the  United  Nations Economic  and   Social  Council  in  consultation  with  the Governments of  the various  countries  and  nongovernmental organisations and  finally a new International Convention on the Recognition  and  Enforcement  of  Arbitral  Awards  was adopted at  New York  on 10th June, 1958. The Convention was duly ratified  by the  Government of India and was deposited with the  Secretary-General of  the United  Nations on  13th July, 1960.  The present  Act was enacted, as its long title indicates, to give effect to the said New York International Convention on  the Recognition  and Enforcement  of  Foreign Arbitral Awards to which India is a party. Article II of the Convention provides for recognition by Contracting States of agreements, including  arbitral clauses in writing, by which the  parties   to  the  agreement  undertake  to  submit  to arbitration and  or any  differences which  have  arisen  or which may  arise between  them in  respect of  defined legal relationship,  whether  contractual  or  not,  concerning  a subject-matter capable of settlement by arbitration and s. 2 of  the   Act  defines   the  expression   "foreign   award" accordingly, i.e.  closely following the language of Article II of  the Convention.  It is  obvious that since the Act is calculated  and   designed  to   subserve   the   cause   of facilitating international  trade and  promotion thereof  by providing for  speedy settlement of disputes arising in such trade  through   arbitration,  any   expression  or   phrase occurring  therein   should  receive,  consisting  with  its literal  and  grammatical  sense,  a  liberal  construction. Moreover, an  examination of the relevant provisions of this Act and the Arbitration Act, 1940 will show that the schemes of the two Acts are not identical and as will be pointed out at the appropriate stage there are various differences which

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 48 of 61  

have a  material bearing on the question under consideration and as such 493 decisions on  similar or  analogous provisions  contained in the Arbitration  Act may  not help  in  deciding  the  issue arising under  the Foreign  Awards Act  because just  as the Arbitration Act, 1940 is a consolidating enactment governing all domestic  awards the  Foreign Awards  Act constitutes  a complete  code   by  itself   providing  for   all  possible contingencies in relation to Foreign awards made pursuant to agreements to  which Article  II of  the Convention applies. With these  preliminary observations  we  now  turn  to  the question of  proper construction  of s.  3  of  the  Foreign Awards Act.      Section 3 of the Foreign Awards Act, 1961 as amended by Act 47  of 1973, (omitting unnecessary words) reads as under :-      "3. Stay  of proceedings  in respect  of matters  to be referred to  arbitration.-Notwithstanding anything contained in the  Arbitration Act,  1940, or  in  the  Code  of  Civil Procedure, 1908,  if any  party to  an  agreement  to  which Article II  of the  Convention set  forth  in  the  Schedule applies,  commences  any  legal  proceedings  in  any  court against any  other party to the agreement, in respect of any matter  agreed   to  be  referred  to  arbitration  in  such agreement, any  party to  such legal proceedings may, at any time after  appearance and before filing a written statement or taking  any other  step in  the proceedings, apply to the Court  to   stay  the  proceedings  and  the  Court,  unless satisfied that  the agreement  is null and void, inoperative or incapable  of being  performed or  that there  is not, in fact, any  dispute between  the parties  with regard  to the matter agreed  to be  referred, shall  make an order staying the proceedings". It may  be stated  that prior  to its amendment by Act 47 of 1973 the  words in the old section 3 were : "If any party to a submission  made in  pursuance of an agreement" which were construed by  this Court  in  V/O  Tractoroexport,  case  as prescribing a  requirement that  there  must  be  an  actual reference made  to the  arbitrators before  any party to the arbitration  agreement   could  invoke   the   section   and Parliament immediately stepped in and amended the section by substituting in  their place the words : "if any party to an agreement"  thereby   facilitating   the   stay   of   legal proceedings even  before any  actual reference  is made  and compelling speedy  settlement  of  disputes  through  agreed arbitration. On  a plain  reading of  the section  as it now stands 494 two things become very clear. In the first place the section opens a  non-obstante clause giving overriding effect to the provision contained  therein  and  making  it  prevail  over anything to  the contrary  contained in the Arbitration Act, 1940 or  the Code of Civil Procedure, 1908. Secondly, unlike s 34  of the Arbitration Act which confers a discretion upon the Court, the section uses the mandatory expression "shall" and makes  it obligatory  upon the  Court to  pass the order staying the  legal proceedings  commenced by  a party to the agreement if the conditions specified therein are fulfilled. The conditions  required to be fulfilled for invoking sec. 3 are :      (i)  there must  be an agreement to which Article II of the Convention set forth in the Schedule applies. (It is not disputed that this is so in the instant case) ;      (ii) a party  to that  agreement  must  commence  legal

