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PETITIONER: UNION OF INDIA

       Vs.

RESPONDENT: BIRLA COTTON SPINNING & WEAVING MILLS LTD.

DATE OF JUDGMENT: 27/03/1963

BENCH: SHAH, J.C. BENCH: SHAH, J.C. SINHA, BHUVNESHWAR P.(CJ) AYYANGAR, N. RAJAGOPALA

CITATION:  1967 AIR  688            1964 SCR  (2) 599

ACT: Arbitration-Balance  of  price  of goods  supplied  under  a cotract-Liability to pay admitted-Invocation of the arbitra- tion  clause  in the contract to set off money due  Under  a different  and  independent  contract-Whether   permissible- Arbitration Act, 1940 (X of 1940), s. 34.

HEADNOTE: The respondent supplied to the appellants goods of the value of Rs. 1,06,670.89 nP. under a contract entered into by  the parties  and  received about Rs. 93,727/- as  part  payment. The  appellant declined to pay the balance on the plea  that an  amount  of about Rs. 10,625/- was due to  the  appellant under another contract between the parties.  The  respondent thereupon filed a suit before the Senior Sub-ordinate Judge, Delhi for realisation of the amount.  ’The appellant applied under  s. 34 of the Arbitration Act, 1940, for stay of  (lie suit alleging that a dispute had arisen between the  parties and there being an arbitration agreement it could be invoked by  the appellant.  The respondent submitted that there  was no dispute concerning the contract which was covered by  any valid arbitration clause and which attracted the application of s. 34 of the Arbitration Act. 600 The  Subordinate  judge  held that before  s.  34  could  be invoked  the  suit must raise a dispute in  respect  of  the matter  agreed  to  be  referred  to  arbitration  and   not independent  of  it  and as no dispute  was  raised  by  the appellant  about its liability to pay the amount claimed  by the  respondent  arising out of the contract  and  the  only dispute which was sought to be raised was in respect of  the liability of the respondent under another contract the  suit could  not  be  stayed.  An appeal against  this  order  was dismissed  in limine by the High Court.  The present  appeal was by way of special leave granted by this Court. It was contended that the terms of the arbitration agreement included  a  dispute  relating  to a  refusal  to  meet  the obligations  arising  under  the contract  even  though  the refusal was not founded on any right arising under the terms of the contract. Held  that for enforcement of the arbitration  clause  there

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must exist a dispute; in the absence of dispute between  the parties  to  the  arbitration  agreement  there  can  be  no reference. A  plea that the appellant though liable to pay  the  amount under the terms of the contract would not pay it because  it (disired  to  appropriate  it towards  another  claim  under another  independent contract cannot reasonably be  regarded as  a  dispute "under or in connection" with  that  contract under which the liability sought to be enforced has arisen. Uttam  Chand  Saligram  v.  Jewa  Mamooji,  I.L.R.  46  Cal, Chundaumull  Jahaleria  v.  Clive Mills  Go.,  Ltd.,  I.L.R. (1948)  2 Cal. 297 and Heyman v. Darwins Ltd.,  L.R.  [1942] A.C. 356 distinguished.

