Union Of India (Uoi) vs Birla Cotton Spinning and Weaving Mills

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Not extracted

Decision Date: 27 March 1963

Coram: B.P. Sinha, J.C. Shah, N. Rajagopala Ayyangar

The Birla Cotton Spinning and Weaving Mills Ltd., hereinafter called “the Company”, supplied goods to the Union of India under a contract dated 30 January 1956, the total value of which was Rs 1,06,670.89. The Union made a partial payment of Rs 93,727, but refused to pay the remaining balance of Rs 12,943.89. In response, the Company instituted Suit No. 386 of 1958 before the Senior Subordinate Judge, Delhi, seeking a decree for the unpaid sum of Rs 10,625 together with interest of Rs 2,762.50 calculated from 12 October 1956 to the date of the suit, as well as interest pendente lite and the costs of the suit. The Company alleged that the Union’s refusal to pay the balance was based on the contention that an amount of Rs 10,625 was owed to the Union under a separate bulk purchase order numbered PBI/7028‑705, dated 16 December 1949. The Company denied the existence of such a contract and pointed out that the dispute raised by the Union concerning that alleged contract had been referred to arbitration before the Officer on Special Duty, Directorate General of Supplies and Disposals, and Shri Ramniwas Agrawala, but the arbitrators had subsequently adjourned the matter sine die.

The Union, by a petition dated 19 May 1959, invoked section 34 of the Indian Arbitration Act in order to obtain a stay of the suit, asserting that a genuine dispute existed between the parties and that an arbitration agreement, contained in clause 21 of form WSB‑133, could be invoked to resolve the dispute. The Union further declared its readiness to cooperate fully with the arbitration process. The Company opposed the petition, maintaining that no dispute arising under the contract in question was covered by any valid arbitration or submission clause, and therefore section 34 could not be applied. The Subordinate Judge held that a stay under section 34 could be granted only if the suit raised a dispute that fell within the scope of the arbitration agreement, and not a dispute that was independent of that scope. Since the Union had not contested its liability to pay the amount claimed under the 1956 contract, but had only raised a dispute concerning the alleged liability under the separate 1949 purchase order, the Judge concluded that the conditions for a stay were not satisfied and refused the petition. An appeal against that order was dismissed in limine by the High Court of Punjab, and the Union obtained special leave to appeal before this Court. The sole ground raised in the appeal is that the arbitration agreement’s terms encompass a dispute relating

In this case, the Court observed that the dispute centred on a refusal to perform obligations arising under the contract, even though the refusal was not based on any right conferred by the terms of the contract. The arbitration agreement that governed the relationship was set out in clause 21, which, for all material purposes, provided that “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 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.” The Court noted that the arbitration clause was expansive; it covered not only disputes arising under the covenants of the contract but also disputes arising under any general or special conditions or any matter in connection with the contract. However, before a judicial authority could order a stay of proceedings under section 34 of the Arbitration Act, three conditions had to be satisfied concurrently: first, there must exist a subsisting and binding arbitration agreement capable of enforcement between the parties; second, the subject‑matter of the dispute in the proceeding sought to be stayed must fall within the scope of that arbitration agreement; and third, the petition for stay must be filed by a party to the arbitration agreement, or by a person claiming under such a party, at the earliest stage of the suit, namely before the filing of a written statement or any other step in the proceedings. The Court further explained that, where these conditions were met, the judicial authority could grant a stay only if it was satisfied that the applicant had, at all material times before the commencement of the suit, been ready and willing to do everything necessary for the proper conduct of the arbitration and that there was no sufficient reason not to refer the matter in accordance with the arbitration agreement. Turning to the evidence placed before the Trial Court, the Court recorded that the record showed no dispute between the Company and the Union arising under the contract that formed the basis of the suit. The Union had accepted liability to pay the amount claimed by the Company, yet it continued to refuse payment on the ground that a separate amount was due from the Company to the Union under a distinct contract. That separate amount had not been sought to be set off under any term of the contract on which the Company relied for its claim. Consequently, the dispute raised by the Union did not relate to the liability under the terms of the contract that contained the arbitration clause, but pertained to an alleged liability under another agreement that had already been referred to arbitration.

In the present matter the Union was not contesting liability under the contract that contained the arbitration clause. Instead the Union claimed that the amount sought, namely Rs 10,625, related to an alleged liability of the Company under a separate agreement, an agreement that had already been referred to arbitration. The Union offered no defence that the sum of Rs 10,625 was not due under the contract on which the Company relied. The Court observed that for an arbitration clause to be invoked there must first be a genuine dispute between the parties to that clause; without a dispute there can be no reference to arbitration.