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 49 of 61  

proceedings against  another party thereto. (It is again not disputed that  Renusagar and  G.E.C. are  the two parties to the arbitration  agreement and  that Renusagar has commenced legal proceedings  against G.E.C.  by filing suit No. 832 of 1982 ;       (iii) the legal proceedings must be "in respect of any matter  agreed  to  be  referred  to  arbitration"  in  such agreement. (The question whether this condition is fulfilled here needs to be decided) ;      (iv) the application  for  stay  must  be  made  before filing the written statement or taking any other step in the legal proceedings.  (Admittedly this condition is fulfilled) ;      (v)  the Court  has to  be satisfied that the agreement is valid,  operative and  capable of  being performed ; this relates  to   the  satisfaction  about  the  ‘existence  and validity’ of the arbitration agreement. (In the instant case these questions do not arise) ;      (vi) the Court  has to  be  satisfied  that  there  are disputes between  the parties  with regard  to  the  matters agreed to be referred; this relates to effect (scope) of the arbitration agreement touching the issue of arbitrability of the claims. (It will have to be dealt with while considering the satisfaction of condition (iii) above). 495 As stated  above  Counsel  for  Renusagar  have  urged  that conditions (iii)  and (vi)  and not satisfied and hence stay of Renusagar’s  suit ought  to be refused while according to Counsel for  G.E.C. all  the conditions  including these two have been  fulfilled and  it is obligatory upon the Court to stay the suit.      Before dealing  with the  question  whether  conditions (iii) and  (vi) are  satisfied in  this case or not we would briefly indicate  how the  schemes of  the two Acts (Foreign Awards Act and Arbitration Act) materially differ on several aspects  having  a  bearing  on  the  points  at  issue.  An examination of  ss. 3,  4 and 7 of the Foreign Awards Act in juxtaposition with ss. 32, 33 and 34 of the Arbitration Acts brings out these differences. Under s. 32 of the Arbitration Acts suits  to challenge  the existence  or validity  of  an arbitration agreement  or award  as also  suits to  have the effect (scope)  of an  arbitration agreement  determined are barred  and   such  questions  can  be  raised  only  by  an application under s. 33 of the Act whereas under the Foreign Awards Act  there is  no provision similar or akin to ss. 32 and 33  (and that  is why  a suit  of the  nature  filed  by Renusagar qua  the  arbitration  agreement  covered  by  the Convention is maintainable) but by virtue of ss. 3 and 7 the same  purpose  is  served  though  by  different  procedure. Sections 3 and 7 read together disclose a scheme that so far as questions  of existence,  validity and  effect (scope) of the arbitration  agreement are  concerned, the determination thereof by  the arbitrators  is also subject to the decision of the  Court and  this decision  of the  Court can  be  had either before the arbitration proceedings commence or during their pendency,  if the  matter is decided by the Court in a s. 3  petition, as  in the present case, or can be had under s. 7  after the award is filed in the Court and is sought to be enforced  under s.  6. True, section 4(2) declares that a foreign award shall be treated as binding ‘for all purposes’ on persons  as between  whom it is  made but that is subject to s.  7 whereunder  enforcibility thereof is made dependent upon satisfaction  of certain conditions specified therein : for example,  under s.  7(1)(a)(iii) one  of such conditions for enforcibility  is that   the  award should not deal with

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 50 of 61  

questions not  referred nor  should it  contain decisions on matters beyond  the scope  of the agreement. In effect, s. 3 of the  Foreign Awards  Act so  to say  combines in  its own ambit both  ss. 33  and 34 of the Arbitration Act ; in other words, questions regarding the existence, validity or effect (scope) of  the arbitration  agreement which  can be decided under s.  33 of  the Arbitration  Act  are  required  to  be decided under  s. 3 of the Foreign Awards Acts before a stay of egal  proceedings contemplated  therein could  be granted and the 496 right to have legal proceedings stayed contained in s. 34 of the Arbitration  Act is  also to  be found in the same s. 3. Further the  Foreign Awards Act has also taken cognizance of the possibility  that there  may not be s. 3 petition at all the matter  being directly  proceeded before the arbitrators and the  possibility of the arbitrators giving a decision on an issue  not within  their competence  or jurisdiction  and such cases  s. 7  contains a  safe-guard which  prevents any such award  from being  made  enforceable.  Such  being  the scheme under  the Foreign  Awards Act we would reiterate our view that  decisions of  our Courts  on similar or analogous provisions contained  in the Arbitration Act would not be of any help  to decide  questions  arising  under  the  Foreign Awards Act.  For instance,  the view  taken by  the Calcutta High Court  in Balabux  Agrawalla’s case (supra) and by this Court in Gaya Electric Supply Co.s case (supra) that a Court acting under  s. 34  of the  Arbitration Act  is a  Court of limited jurisdiction  performing a limited function and that a petition under s. 33 cannot be stayed by invoking s. 34 of that Act will be of no avail whatever in face of the express provisions contained  under s.  3 of  the Foreign Awards Act which section, as indicated earlier, combines within its own ambit both  sections 33  and 34  of the  Arbitration Act and those questions  have to  be decided  by  the  Court  before granting  stay.  Similarly,  the  broad  principle  that  an arbitrator has  no power  to determine  questions of his own jurisdiction  (which   include   questions   regarding   the existence, validity and effect i.e. scope of the arbitration agreement) and  that neither  English  Law  nor  Indian  Law allows these  questions to  rest with  the  arbitrator  (for which Counsel  for Renusagar  have been  contending  and  we shall deal  with it later) would be hardly applicable to any foreign award  made under  the Act. if the scheme of the Act emerging from  a combined  reading of  ss. 3  and 7  clearly shows that  so far  as the  questions of existence, validity and  effect   (scope)  of   the  arbitration  agreement  are concerned, the  determination thereof  by the arbitrators is subject to  the decision of the Court and that this decision of the  Court can  be had under s. 7 even after the award is made  and   filed  in  the  Court  but  before  it  is  made enforceable ; s. (7)(a)(i) and (iii) show that the award can be challenged  on  these  grounds  which  implies  that  the arbitrators have  decided those questions while making their award.      Turning now  to  the  question  whether  in  this  case conditions (iii)  and (vi)  indicated above are satisfied or not we  would like  to observe  that the  two conditions are inter-related and  in substance  bear upon  the same aspects and, therefore,  could be  dealt  with  together.  The  main question is  whether Renusagar’s  suit can  be  said  to  be "respect 497 of any  matter agreed  to be  referred to  arbitration" ? On this,  Counsel  for  Renusagar  put  forward  a  two-pronged

