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PETITIONER: UNION OF INDIA

       Vs.

RESPONDENT: SALWEEN TIMBER CONSTRUCTION (INDIA) & ORS.

DATE OF JUDGMENT: 25/09/1968

BENCH: RAMASWAMI, V. BENCH: RAMASWAMI, V. SHAH, J.C. GROVER, A.N.

CITATION:  1969 AIR  488            1969 SCR  (2) 224  CITATOR INFO :  RF         1971 SC1495  (32)  RF         1984 SC1072  (41)  F          1985 SC1156  (45)

ACT:     Arbitration--Arbitration  clause  in   contract--Dispute whether arises out of contract--Test for determining.

HEADNOTE:     There was a dispute between the appellant and respondent regarding the supply of timber.  In pursuance of the  clause in  the  contract which provided that in the  event  of  any question  or  dispute  arising under  the.  contract  or  in connection  with  the  contract it  should  be  referred  to arbitration, the dispute was so referred.  One of the  items in dispute was a ’claim by the respondent that there was  an excess  supply  of timber to cover  up  possible  rejection, which should be returned by the appellant with  compensation for deterioration, or that payment should be made for it  at the market value.  The appellant contended that the terms of the  contract did not require the respondent to  tender  for inspection  an,of  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 contract or in connection with the contract.     On the question whether the arbitrators had jurisdiction to adjudicate upon the claim,     HELD:  The  test for determing the question  is  whether recourse  to  the contract, by which both the  parties   are hound,   was   necessary  for  the  purpose  of  determining whether  the claim of  the respondent was    justified    or otherwise.  Since  it  was  necessary  to  have recourse  to the  terms of the, contract for the purpose of deciding  the matter  in dispute, the matter was within the scope  of  the arbitration  clause and the arbitrators had jurisdiction  to decide it. Ruby  General  Insurance  Co.  Ltd. v.  Peary   Lal   Kumar, [1952] 5.C.R. 501, followed. Piercy  v. Young, 14 Ch.D. 200 and Turnock v.  Sartoris   43

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Ch.D.150, explained.

JUDGMENT:     CIVIL  APPELLATE JURISDICTION: Civil Appeal No.  549  of 1966.     Appeal by special leave from the order dated October 23, 1964  of  the Punjab High Court, Circuit Bench at  Delhi  in Civil Revision No. 438-D of 1964. V.A. Seyid Muhammad and S.P. Nayar, for the appellant. S.V. Gupte and A.K. Nag, for respondents Nos. 1 and 2. A.G. Ratnaparkhi, for respondent No. 5. 225 The Judgment of the Court was delivered by Ramaswami,  J.This  appeal is  brought  by   Special   leave against  the  judgment  of the Punjab High  Court  in  Civil Revision No. 438-D of 1964 by which the revision petition of the  appellant  against  the  order  of  Shri  D.R.  Khanna, Subordinate  Judge, 1st Class, Delhi dated 20th April,  1964 in Suit No. 128 of 1’963 was dismissed in limine.  Suit  No. 128 of 1963 was an  application by the Union of India  under sections  5, 12(2),31(3), 32 and 33 of the Arbitration  Act, 1940  for obtaining a declaration that the reference of  the claim  of the respondent firm in respect of excess  quantity of  timber alleged to have been delivered and certain  other matters was not covered by the arbitration agreement and for leave to revoke the authority of the Arbitrators and Umpire. The  petition was rejected by the Subordinate Judge  by  his order dated 20th April, 1964.       By a savingram dated 21st December, 1953 the Union  of India  (hereinafter  called the appellant)  entered  into  a contract of purchase of ’1,01,750 cubic feet of teak logs at Rs.  9/12/- Vet c.ft. to be delivered F.O.R. Halisahaar  and Lillooah, both in West Bengal near Calcutta.  The  consignee was the District Controller of Stores, Eastern Railway.  The formal  acceptance  of  tender confirming the savingram  and containing  the  other terms of the contract was  issued  on 13th  January,  1954.   Besides the quantity  of  teak  logs originally  contracted to be supplied, the  respondent  firm subsequently  supplied  a quantity of 1676.95  c.ft.   Burma teak  squares  at  the  same  rate  and  the  contract   was accordingly amended on 13th December, 1957.  It was provided in  clause  17(c)  of  the acceptance  of  tender  that  the respondent  firm was to offer the timber for  inspection  at its own premises at Halisahaar and  Lillooah.  Although  the delivery   time  was extended from time to time,  upto  26th January,  1958. the respondent firm supplied only  77,21/.89 cubic  feet of timber and  the contract  in respect  of  the unsupplied  quantity  was cancelled on 20th june,  1958  and that  the  supplied quantity was repurchased  by  Government from third party at a loss of Rs. 1,54,541.36 on 23rd  July, 1958.   Including this item the  appellant made  a claim  of Rs. 3,50.085.99 against the respondent firm out of which  it recouped  Rs. 1,79.366 from the sums due to  the  respondent firm leaving a balance of Rs.1.70,719.99.  The  contract  in question is governed by the arbitration agreement  contained in clause 21 of the form W.S.B. 133 which states as  follows :--                   "Arbitration:               In  the  event  of  any  question  or  dispute               arising  under     these  conditions  or   any               special   conditions   of  contract   or   in-               connection  with this contract (except  as  to               any matters the decision of which is specially