JUDGMENT: CIVIL APPELLATE JURISDICTION : Civil Appeal No. 609 of 1961. Appeal  by special leave from the judgment and  order  dated April  12, 1960 of the Punjab High Court (Circuit Bench)  at Delhi in First Appeal from Order No. 43-D of 1960. N. S. Bindra and   H. Dhebar, for the appellant. G.B. Pai, J.B. Dadachanji, O.C. Mathur and Ravinder  Narain, for the respondent  601 1963.  March 27.  The judgment of the Court was delivered by SHAHJ.-The  Birla  Cotton Spinning and Weaving  Mills  Ltd.- hereinafter  called ’the Company’-supplied to the  Union  of India  goods  of the value of Rs. 1,06,670.89  nP.  under  a contract dated January 30, 1956 and received Rs. 93,727/- as part  payment of the price.  The Union declined to  pay  the balance  of  Rs. 12,943.89 nP.  The Company  then  commenced Suit No. 386 of 1958 in the Court of the Senior  Subordinate Judge,  Delhi, against the Union of India for a  decree  for Rs. 10,625/- and Rs. 2, 762.50 nP. as interest from  October 12,  1956 till date of suit and interest pendente  lite  and costs of  the suit.  The Company alleged that the Union  had withheld payment of the balance of Rs. 12,943. 89 nP. on the plea  that  an amount of Rs.10, 625/- was due to  the  Union under  another  contract  between the  parties  for  a  bulk purchase  order No. PBI/ 7028-705 dated December  16,  1949. The  Company submitted that there was no such  contract  and the  dispute  raised in that behalf by the  Union  had  been referred to the arbitration of the Officer on Special  Duty, Directorate  General  of  Supplies and  Disposals  and  Shri Ramniwas  Agrawala but had since been adjourned sine die  by the arbitrators. The Union by petition dated May 19, 1959 applied under s. 34 of the Indian Arbitration Act for stay of the suit  alleging that  a  dispute had arisen between the  parties  and  there being an arbitration agreement which could be invoked  under the  circumstances and the Union being ready and willing  to do  all  things  necessary  for  the  proper  conductof  the arbitration under cl. 21 contained-in form No. WSB133.   The Company  resisted the petition contending that there was  no dispute  concerning  the contract which was covered  by  any valid submission arbitration clause, and which attracted the application 602 of s. 34 of the Arbitration Act.  The subordinate judge held that  before  s. 34 could be invoked the suit must  raise  a dispute  in respect of the matter agreed to be  referred  to arbitration and not independent of it and as no dispute  was raised  by the Union about its liability to pay  the  amount claimed  by the Company arising under the contract  and  the

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only dispute which was sought to be raised was in respect of the  liability  of the Company under another  contract,  the suit  could  not  be stayed.  An appeal  against  the  order refusing  to  stay the suit was dismissed in limine  by  the High  Court  of Punjab.  With special leave, the  Union  has appealed to this Court. The  only contention raised in the appeal is that the  terms of the arbitration agreement include a dispute relating to a refusal  to meet the obligations arising under the  contract even though the refusal was not founded on any right arising under the terms of the contract.  The arbitration  agreement is  contained in cl, 21, which is so far as it  is  material provides :               "In  the  event  of any  question  or  dispute               arising under these conditions or any  special               conditions  of contract or in connection  with               this  contract (except as to any  matters  the               decision of which is specially provided for by               these  conditions) the same shall be  referred               to the award of an arbitrator to be  nominated               by  the  purchaser  and an  arbitrator  to  be               nominated by the Contractor, or in case of the               said  arbitrators  not agreeing  then  to  the               award  of  an Umpire to be  appointed  by  the               arbitrators  in writing before  proceeding  on               the   reference  and  the  decision   of   the               arbitrators,  or  in the event  of  their  not               agreeing of the Umpire appointed by them shall               be final and conclusive and the provisions  of               the  Indian Arbitration Act, 1940, and of  the               Rules there under and  603 any Statutory modification thereof shall be deemed to  apply to and be incorporated in this contract." The  arbitration  clause  is  wide  and  includes  not  only disputes  arising  under the covenants of the  contract  but also  to disputes under conditions general or special or  in connection with the contract.  But before an order for  stay of  a proceeding maybe made under s. 34 of  the  Arbitration Act, the following conditions must co-exist : (i)there  must  be  a  subsisting  and  binding  arbitration agreement capable of being enforced between the parties ; (ii) the subject-matter in dispute in the proceeding  sought to  be  stayed must be within the scope of  the  arbitration agreement and (iii)the petition must be made to the judicial authority  by a party to the arbitration agreement or some person claiming under him at the earliest stage of the proceeding i.e.  before the filing of the written statement  or  taking any other step in the proceeding. The judicial authority may, if these conditions exist, grant stay, if it is satisfied that the party applying is and  has also been at all material times before the proceedings  were commenced  ready and willing to do all things necessary  for the  proper  conduct  of the arbitration  and  there  is  no sufficient reason for not referring the matter in accordance with the arbitration agreement. The  evidence  recorded by the Trial  Court  discloses  that there was no dispute between the Company 604 and  the Union arising under the contract on which the  suit was  filed.  The Union accepted liability to pay the  amount claimed  by  the  Company in tile  suit.   The  Union  still declined to pay the amount asserting that an amount was  due from  the company, to the Union under a  distinct  contract.