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 51 of 61  

submission. Initially  it was  urged  that  the  arbitration clause in the Contract does not include within its scope the issue of  arbitrability of  the three claims and so the suit is not  liable to  be stayed  but we  have already negatived this part  of the submission by holding that the language of the arbitration  clause is  wide enough to embrace the issue of the  arbitrability of  the claims.  Now the submission is that the  phrase "in  respect of  any matter  agreed  to  be referred to  the arbitration"  occurring in  s. 3  should be construed as  covering only the disputes or claims on merits which have  been  referred  to  the  arbitrators  and  since Renusagar’s suit merely raises the issue of arbitrability of those claims the suit cannot be said to be in respect of any matter agreed to be referred to arbitration; in other words, the submission is that the relevant phrase in s. 3 should be given a  narrow construction.  In the  first place  there is nothing in  the section  which warrants  the placing of such narrow construction on the relevant phrase. What matters are agreed to  be referred  to arbitration will depend upon what language is  employed by  the  parties  to  the  arbitration agreement and  as we have indicated earlier there is nothing in law  or equity  which prevents the parties from referring even the questions of existence, validity or effects (scope) of the  arbitration agreement  itself to the arbitrators (in fact. Lord  Porter’s observations quoted earlier from Heymen v. Darwins  Ltd. and Das J’s view in Balabux Agarwala’s case show that  the parties  can do  it.) Secondly, the scheme of ss. 3 and 7 of the Foreign Awards Act, as discussed earlier, clearly suggests that the relevant phrase would include even questions of  existence, validity  and effect (scope) of the arbitration agreement.  It is,  therefore, not  possible  to place a  narrow construction  on that  phrase  in  s.  3  as suggested by  Counsel for  Renusagar. The  decision of  this Court in  Shiva Jute  Bailing  Ltd.  case  (supra)  and  the supporting observations  in three  other decisions  of  this Court, namely, Kharda Co’s case, Waverly Jute Mills case and M/s. R.N.  Ganekar & Co’s case (all supra) on which reliance was placed  by Counsel for Renusagar are of no avail for two reasons -  (i) they  deal with  a position arising under ss. 33, 34 and 35 of the Arbitration Act and the manner in which certain phrases  occurring therein are construed would offer no guidance  in construing  the relevant phrase occurring in s. 3  of the  Foreign Awards  Act  which  will  have  to  be construed on its own language and in the light of the scheme of the Foreign Awards Act and (ii) though the ratio in Shiva Jute Bailing  Ltd. case has been expressed rather broadly it cannot be  forgotten that  in each one of the four cases the question pertained  to either  the existence or the validity of the arbitration 498 agreement and  not the effect (scope) thereof, (i.e. not the issue of  the arbitrability  of the  claims) and, therefore, the ratio  in that  case as also the supporting observations made in  the other three cases will have to be understood as being applicable to the actual issue that arose on the facts of each  on of  them. We  therefore, conclude  that both the conditions (iii) and (vi) are satisfied in the instant case.      The next  contention-and this  has been, if one may so, the crux  of the  entire submission of Counsel for Renusagar in the  case-is that arbitrability of the three claims falls within the  wide ambit  of the  arbitration clause  and that therefore Renusagar’s  suit is in respect of a matter agreed to be referred to the arbitration within the meaning of sec. 3, in  law, that is to say under the law of the Forum (being the  Indian   law  in   the  instant   case)  the  issue  of

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 52 of 61  

arbitrability of  claims cannot be finally determined by the arbitrators but  must rest  with  the  Court  and  therefore Renusagar’s  suit  cannot  be  stayed  under  that  section. According to  Counsel both English law as well as Indian law is the  same which  does not allow questions of arbitrator’s own jurisdiction to rest finally with the Arbitrators and in support  of   this  proposition   Counsel  relied  upon  the following authorities:      (a)  Attorney-General for  Manitoba v.  Kelly and  Ors, (supra) where  the Privy  Council at  page 276 of the Report has observed  thus :  "Whenever there  is  a  difference  of between the  parties as  to the  authority conferred  on  an umpire  under  an  agreed  submission,  the  decision  rests ultimately with  the Court  and not  with umpire  :  Produce Brokers Co.  v.  Olympia  Oil  and  Cake  Co.  It  would  be impossible  to  allow  an  umpire  to  arrogate  to  himself jurisdiction over a question which, on the true construction of the submission, was not referred to him. An umpire cannot widen the  area of  his jurisdiction by holding, contrary to the fact,  that the  matter which  he affects  to decide  is within the submission of the parties."      (b)  Dalmia Dairy  Industries Ltd.  v. National Bank of Pakistan (supra)  where the  enforcibility of the award made by a  sole arbitrator  pursuant  to  an  arbitration  clause contained in  the document  of  guarantee  executed  by  the National  Bank   of  Pakistan  in  favour  of  Dalmia  Dairy Industries Ltd.  was resisted  by the Bank inter-alia on the ground that  the arbitrator  was not  entitled to decide the question of  his own  jurisdiction when  the validity of the contract of guarantee 499           itself was  disputed, and  the Court  of Appeal at pages 292-293  of the  Report observed  thus  :  "Whilst  we recognise that  in answering issue I(B) differently from the learned Judge we are rejecting this preference on this issue Mr. Sikri’s  evidence rather than that of Mr. Lall, we reach our conclusion  for the  reason that  we find nothing in the learned Judge’s  judgment or  in Mr.  Sikri’s evidence or in the Indian  authorities, which seems to us justify departure from the  logical conclusion  that there is no difference in principal  between  a  contract  containing  an  arbitration clause admittedly  concluded but void for initial illegality and a contract containing such a clause admittedly concluded but where  it is  alleged that  either the  contract or  the arbitration clause  or both  have  become  void  because  of subsequent illegality.  It seem  to us  to follow  that even where the  arbitration clause  is framed as widely as in the present claim  and bears  the  construction  which  we  have upheld in  our answer  to issue  1(A), Indian  law will  not allow effect  to be given to it so as to allow an arbitrator appointed  thereunder   finally   to   determine   his   own jurisdiction."      (e)  Becker Auto-Radio  case (supra)  where the  United States Court of Appeals (3rd Circuit) has expressed the view that the  question of  arbitrability of a dispute is for the Court to  decide (para  7 at page 44 of the Report read with footnote 10).      (d)  R. Prince  and Co.  v. Governor-General in Council (supra) where following the aforesaid Privy Council decision the Punjab High Court at page 242 of the Report has observed thus :  "It is well established that an arbitrator or umpire must not  go beyond  the submission  and although there is a presumption in  favour of  the validity of the award and the onus  of  proving  that  the  arbitrator  has  exceeded  his jurisdiction rests  on the  person alleging  it, if an award