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             provided for 226               by   these  conditions)  the  same  shall   be               referred  to the award of an arbitrator to  be               nominated  by the Purchaser and an  arbitrator               to be nominated by the Contractor, or in  case               of  the said arbitrators not agreeing then  to               the award of an Umpire to be ,appointed by the               arbitrators  in writing before  proceeding  on               the   reference  and’  the  decision  of   the               arbitrators,  or  in the ’event of  their  not               agreeing,  of  the Umpire appointed  by  them,               shall   be  final  and  conclusive   and   the               provisions  of  the  Indian  Arbitration  Act,               1940,  and  of the Rules  thereunder  and  any               Statutory   modification  thereof  shall’   be               deemed to apply to and be incorporated in this               contract.                     Upon  every and any such reference,  the               assessment  of  the costs  incidental  to  the               reference  and award respectively shah  be  in               the  discretion of the arbitrators or  in  the               event  of  their not agreeing  of  the  Umpire               appointed by them."     In pursuance of the arbitration .clause the   respondent firm appointed one Mr. T.R. Sharma as its arbitrator and the appellant  appointed Mr. R.R. Desai, Deputy  Legal  Adviser, Ministry  of Law, Government of India as its  nominee.   Mr. P.S.  Bindra, a retired District Judge was appointed as  the Umpire  by order of the Sub-Judge dated 2-8-1961.  Both  the parties   filed   their   respective   claims   before   the arbitrators.   The  respondent  firm claimed a  sum  of  Rs. 73,50,000 while the appellant contended that the  respondent committed  breach  of  the contract  by  not  supplying  the stipulated  quantity  of timber under the contract  and   as such  claimed  damages to the extent of Rs.  3,00,000.   The case  of the respondent firm was that in order to  cover  up possible  rejection, a quantity of timber much in excess  of the contracted quantity was despatched to the consignees and the excess quantity measuring 3,400 tons i.e. 1,70,000 cubic feet was still lying with the Lillooah consignnee and  1,500 tons  i.e. 75,000 cubic feet with the  Halisahaar  consignee and  had not been returned despite repeated  requests.   The respondent  firm claimed return of this quantity  of  timber and   compensation   for   its   deterioration.    It    was alternatively  contended that in case the Government  failed to  return  the  whole or part of the  excess  timber,  then payment for that quantity at the market rate should be made. The appellant in its reply denied the allegation relating to the  delivery  and  retention  of excess quantity.   It  was specifically denied that 4,900 tons or any quantity was  due to  be  returned  to  the respondent firm  or  that  it  was entitled to recover Rs. 73,50,000 or any amount as  claimed. It  was  contended  that  in  terms  of  the  contract   the respondent firm was to offer inspection of the store at  its own  premises ’at Lillooah and Halisahaar but instead  doing so, the respondent firm started to despatch the logs to  the DCO’s Lillooah and Halisahaar to be 227 inspected  at the consignees’ premises.  This was  done  for its  own  convenience and at its own  risk.   The  inspected stores  were  retained by the consignee while  the  rejected stores  were to be removed by the respondent firm  from  the consignee’s    premises  at  their  own  expense.   It   was submitted that the dispute raised by the respondent firm was