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This  amount was not sought to be set-off under any term  of the  contract under which the Company made the  claim.   The dispute raised by the Union was therefore not in respect  of the  liability  under  the  terms  of  the  contract  ’which included  the  arbitration  clause, but  in  respect  of  an alleged  liability  of the Company  under  another  contract which  it  may  be  noted  had  alreajy  been  referred   to arbitration.   The Union had no defence to the action  filed by the Company : it was not contended that the amount of Rs. 10,625/-  was  not  due to the Company  under  the  contract reliecd upon by the Company.  For enforcement of the  arbit- ration clause there must exist a dispute : in the absence of a   dispute  between  the  parties  to  the  arbi.   tration agreement, there can be no reference. It  was  urged  that mere refusal by the Union  to  pay  the amount  due is sufficient to raise a dispute "in  connection with  the  contract"  within the meaning of cl.  21  of  the Arbitration  agreement.   We arc unable to agree  with  that contention.   A dispute that the Union is not liable to  pay the  price under the terms of the contract is undoubtedly  a dispute  under the contract, and in any event in  connection with the contract.  But a plea that the Union though  liable to  pay the amount under the terms of the contract will  not pay it because it desires to appropriate it towards  another claim  under another independent contract cannot  reasonably be regarded as a dispute "under or in connection" with  that contract under which the liability sought to be enforced has arisen. The  decision  of the  Calcutta High  Court in  Uttam  Chand Saligram v. Jewa Mamooji (1). on (1)  I.L,R. 46 Cal.  603               any  Statutory modification thereof  shall  be               deemed to apply to and be incorporated in this               contract."   The  arbitration  clause  is wide and  includes  not  only disputes  arising  under the covenants of the  contract  but also  to disputes under conditions general or special or  in connection with the contract.  But before an order for  stay of  a proceeding maybe made under s. 34 of  the  Arbitration Act, the following conditions must co-exist :               (i)   there  must be a subsisting and  binding               arbitration   agreement   capable   of   being               enforced between the parties ;               (ii)  the  subject-matter  in dispute  in  the               proceeding sought to be stayed must be  within               the scope of the arbitration agreement and               (iii) the   petition  must  be  made  to   the               judicial   authority   by  a  party   to   the               arbitration agreement or some person  claiming               under  him  at  the  earliest  stage  of   the               proceeding i.   e.  before the filing  of  the               written statement or taking any other step  in               the proceeding.    The  Judicial authority may, if these  conditions  exist, grant  stay, if it is satisfied that the party  applying  is and  has  also  been  at  all  material  times  before   the proceedings  were  commenced  ready and willing  to  do  all things  necessary for the proper conduct of the  arbitration and  there  is no sufficient reason for  not  referring  the matter in accordance with the arbitration agreement. The  evidence  recorded by the Trial  Court  discloses  that there was no dispute between the Company 604 and  the Union arising under the contract On which the  suit

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was  filed. -The Union accepted liability to pay the  amount claimed  by  the  Company in tile  suit.   The  Union  still declined to pay the amount asserting that an amount was  due from  the  Company to the Union under a  distinct  contract. This  amount was not sought to be set-off under any term  of the  contract under which the Company made the  claim.   The dispute raised by the Union was therefore not in respect  of the  liability  under  the  terms  of  the  contract  ’which included  the  arbitration  clause, but  in  respect  of  an alleged  liability  of the Company  under  another  contract which  it  may  be  noted  had  already  been  referred   to arbitration.   The Union had no defence to the action  filed by the Company : it was not contended that the amount of Rs. 10,625/-  was  not  due to the Company  under  the  contract relied  upon by the Company.  For enforcement of the  arbit- ration clause there must exist a dispute : in the absence of a dispute between the parties to the arbitration  agreement, there can be no reference.     It  was urged that mere refusal by the Union to pay  the amount  due is sufficient to raise a dispute "in  connection With  the  contract"  within the meaning of cl.  21  of  the Arbitration  agreement.   We are unable to agree  with  that contention.   A dispute that the Union is not liable to  pay the  price under the terms of the contract is undoubtedly  a dispute  under the contract, and in any event in  connection with the contract.  But a plea that the Union though  liable to  pay the amount under the terms of the contract will  not pay it because it desires to appropriate it towards  another claim  under another independent contract cannot  reasonably be regarded as a. dispute "under or in connection" with that contract under which the liability sought to be enforced has arisen.      The decision of the  Calcutta High Court in Uttam Chand Saligram v. Jewa Mammoji (1), on (1)  I.L.R. 46 Cal.  605 which  reliance  was placed by the Union does  not,  in  our judgment,  support  any such proposition.  In that  case  an award of the arbitrator was challenged on the ground that it was without jurisdiction, there being no dispute between the parties,  the party applying having admitted  his  liability under  the  contract.   Rankin  J.  held  that  though   the existence  of it dispute was an essential condition for  the arbitrator’s jurisdiction, the dispute may be either in  the acknowledgement of the debt or as regards the mode and  time of  satisfying  it.  In that case the Court  held  that  the defence of the applicant applying for vacating the award was that he was not under any obligation to pay the amount  due. This is clear from the observation made on 1). 540 where the learned judge observed :               "x    x  x  but  in  truth  the   petitioner’s               later letters  to  the Chamber,  his  petition               itself in paragraphs 5, 6 and 12, paragraph  6               of the affidavit filed in this behalf in reply               all  show conclusion that he  was  withholding               payment under a claim of right so to do.  That               the claim has little substance makes his  case               so much the worse."     The  Union  is however not seeking to  withhold  payment under a claim of right so to do.  What the Union contends is that  under the contract they are liable to pay the  amounts due  but they will not pay because they have  another  claim unrelated to the claim in suit against the Company.     The  decision of the Calcutta High Court in  Chundanmull Jhaleria v. Clive Mills Co. Ltd. (1), on which also reliance