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 53 of 61  

extends to matters not within the scope of the submission it must be  held to  be void to the extent that it is in excess of  the   submission.  An  Arbitrator  cannot  give  himself jurisdiction by  a wrong decision as to the facts upon which the limit  of his  jurisdiction depends and where there is a difference between  the parties  as to  the authority of the arbitrator under an agreed submission the decision rests 500           with the  Court  and  not  with  the  arbitrator." Observations in  similar strain  made by  the Allahabad High Court in  Municipal Board v. Eastern U.P. Electricity Supply Co. Ltd.  and Ors.  (supra), by the Delhi High Court in M/s. Jagan Nath  Phool Chand v. Union of India & Ors. (supra) and by the  Bombay High  Court in  Vallabh Pitti  v.  Narsingdas (supra) were also relied upon.      (e)  Russell on  Arbitration (20th  Edition) : At pages 91-92 the following statement of law occurs : "It can hardly be with  in the  arbitrator’s jurisdiction to decide whether or not  a condition  precedent to  his jurisdiction has been fulfilled. It  has indeed  several times  been said  bluntly that  an   arbitrator  has   no  power  to  decide  his  own jurisdiction and  in one  case where rules of an institution prepared to  conduct arbitrations  gave the  arbitrator such power, the  court will ignore this when asked to enforce the award, and  decide  the  question  itself"  :  Dalmia  Dairy Industry’s case.  Again at  page 112  the learned author has digested Dalmia  Dairy Industry’s case thus : "Again some of the rules give the arbitrator power to decide whether he has jurisdiction in a particular dispute. But English court will never give  effect to  such rules  and accordingly, if it is sought to  enforce in  England an  award given  after such a decision by the arbitrator, the court will not accept it but will have  to determine  the question  of  jurisdiction  for itself."      In our  view the  aforesaid authorities  relied  on  by Counsel for  Renusagar do  not touch the real question which we have  to decide  in the  case. The question is whether in view of the wide arbitration clause which embraces questions of existence,  validity or  effect (scope)  of the agreement itself Renusagar’s  suit (which  is in  respect of  a matter agreed to  be referred) should be stayed so as to enable the arbitrators to  proceed with  the reference  and make  their award and  that question  is required  to be  considered  in regard to foreign awards to be made under the Foreign Awards Act and as such must be considered in light of the scheme of that Act  and will necessarily be governed by the provisions thereof. As  explained earlier  the scheme that emerges on a combined reading  of ss.  3 and  7 of the Foreign Awards Act clearly contemplates  that questions  of existence, validity or effect  (scope) of  the arbitration  agreement itself, in cases where  such agreement is wide enough to include within its ambit  such questions, may be decided by the arbitrators initially but their deter- 501 mination is  subject to  the decision  of the Court and such decision  of   the  Court  can  be  had  either  before  the arbitration proceedings  commence or  during their pendency, if the  matter is  decided in a section 3 petition or can be had under  sec. 7  after the  award is mane and filed in the Court and is sought to be enforce by a party thereto. In the face of  such schemes  envisaged by  the Foreign  Awards Act which governs  this case  it will be difficult to accept the contention that the arbitrators will have no jurisdiction to decide questions regarding the existence, validity or effect (scope) of  the arbitration  agreement. In  fact the  scheme