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outside the scope of the arbitration agreement and that  the arbitrators  had no jurisdiction to entertain such a  claim. After  hearing the parties, the Subordinate  Judge  rejected the  application  of the appellant by his order  dated  20th July, 1964.       It  is necessary at this stage to quote  the  relevant clauses of the contract.  Clause 13 ( 1 ) provides:                     "Inspection  and  Rejection:  Facilities               for  Test  and  Examination:---The  Contractor               shall afford at his own expense the  Inspector               all  reasonable accommodation  and  facilities               for  satisfying  himself that the  stores  are               being or have been manufactured in  accordance               with the particulars and for this purpose  the               Inspector  shall have full and free access  at               any   time   during  the  contract    to   the               Contractor’s   work   and  may   require   the               Contractor  to make arrangements for  anything               to  be  inspected at his premises  or  at  any               other place and the Contractor shall reserve a               similar  right as regards any sub-contract  he               may make.               The  Contractor shall pay all costs  connected               with  such  tests and provide,  without  extra               charge,  all  materials,  tools,  labour   and               assistance  of every kind which the  Inspector               may  consider  necessary  for  any  test   and               examination other than special or  independent               tests which he shall require to be made on the               contractor’s  premises, and shall pay all  the               costs    attendant    thereon,failing    these               facilities  (in regard to which the  inspector               will  be the sole judge) at his  own  premises               for  making  the tests, the  Contractor  shall               bear  the  cost  of Carrying  out  such  tests               elsewhere".                     Clause 13(4) reads as follows :--               "Inspection  and  rejection: The  whole  of  a               consignment   may   be   rejected,   if,    on               inspection,  a portion upto 4 per cent of  the               consignment  (at  the sole discretion  of  the               Inspector) is found’ to be unsatisfactory."                     Clause 13(5) states:               "Rejection:  If  any stores  are  rejected  as               aforesaid  then,  without  prejudice  to   the               foregoing    provisions,    the     Secretary,               Department  of Supply shall be at  liberty  to               :-- 228               (a) allow the contractor to resubmit stores in               replacement of  those  rejected within a  time               specified  by  the  Secretary,  Department  of               Supply,  the  contractor bearing the  cost  of               freight  in  such  replacement  without  being               entitled to any extra payment, or               (b) buy the quantity of the stores rejected or               others  of a similar nature elsewhere  at  the               risk  and  cost  of  the  contractor   without               affecting   the  contractor’s   liability   as               regards supply of any further consignment  due               under the contract, or               (c)  terminate the contract and  recover  from               the  con-    tractor the  loss  the  purchaser               thereby incurs".     On behalf of the appellant Dr. Seyid Mohammad  presented