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was  placed  does not assist the Union.  In  that  case  the Court  decided that an arbitration clause in a contract,  by which  the parties thereto agree to refer their disputes  to arbitration; may be wide enough to include a dispute whether the (1)  I. L.R. (1948) 2 Cal. 297, 606 contract  itself has or has not been frustrated; but in  the present case we are not concerned about any dispute relating to frustration of the contract.       The principle of the decision of the House of Lords in Heyman v. Darwins Ltd. (1), on which reliance was placed  on behalf of the Union has also no application.  It was held in that case that when an arbitration clause in a contract pro- vides  without  any  qualification that  any  difference  or dispute which may arise "’in respect of" or "with regard to" or  "under the contract" shall be referred  to  arbitration, and  the parties are at one in asserting that  they  entered into  a binding contract, the clause will apply even if  the dispute   involves   an   assertion  by   one   party   that circumstances  have  arisen,  whether before  or  after  the contract has been partly performed, which have the effect of discharging   one  or  both  parties  from  all   subsequent liability  under  the contract, such as repudiation  of  the contract by one party accepted by the other, or  frustration of  the  contract, Viscount Simon, L.C.,  observed  in  that case:               "An   arbitration   clause   is   a    written               submission,  agreed to by the parties  to  the               contract, and, like other written  submissions               to arbitration, must be construed according to               its   language  and  in  the  light   of   the               circumstances  in  which it is made.   If  the               dispute is whether the contract which contains               the clause has ever been entered into at  all,               that issue cannot go to arbitration under  the               clause,  for the party who denies that he  has               ever  entered  into the  contract  is  thereby               denying  that he has ever joined in  the  sub-               mission.   Similarly,  if  one  party  to  the               alleged contract is contending that it is void               ab initio (because, for example, the making of               such  a contract is illegal), the  arbitration               clause  cannot operate, for on this  view  the               clause   itself  also  is  void.   But  in   a               situation where the parties are,               (1)   L. R. [1942] A. C. 356.                607               at  one in asserting that they entered into  a               binding contract, but a difference has  arisen               between  them whether there has been a  breach               by one side or the other, or whether  circums-               tances  have arisen which have discharged  one               or both parties from further performance, such               differences should be regarded as  differences               which  have arisen "in respect of,"  or  "with               regard  to"  or "under the contract",  and  an               arbitration   clause  which  uses  these,   or               similar,   expressions  should  be   construed               accordingly."   But  the  Union is not seeking to go to arbitration  on  a dispute between the parties about a breach committed by  one side or the other or whether circumstances have arisen which have   discharged   one  or  both   parties   from   further performance.  It is a case in which in substance there is no

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dispute  between the parties "under", "in connection  with", or  even "with regard to" the contract.  The plea raised  by the  Union for stay of the suit was frivolous.  It is  some- what  surprising that the plea should have been  raised  and persisted  in,  and even after going to arbitration  in  the other  case  have been brought up to  this  Court  involving large costs to the public exchequer.      The appeal therefore fails and is dismissed with costs.                              Appeal dismissed 608