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 54 of 61  

makes for  avoidance of  dilatory tactics on the part of any party to  such agreement by merely raising a plea of lack of arbitrator’s competence-and  a frivolous  plea  at  that-and enables the  arbitrator to determine the plea one way or the other and if negatived to proceed to make his award with the further safeguard  that the  Court would be in a position to entertain and decide the same plea finally when the award is sough to  be enforced.  All that  condition (iii)  of sec. 3 requires is that the legal proceedings must be in respect of a matter  "agreed to  be referred  to the  arbitration"  and there is  no warrant to add further words namely, "agreed to be referred  to the  arbitration for  final  determination". Obviously  if   the  occasion  to  decide  the  question  of arbitrator’s jurisdiction  arises at an earlier stage namely in a  section-3 petition  the Court  has to decide it before granting stay  of the legal proceedings and such decision of the Court on that question will be conclusive and binding on the arbitrator  and the question before him will then become academic. It  is thus  clear that under the scheme questions of existence,  validity of effect (scope) of the arbitration agreement itself,  in cases  where  the  arbitration  clause embraces within its scope such questions, (unless decided by the Court  in  a  section-3  petition)  could  be  initially determined by the arbitrators, which would be subject to the final decision  of the  Court. This  position under  the New York Convention  (to give effect to which the Foreign Awards Act was  passed) has  been clarified  by Albert  Jan Van Den Berg in  his treatise  of New  York Convention at page 312-a passage on  which Counsel for Renusagar relied. This is what learned author has stated:      "The Convention  does not imply that the arbitrator may give a  final decision  on his  competence. Under almost all arbitration laws  the arbitrator  has no  power to give such final decision;  as arbitration  excludes the  competence of the courts,  which is  considered as  a far-reaching effect, the courts  retain the  last word in this matter. Many laws, however, allow  the arbitrator  to give a provisional ruling on his competence in order not to 502      delay the arbitration and to alleviate dilatory tactics by obstructive  respondents. This  principle that  the court has the  last word  on the  arbitrator’s competence  is  not different for the New York Convention. If it were otherwise, the Convention  would have  contained express  provisions to that effect in order to make clear that in deviates from the prevailing principles of the national arbitration laws." Secondly, even  the aforesaid  authorities on which reliance has been  placed by Counsel for Renusagar (excepting perhaps the American  decision in  Becker Auto-Radio case merely lay down  that   the  decision   on  questions  of  arbitrator’s jurisdiction  (assuming   no  distinction  is  made  between questions  regarding   the  existence  or  validity  of  the agreement on  the one hand and effect (scope) thereof on the other) rests  finally or  ultimately with  the Court and not with the  Arbitrator or  Umpire. [As  regards  the  American decision in  Becker Auto-Radio  case it  may be  stated,  as pointed out  by Counsel  for G.E.C.  that the  point was not decided  but  the  statement  or  observation  was  made  on concession of  the parties;  and as regards statement of law at pages  91-92 in Russell on Arbitration it must be pointed out that  the passage  pressed into  service by  Counsel  is merely a half portion of the statement of law but the fuller statement of  law, as  we  shall  indicate  later,  gives  a different picture.]  These authorities  do not  suggest that the arbitrator or umpire may not decide these questions even

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 55 of 61  

provisionally or  tentatively,  In  other  words,  there  is nothing in  the general law of arbitration either English or Indian which  prevents the  arbitrators or  an  umpire  from deciding questions  of their  own jurisdiction provisionally or tentatively  and to  proceed to make their awards on that basis,  though   it  is  clear  that  their  provisional  or tentative decision  on questions  of their  own jurisdiction would be subject to the final determination by the Court and if the  Court takes  a contrary view their award will not be given effect  to and  in our view this is exactly the scheme of the Foreign Awards Act.      It may  not be  out of  place to  mention here that the statement of  Albert Jan  van den  Berg that  many  national arbitration laws  allow the arbitrator to give a provisional ruling  on   his  competence  in  order  not  to  delay  the arbitration and to alleviate dilatory tactics by obstructing respondents is  borne out  in regard  to the  general law of arbitration both  English and  Indian by  several decisions. The position under English law has been summarised in Russel on Arbitration  at pages  91-92 where  a fuller statement of law (to which we had adverted earlier) appears thus: 503      "It can  hardly be within the arbitrator’s jurisdiction to decide  whether or  not  a  condition  precedent  to  his jurisdiction has been fulfilled. It has indeed several times been said  bluntly that an arbitrator has no power to decide his own  jurisdiction and  in one  case where  rules  of  an institution  prepared   to  conduct  arbitrations  gave  the arbitrator such power, the Court will ignore this when asked to enforce  the  award,  and  decide  the  question  itself. However, an arbitrator is always entitled to enquire whether or not  he has  jurisdiction. An umpire faced with a dispute whether or  not there  was a  contract from  which alone his jurisdiction, if any, can arise can adopt one of a number of courses. He  can refuse  to deal  with the matter at all and leave the  parties to  go to  court, or  he can consider the matter and if he forms the view that the contract upon which the claimant  is relying  and from  which,  if  established, alone his  jurisdiction can  arise is in truth the contract, he  can   proceed  accordingly."  (The  first  part  of  the statement  is  based  on  Dalmia  Dairy  Industry’s(1)  case (supra) while  the  latter  part  is    based  on  Brown  v. Oesterrei-chischer Waldbesitzer  R. Gmbh  and Per Roskill J. in Luanda Exportadora and Ors. v. Tamari & Sons & Others,(2)      So far  as Indian  Law is  concerned  the  position  is clarified  in   Vallabh  Pitti   v.  Narsingdas  (supra)...a decision on  which Counsel  for Renusagar  relied where  the Bombay High  Court has  held that  the jurisdiction  of  the arbitrators to  decide the  question  of  existence  of  the contract which  contains an arbitration clause is not wholly taken away  by  mere  denial  of  its  existence;  that  the arbitrator may consider the question of jurisdiction, not to give final  and binding  judgment on  that question  but  in order to  determine what course they should adopt; that they may in a case hold that they have no jurisdiction and direct the party  who affirms the jurisdiction to obtain a decision of the Court under the Arbitration Act but on the other hand if they  are satisfied  that they have got jurisdiction they may proceed with the arbitration and make their award; but a decree in  terms of  such award may not be made by the Court if at the time when one is sought the Court decides question of jurisdiction otherwise. The High Court pointed out that a similar  view   was  taken  by  Bachawat,  J.  in  Pannallal Sagoremull v.  Fatey  Chand  Muralidhar(3)  and  that  after deciding the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 56 of 61  