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the  argument  that the dispute regarding  the  respondent’s claim in respect of the excess quantity of timber  measuring 4,900 tons said to have been tendered but not inspected  was not   a  dispute  ’arising  under  the  contract"  0r    ’in connection with the contract’ and hence the arbitrators  had no jurisdiction to adjudicate upon that claim. It was stated that  the terms of contract did not require  the  respondent firm to tender for inspection any quantity in excess of  the contracted  quantity  of timber and the alleged  placing  of unlimited   stocks  of  timber  at  the   disposal  of   the Government  officials far in excess of the quantity  ordered was  beyond the scope of the contract.  It was argued   that the  claim  should  be  treated as a  claim  relating  to  a transaction of involuntary bailment and not to anything done in  the  performance.  implementation or  execution  of  the contract.   It was said that the claim for return  of  these goods  and damages for deterioration or in  the  alternative for   their  market  value was a claim in  detinue  and  the dispute  was  not  hence  a  dispute  "arising  out  of  the contract"  or  ’in connection with the contract’ but  was  a dispute  relating, to a tort of wrongful detention.   We  do not  think that there is any justification for the  argument put forward on behalf of the appellant.  In our opinion. the claim made by the respondent firm was a claim arising out of the  contract.  The  test for determining  the  question  is whether  recourse to the contract by which both the  parties are  bound  is  necessary for  the  purpose  of  determining whether  the  claim of the respondent firm iS  justified  or otherwise.  If it is necessary to take recourse to the terms of  the contract for the purpose of deciding the  matter  in dispute. it must be held that the matter is within the scope of   the  arbitration  clause  and  the   arbitrators   have jurisdiction  to  decide this case.  In Herman  &  lint.  v. Darwins Ltd.(1) the law on the point is very clearly  stated in the following passage: (1) [1942] A.C. 356 at 365. 229                     "An  arbitration  clause  is  a  written               submission  agreed  to by the parties  to  the               contract, and, like other written  submissions               to arbitration, must be construed according to               its   language  and  in  the  light   of   the               circumstances  in  which it is made.   if  the               dispute is whether the contract which contains               the clause has ever been entered into at  all,               that issue cannot go to arbitration under  the               clause,  for the party who denies that he  has               ever  entered  into the  contract  is  thereby               denying  that  he  has  ever  joined  in   the               submission.   Similarly, if one party  to  the               alleged   contract  is contending that  it  is               void  ab  initio (because,  for  example,  the               making  of  such a contract is  illegal),  the               arbitration clause cannot operate, for on this               view the clause itself also is void.  But,  in               a  situation where the parties are at  one  in               asserting  that  they entered into  a  binding               contract, but a difference has arisen  between               them  whether there has been a breach  by  one               side  or the other, or  whether  circumstances               have ,arisen which have discharged one or both               parties   from   further   performance,   such               differences should be regarded as  differences               which  have  arisen ’in respect  oF  or  "with               regard  to", or "under" the contract,  and  an

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             arbitration   clause  which  uses  these,   or               similar   expressions  should   be   construed               accordingly". In  Stebbing  v.  Liverpool &  London  and  Globe  Insurance Company Ltd. (1) the policy of insurance contained a  clause referring to the decision of an arbitrator "all  differences arising  out of this policy".  It also contained  a  recital that the assured had made a proposal and declaration as  the ’basis  of  the contract, and a clause to  the  effect  that compliance  with  the conditions indorsed  upon  the  policy should be a condition precedent to any liability on the part of the insurers.  One of the conditions provided that if any false declaration should be made. e or used in support of  a claim all benefit under the policy should be forfeited.   In answer to a claim by the assured, the insurers alleged  that statements in the proposal and declaration were false.  When the  matter   came  before  tire  arbitrator,  the   assured objected  that this was not a difference in the  arbitration and that the arbitrator had no power  to  determine  whether the  answers were true or not, or to determine  any  matters which  called  in question the validity of the  policy.   In holding  that the arbitrator had jurisdiction to decide  the matter, Viscount Reading, C.J. observed:               "If  the  company were seeking  to  avoid  the               contract in the true sense they would have  to               rely  upon some matter outside the,  contract,               such as a misrepresentation (1) [1917] 2 K.B. 433. 230               of some material fact, inducing the  contract,               of which force and effect are not declared  by               the   contract  itself.  In  that   case   the               materiality  of  the fact and  its  effect  in               inducing the contract would have to be  tried.               In  the present case the company are  claiming               the benefit of. a clause in the contract  when               they say that the parties have agreed that the               statements  in question are material and  that               they induced the contract. If they succeed  in               escaping  liability that is by reason  of  one               of   the clauses in the policy.  In  resisting               the claim they are not avoiding the policy but               relying   on  its  terms.   In   my   opinion,               therefore,  the  question whether or  not  the               statement is true is a question arising out of               the policy". The  principle  has been reiterated by this  Court  in  Ruby General  Insurance Co’. Ltd. v. Pearey Lal Kumar &  Anr.(1). In  that case the appellant company insured a car  belonging to respondent No. 1 and  issued the policy which  contained, inter alia, the following terms :-                    "All  differences  arising  out  of  this               policy shall be referred to the decision of an               arbitrator    to   be   appointed    by    the               parties   ....  If the company shall  disclaim               liability   to  the  insured  for  any   claim               hereunder  and  such claim  shall  not  within               twelve  calendar months from the date of  such               disclaimer have been referred  to  arbitration               then the claim shall have been deemed to  have               been abandoned and shall not be recoverable". The car was lost and company through its Branch Manager dis- claimed liability on three different dates.  The insured did not  take  any  action in regard to the  appointment  of  an arbitrator  until  more than twelve months  after  the  last