The Union argued that its mere refusal to pay the amount was sufficient to create a dispute “in connection with the contract” within the meaning of clause 21 of the arbitration agreement. The Court rejected this contention. The Court explained that a dispute in which the Union claims it is not liable to pay the price under the contract is indeed a dispute under that contract. However, the Union’s position that it is liable to pay under the contract but will withhold payment because it wishes to set off the amount against a claim arising from a different, independent contract cannot be regarded as a dispute “under or in connection” with the contract whose arbitration clause is invoked. In other words, the Union’s refusal, motivated by a desire to apply the payment to an unrelated claim, does not satisfy the requirement of a dispute pertaining to the contract whose arbitration clause is at issue.

The Court further considered the decision of the Calcutta High Court in Uttam Chand Saligram v. Jewa Mamooji (I.L.R. 46 Cal.). That decision was relied upon by the Union to support its argument. In the cited case an arbitrator’s award was challenged on the ground of lack of jurisdiction because there was no dispute between the parties, the applicant having admitted liability under the contract. Rankin J. held that while the existence of a dispute is an essential condition for arbitrator jurisdiction, the dispute may concern either the acknowledgment of the debt or the manner and time of its satisfaction. The Court noted that the applicant’s defence in that case was that he was not obliged to pay the amount due, and the learned judge observed that the applicant’s later correspondence demonstrated a refusal to pay based on a “claim of right,” a claim that was ultimately deemed insubstantial. The Court distinguished the present case, observing that the Union is not withholding payment on a claim of right. Instead, the Union alleges that although it is liable to pay the amount under the contract, it will not do so because it possesses a separate claim unrelated to the present suit, a contention that does not give rise to a dispute within the meaning of the arbitration clause.

In this case the Union asserted that although it owes the amounts stipulated in the contract, it refuses to make payment because it has another claim that is unrelated to the claim that is the subject of the present suit against the Company. The Court then considered the decision of the Calcutta High Court in Chundanmull Jhaleria v. Clive Mills Co. Ltd. (I.L.R. (1948) 2 Cal. 297.), which the Union had also relied upon, and held that the decision does not assist the Union. In that Calcutta case the Court had held that an arbitration clause in a contract, by which the parties agree to refer any disputes to arbitration, may be sufficiently wide to cover a dispute even where the question is whether the contract itself has been frustrated. The present dispute, however, does not involve any question of contract frustration, and therefore the Calcutta authority is not applicable.

The Court also examined the principle laid down in the House of Lords decision in Heyman v. Darwins Ltd. (L.R. [1942] A.C. 356.), which the Union had relied upon, and found that that principle likewise does not apply to the present matter. The Heyman case held that where an arbitration clause states, without qualification, that any difference or dispute which may arise “in respect of,” “with regard to,” or “under the contract” shall be referred to arbitration, and the parties agree that a binding contract exists, the clause will still apply even if the dispute concerns an assertion by one party that certain circumstances, whether occurring before or after partial performance of the contract, have discharged one or both parties from further liability, such as repudiation or frustration of the contract. Viscount Simon, L.C., explained that an arbitration clause is a written submission agreed to by the parties and must be interpreted according to its language and the circumstances of its making. He observed that if the dispute is whether the contract containing the clause was ever entered into, arbitration cannot be invoked because the party denying the contract also denies the arbitration submission. Likewise, if a party claims the alleged contract is void ab initio because it is illegal, the arbitration clause cannot operate because it would also be void. However, where both parties acknowledge a binding contract and a difference has arisen concerning breach or discharge of performance obligations, such differences fall within the expressions “in respect of,” “with regard to,” or “under the contract,” and an arbitration clause using those terms should be construed to cover them. But the

The Union did not seek to refer the present controversy to arbitration on the ground that one side had allegedly breached the contract or that an event had occurred which might have discharged either or both parties from further performance. In other words, the Union’s submission did not allege any disagreement that fell within the scope of the contract or that could be described as a dispute “under,” “in connection with,” or even “with regard to” the contractual relationship. Because the matter did not involve a genuine contested issue relating to the performance of the contract, the request made by the Union for a stay of the suit was found to be without substantive basis and was characterised by the Court as frivolous. It was noted with some surprise that such a plea had been raised, continued to be pursued, and even resurrected after the parties had already proceeded to arbitration in the other related case, thereby causing unnecessary expenditure of public resources. The Court observed that the Union’s attempt to obtain a stay served no legitimate purpose and only added to the financial burden on the public exchequer. Given the lack of a valid dispute and the frivolous nature of the Union’s plea, the appellate authority concluded that the appeal could not succeed. Accordingly, the appeal was dismissed and the Union was ordered to bear the costs of the proceedings.