504 question in  issue he affirmed the award and passed a decree in terms   thereof.  Similarly, it  may be  pointed out that there is no difference between English law and Indian law on the point  that an  arbitration agreement  which empowers an arbitrator to decide the question of its existence, validity or effect  (scope) is neither invalid nor void. In Heyman v. Darwins Ltd.  Lord Wright’s  observations at  p. 385  of the Report clearly  suggest that  there can be a valid agreement to refer  any dispute  to arbitration including a dispute as to whether  the contract  in which the arbitration clause is contained was  ever entered into at all, or whether if there was, it  had been avoided or ended. As regards Indian law in Fertilizer Corporation  of India  v.  Chemical  Construction Corporation(1) the  Bombay High  Court  has  clarified  this position while  dealing with  Rules 3 and 4 of Article 13 of the Rules  of Conciliation  and Arbitration  framed  by  the International  Chamber   of   Commerce   under   which   the arbitrators were clothed with a power to decide, inter alia, a question as to the existence and validity of the Contract. Not only  has the High Court held that the conferral of such power on  the arbitrators does not render the Rules void but has further gone on to hold that if such a plea is raised by way of a defence in an application for stay of suit under s. 34 of  the Arbitration  Act it  will be  for  the  Court  to consider the  validity of  the arbitration  agreement itself and if  in the  opinion of  the  Court  the  contract  which contains the  arbitration clause  is valid  no  question  is likely to  arise before  the arbitrators  on that  point and even if  such question were to arise the arbitrators will be concluded by  the decision  of the  Court. We  may point out that following  this decision  in  Fertilizer  Corporation’s case (supra) the Court of Appeal in Dalmia Dairy Industries’ case (supra)  has held  that the Rules of I.C.C enabling the Arbitral Tribunal  to decide  its own  jurisdiction were not void (vide  page 290 of the Report) and it has further noted without disapproval  the further  observations of the Bombay High Court  that  if  the  court  once  itself  decides  the question that  the arbitrators  had jurisdiction  then  that point would  hardly be  raised before the arbitrators and if it were  the arbitrators  would be  bound by the decision of the Court on the point.      In view of the position which arises from the aforesaid discussion it  is really  unnecessary for  us to go into and decide the  question whether, in cases where the arbitration clause contained in the underlying Commercial Contract is so widely worded as to include 505 within its scope the questions of its existence, validity or effect (scope),  the decided  cases have  made a distinction between questions  as to  the existence  or validity  of the agreement on  the one  hand and  its effect  (scope) on  the other and  have held  that in  the case  of the former those questions cannot  be decided by the arbitrators, as by sheer logic the  arbitration  clause  must  fall  along  with  the underlying Commercial  Contract which is either non-existent or illegal,  while  in  the  case  of  the  latter  it  will ordinarily be  for the  arbitrators  to  decide  the  effect (scope) of  the arbitration agreement as is contended for by Counsel for  G.E.C., because  both under  the scheme  of the Foreign Awards  Act as  well as  under the  general  law  of arbitration obtaining  in England and in India, the decision of the  arbitrator on  the question  of his own jurisdiction will have  to  be  regarded  as  provisional  or  tentative, subject to  final determination  of  that  question  by  the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 57 of 61  

Court. However,  on a consideration of the rival authorities that have  been cited  at the Bar bay Counsel on either side we are  inclined to  accept the  contention of  Counsel  for G.E.C. for  the following  reasons: (a)  that conceptually a challenge to  the existence  or validity  of the arbitration agreement contained  in an underlying Commercial Contract is fundamentally different  from an  inquiry into the scope and effect of  such agreement  in as  much as the former goes to the root  of the  arbitration agreement  whereas the  latter pre-supposes that  the arbitration  agreement exists in fact and in law and the inquiry is then undertaken as to its true scope and  effect; (b) that indisputably, decided cases have made this  distinction between  the two  concepts,  e.g.  in Jawahar Lal  Barman’s case (supra) this Court has noted this distinction for  the purposes  of procedural aspects arising under ss. 31(2), 32 and 33 of the Arbitration Act, 1940, but the  English  cases  particularly  Heyman  v.  Darwins  Ltd. (supra) and  Willesford v.  Watson (supra)  have  made  that distinction substantively;  (c)  that  certain  observations made by this Court in para 6 of its judgment in Water Supply Service India  (P) Ltd.  v. The Union of India and Others(1) on which  Counsel for  Renusagar have  relied in  support of their contention  that existence of an arbitration agreement is the  same as  the effect  (scope) thereof, do not, in our view, have  the effect of equating the question of the scope of the  arbitration  agreement  with  the  question  of  its existence; in  that case  the application made under s. 5 of the Arbitration  Act to revoke the arbitration was obviously mis-conceived inasmuch as the ground on which the revocation was sought  was that  the disputes  sought to be referred to arbitration were  not within  the purview of the arbitration clause and 506 it was  in that  context that  the observations were made in para 6  of the  judgment to  say that  such a dispute was as regards the existence of the arbitration agreement; in fact, the ratio of the decision was that the controversy raised in the case  fell within  the scope of s. 33 of the Arbitration Act and  not s.  5; in any case, in our view, the incidental observation in  para 6 of the judgment in that case on which Counsel  for  Renusagar  have  relied  cannot  outweigh  the distinction which  has been  noticed by  this Court  in  its well-considered  judgment   in  Jawahar  Lal  Barman’s  case (supra); (d)  that an analysis of several decisions cited at the Bar,  we venture  to suggest,  shows that almost all the decision which  articulate the  principle broadly  by saying that an  arbitrator has  no power to decide questions of his own jurisdiction  are cases  in which the question of either the existence  or the  validity of the arbitration agreement was involved,  whereas whenever the question of arbitrator’s jurisdiction depended  upon  the  scope  or  effect  of  the arbitration agreement Courts appear to have readily directed the parties  to go  before the  arbitrators; and  (e) in any event the  decision of  the Court  of Appeal  in Chancery in Willesford  v.   Watson  (supra)-which   decision  has  been annotated and  digested  in  Russell  on  Arbitration  (20th Edn.)-is a  clear authority  for the  proposition that where the arbitration  clause was  very widely  worded  so  as  to include  within   its  scope   any  dispute   "touching  the construction  of"   the   contract   which   contained   the arbitration clause,  the Court  would not  decide but  would leave it  to the  arbitrator to  decide the question whether the matter  in dispute  between the  parties fell within the arbitration agreement.  In fact, the Court of Appeal in that case repelled  every endeavour on the part of the appellants