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disclaimer  by the company.The case of the company was  that the  insured must be deemed to have abandoned his  claim  by virtue  of  the  contract  of  insurance  policy  while  the respondent averted that there was never any valid disclaimer by the company of its liability as the Branch Manager had no authority  to disclaim the liability and it could have  been disclaimed  only  by  the resolution of  the  company.   The company  made  an  application under s.  33  of  the  Indian Arbitration Act praying for a declaration that the reference to  arbitration  was illegal and the award if  made  by  the arbitrator would not bind the company.  It was contended  on its  behalf  that the arbitration clause had  ceased  to  be operative and the question as to the existence and  validity of the arbitration agreement was triable by the court  under s. 33 of the Arbitration Act and not by the arbitrator.  The argument  was rejected by this Court.  It was held that  the point on which the parties were in dispute was a difference (1) [1952] 3.C.R. 501. 231 arising out of the policy, because recourse to the  contract by  which both the parties were bound was necessary for  the purpose  of determining the matter in dispute between  them. As  there was no contention raised by either of the  parties that  there was no contract entered into at all or  that  it was void ab initio the arbitrator had jurisdiction to decide the  matter referred to him.  In our opinion, the  principle applies to the present case and it follows that the  dispute between   the  parties  falls  within  the  scope   of   the arbitration clause.     On behalf of the appellant reliance was ’placed upon the decision of Court of Appeal in Percy v. Young(1) in which it was  held that the clause "that any differences or  disputes that  may arise between the partners shah be settled  by  an arbitrator"   does  not  include  a  dispute   whether   the partnership  has been terminated, or whether certain  shares have  been  paid  on account to the partnership  or  to  one partner alone.  In our opinion, the principle does not apply in  the  present  case  where  the  question  presented  for determination is quite different.  Counsel for the appellant also  referred to Turnock v. Sartoris(2). In that  case  the lessor  was  under a covenant to supply his  lessee  with  a specific   quantity  of  water.   The  lease   contained   a comprehensive  arbitration clause. Dispute having arisen  as to  the  supply  of water,  an  agreement  was  subsequently entered  into, binding the lessor to take certain  steps  to secure  the supply and varying the rights of the parties  in respect  of  the  supply.   The  lessee  brought  an  action alleging  that the steps agreed upon had not been taken  and that  he had not been fully supplied with water  and  asking for an action of the .damages to be taken.  The lessor moved to  have the action stayed. lit was held that  the  disputed matters  arose partly under the agreement and  were  outside the arbitration clause in the lease and that even if all the matters for which damages  were  claimed  could  be  brought within  the  arbitration clause it would not  be  proper  to refer  them  to  an  arbitration  who  would  not  have  the authority to construe the agreement to determine its  effect upon  the  lease.  It is manifest that the decision  has  no bearing  upon the question p.resented for  determination  in the present case.     For  the  reasons. already expressed, we hold  that  the claim  of  the respondent firm was within the scope  of  the arbitration clause and the application made by the appellant in  Suit  No.  128 of 1963 was.  rightly  dismissed  by  the Subordinate  Judge.  Accordingly, the appeal  fails  and  is

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dismissed with costs. V.P.S.                                     Appeal dismissed. (1) 14 oh. D. 200. (2) 43 Cn. D. 150. 232