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 58 of 61  

to require  the Court  to do the very thing which lay within the competence  of the  arbitrators-that is  to say, to look into the  whole matter,  to construe  the instrument  and to decide whether the thing complained of was inside or outside the agreement, and directed the parties to go to arbitration by staying the suit. It would be debatable whether in such a case where  the Court  has expressly  declined to decide the dispute involved  between the  parties and  has directed the parties to  go to  arbitration, the arbitrator’s decision on the question  of his  jurisdiction would again be subject to Court’s decision. Would it not be a case similar to the case falling within  the principle  of a specific question of law being expressly  referred to  an arbitrator  whose  decision thereon finally  binds the parties: But as stated at the out set, the  aforesaid question  on which we have expressed our view, does not arise for decision in this case.      It was  next contended  by Counsel for Renusagar that a stay, if 507 granted as  sought by  G.E.C. in  a petition  under s. 3, it would render Renusagar’s suit dead for all practical purpose and there  will be  nothing left  to be  decided in the suit either  because   the  suit   is  stayed   indefinitely   or alternatively  because  the  decision  on  the  issue  would operate as  red judicata  in the  suit, and,  therefore,  no relief of stay should be granted which will have such effect merely on  a prima  facie view or a pro tanto finding on the issue of  arbitrability of  the claims,  in support  Counsel relied upon  a decision  of  the  Allahabad  High  Court  in Strauss Company’s  case (supra)-a  case  arising  under  the earlier Indian  Arbitration Act  1899-where that  High Court has expressed  the view  that, "a  stay order under s. 19 of the Arbitration  Act, when the arbitration has in fact taken place, is  sufficient finally  to dispose  of the  suit". In other words,  the contention  was that  a section 3 petition could  not  be  a  proper  stage  to  decide  the  issue  of arbitrability of  the claims  but the same should be decided in the  suit when it will be finally tried. If regard be had to the  provisions of  s. 3  as well  as the  legal position arising under  decided cases the contention will be found to be devoid  of any  substance. It  may be  that a stay of the suit either under s. 3 of the Foreign Awards Act or under s. 34 of  the Arbitration  Act, 1940  may have  the  effect  of finally disposing  of the suit for all practical proposes as pointed out  by the  Allahabad High  Court. But  that is  no reason why the relief of stay should be refused by the Court if the  concerned legal  provision requires  the Court to do so.  Here  we  are  concerned  with  s.  3  which  makes  it obligatory upon  the Court  to stay the legal proceedings if the conditions of the section are satisfied and what is more the section  itself requires that before any stay is granted the Court should be satisfied that the arbitration agreement is valid,  operative and capable of being performed and that there are  disputes between  the parties  with regard to the matters agreed  to be referred to arbitration (condition (v) and (vi)  mentioned earlier).  In other  words, the  section itself indicates  that the  proper stage  at which the Court has to  be fully  satisfied about these conditions is before granting the  relief of stay in a s. 3 petition and there is no question  of the  Court  getting  satisfied  about  these conditions on  any prima  facie view  or a pro tanto finding thereon. Parties  have to  put their  entire material before the Court  on these issues (whichever may be raised) and the Court has  to record  its finding  thereon after considering such material.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 59 of 61  

    It may  be stated  that though  s.34 of the Arbitration Act, 1940  confers a discretion upon the Court in the matter of granting  stay of  legal proceedings  where there  is  an arbitration agreement,  it cannot  be disputed  that  before granting the stay the Court has to satisfy itself 508 that arbitration  agreement exists factually and legally and that the  disputes between  the parties are in regard to the matters agreed  to be referred to arbitration (these aspects fall within the phrase ’if satisfied that there is no reason by the matter should not be referred’ occurring therein) and decided cases  have taken  the  view  that  the  Court  must satisfy itself  about these matters before the stay order is issued. In other words, Court under s.34 must finally decide these issues before granting stay. In Phagwandas v. Atmasing on a  consideration Act  the Bombay of the scheme underlying ss. 32,33 and 34 of the Arbitration High Court has taken the view that  is a  defendant who applies for stay s. 34 has to say that  there is  an arbitration  agreement  that  if  the plaintiff says  that there  is no  agreement then the issues arises between  the parties  and there  nothing in  s. 34 to prevent the  Court from  deciding that issue to enable it to pass an order under that Section. The same position under s. 4(1) of  the English Arbitration Act, 1950 has been affirmed in a  judgment of  the Court  of Appeal in England in Modern Building Wale  Ltd. v.  Limmer and  Trinidad Co. Ltd.(2) The Court of  Appeal  held  that  where  a  party  claimed  that proceedings  should   be  stayed   because  there   was   an arbitration agreement in force the Court was under a duty to construe the  terms of  the  contract  in  order  to  decide whether there  was  a  valid  arbitration  clause  and  that question had  to be  determined at  an  interlocutory  stage because it had to be done before the defendant took any step in the action. In Anderson Wright Ltd. v. Meran & Co.(3) the respondent (Moran & Co.) sold certain goods to the appellant under a  number of similar contracts, which contained a wide arbitration clause.  Respondent, however,  described himself as broker  when signing the contracts. The appellants wanted to claim damages from the respondent for non-delivery of the goods under the contract-notes and desired to refer the same to  the   arbitration.  To   prevent  this  arbitration  the respondent filed  a suit for a declaration that he was not a party to  the said  contracts, he  having signed the same as broker and  that he had incurred no liability thereunder and he  further  prayed  for  the  consequential  relief  of  an injunction restraining  the appellant  from claiming damages in respect  of the said contracts. The appellant applied for the stay  of the  suit under  s. 34  of the Arbitration Act. Learned trial  Judge granted stay of the suit. The Appellate Bench of  the High  Court took the view that the only matter in dispute  between parties was whether the respondent was a party to  the contract  or not  and that  this  dispute  was outside the 509 scope of  the  arbitration  agreement  but  no  opinion  was expressed on  the  question  whether  there  was  a  binding arbitration agreement  between the  parties (which  was  the only  issue   in  the  suit,  the  relief  on  merits  being consequential) since  that would,  in  the  opinion  of  the Appellate Court, create a bar of res judicata against one of the party.  This Court,  however, held that it was incumbent upon a Court, when invited to stay a suit under s. 34 of the Arbitration Act,  to decide  first of all whether there is a binding arbitration agreement between the parties or not. At page 870 of the Report the Court has observed thus:

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 60 of 61  

    "In this  case it  is certainly  not admitted  that the      respondent was  a party  to the contract. In fact, that      is  the  subject-matter  of  controversy  in  the  suit      itself. But,  as has  been said  already, the  question      having been  raised in  this application under s. 34 of      the  Arbitration   Act,   the   Court   has   undoubted      jurisdiction to decide it for the purpose of finding as      to whether  or  not  there  is  a  binding  arbitration      agreement between the parties to the suit." The Court actually sent the case back for a decision of that question with  a direction  that if  the Court  came to  the conclusion that  the respondent was, in fact, a party to the contracts, the  suit shall be stayed and the appellant would be allowed  to proceed by way of arbitration but, if, on the other hand,  the finding  was adverse  to the  appellant the application  for   stay  will   be  dismissed.  Counsel  for Renusagar pointed out that the suit did not merely raise the issue that  the respondent  was not a party to the contract- notes and that therefore, there was no arbitration agreement between the  parties but  also  claimed  relief  on  merits, namely,  an   injunction  restraining   the  appellant  from claiming damages  in respect  of  the  said  contracts  and, therefore, the  direction to  stay  the  suit  in  case  the finding on the main issue went a against the respondent, had some meaning  but in the instant case before us no relief on merits has  been claimed  by Renusagar  in  its  suit  which merely raises  the issue  of arbitrability of the claims. In our view,  this distinction is neither valid nor relevant to the question under consideration. Not valid because the only issue which  the suit  (filed by  Moran &  Co.)  raised  was whether there  was binding arbitration agreement between the parties or  not and an adverse decision thereon in a sec. 34 application would  have had  the effect  of disposing of the suit for  all practical  purposes, the  consequential relief automatically falling  to the ground along with such adverse decision. Not  relevant because  the question  of  issue  is whether a  sec. 34  application is proper stage for deciding such issue  though it  may have  the  effect  of  the  issue becoming res-judicata in 510 the suit.  What is  of significance  is that the decision of this Court  does show  that notwithstanding  the fact that a finding on  the issue that the respondent was a party to the contracts  would   have  operated  as  res-judicata  in  the respondents’ suit,  the Court  directed  that  issue  to  be decided in  a s.  34 petition  for  stay.  In  deciding  the question under  s. 34 in this manner the Court expressed its entire agreement  with the  view enunciated  by Mr.  Justice S.R.  Das   in  Khushiram  v.  Hantumal  that  where  on  an application made  under sec.  34 of  the Arbitration Act for stay of  a suit,  an issue  is raised  as to  the formation, existence  or   validity  of  the  contract  containing  the arbitration clause,  the Court is not bound to refuse a stay but may  in its  discretion, on  the application  for  stay, decide the  issue as  to the  existence or  validity of  the arbitration   agreement   even   though   it   may   involve incidentally a  decision as  to the validity or existence of the parent  contract. If this is the position under s. 34 of the Arbitration  Act which  confers discretionary power upon the Court  a fortiori  the Court  acting under  s. 3  of the Foreign Awards  Act must  decide such  issues at  that stage when the grant of stay is obligatory.      In  the   instant  case  the  issue  pertained  to  the arbitrability of  the three  claims  under  the  Arbitration clause  in   the  contract  and  depended  upon  the  proper

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 61 of 61  

construction thereof  in light of the conduct of the parties and surrounding circumstances and no prejudice was caused to any of  the parties  as  both  Renusagar’s  application  for injunction and  G.E.C.’s stay  petition under  sec.  3  were heard together  and parties  did put  before the Court-Trial Court, the  Appeal Court  and even   before  us  the  entire material such  as each  wanted to  rely upon  and  sought  a decision on  the concerned  issue and  we are satisfied that the finding  recorded by  both the lower courts on the issue is correct;  and in  that view  of the matter the prayer for injunction restraining arbitration sought by Renusagar could not be  granted and  was rightly  refused. The triable issue raised in  the suit having been found upon against Renusagar no question of balance of convenience survives.      We would  reiterate that  the Court’s  decision on  the issue of  arbitrability of  three claims  will  have  to  be regarded as  final, conclusive  and binding  and that  issue would not  arise before  the Court  of arbitration of I.C.C. and even if it is raised it would be purely academic.      In the  result both  the  appeals  filed  by  Renusagar against G.E.C. are dismissed with costs. S.R.                                      Appeals dismissed. 511