Union of India v. Birla Cotton Spinning and Weaving Mills Ltd.

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 609 of 1961

Decision Date: 27 March 1963

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

In this case the Court recorded that the respondent, Birla Cotton Spinning & Weaving Mills Ltd., had supplied goods to the Union of India valued at Rs 1,06,670.89 under a contract dated 30 January 1956 and had received a part payment of Rs 93,727. The Union subsequently refused to pay the remaining balance, contending that an amount of approximately Rs 10,625 was due to it under a separate contract between the same parties. Consequently, the respondent instituted a suit before the Senior Sub‑ordinate Judge of Delhi seeking realisation of the outstanding sum. The Union then moved an application under section 34 of the Arbitration Act, 1940, seeking a stay of the suit on the ground that a dispute had arisen between the parties and that the arbitration agreement contained in their contract could be invoked to resolve that dispute. The respondent opposed the application, arguing that there was no dispute relating to the contract that was covered by a valid arbitration clause and therefore section 34 was inapplicable. The Sub‑ordinate Judge held that section 34 could be invoked only when the suit raises a dispute concerning the matter that the parties have agreed to refer to arbitration, and not a dispute that is independent of that matter. Since the Union had not challenged its liability to pay the balance due under the contract, but had only raised a separate claim concerning the respondent’s liability under another contract, the Judge concluded that the suit could not be stayed. The High Court affirmed this decision, dismissing the appeal at the preliminary stage. The present appeal, filed by special leave, argued that the arbitration agreement should be construed to include a dispute arising from a refusal to fulfil obligations under the contract, even though such refusal was not founded on any right under the contract’s terms. The Court held that enforcement of an arbitration clause requires the existence of a genuine dispute between the parties to that agreement; in the absence of such a dispute there can be no reference to arbitration. The Court further observed that a plea by the Union that, although it was liable to pay the amount under the contract, it would withhold payment in order to set off a claim arising under a separate, independent contract, cannot be characterised as a dispute “under or in connection with” the contract whose liability was being enforced.

In this matter, the Court referred to the authorities 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, and distinguished them from the present issue. The judgment was rendered in Civil Appeal No. 609 of 1961, arising by special leave from the order dated 12 April 1960 of the Punjab High Court (Circuit Bench) at Delhi, which had been issued in the first appeal from Order No. 43‑D of 1960. Counsel for the appellant comprised N. S. Bindra and H. Dhebar, while the respondent was represented by G. B. Pai, J. B. Dadachanji, O. C. Mathur and Ravinder Narain. The judgment was delivered on 27 March 1963 by Justice Shahj.

The factual backdrop involved the Birla Cotton Spinning and Weaving Mills Ltd., hereafter referred to as “the Company,” which supplied goods valued at Rs 1,06,670.89 n.p. to the Union of India under a contract dated 30 January 1956. The Union made a partial payment of Rs 93,727, leaving a balance of Rs 12,943.89 unpaid. Consequently, the Company instituted Suit No. 386 of 1958 before the Senior Subordinate Judge, Delhi, seeking a decree for Rs 10,625, interest of Rs 2,762.50 from 12 October 1956 to the date of the suit, interest pendente lite, and costs. The Company alleged that the Union withheld the balance on the ground that Rs 10,625 was allegedly due under a separate contract concerning bulk purchase order No. PBI/7028‑705 dated 16 December 1949. The Company denied the existence of such a contract and stated that the Union’s dispute had been referred to arbitration before the Officer on Special Duty, Directorate General of Supplies and Disposals, and Shri Ramniwas Agrawala, but that the arbitration had been adjourned sine die. On 19 May 1959, the Union filed a petition under section 34 of the Indian Arbitration Act, seeking a stay of the suit on the basis that a dispute existed and that an arbitration agreement, embodied in clause 21 of Form No. WSB133, could be invoked. The Company opposed the petition, contending that no dispute arose concerning the contract governed by a valid arbitration clause and therefore section 34 was inapplicable. The subordinate judge held that invocation of section 34 required a dispute directly related to the matter agreed to be referred to arbitration; since the Union raised no dispute about its liability under the contract in question and only sought to raise a dispute concerning its liability under another contract, the suit could not be stayed.

The lower tribunal held that because the dispute concerned the liability of the Company under a different contract, the suit could not be stayed. The High Court of Punjab subsequently dismissed, in limine, the appeal against the order that refused to stay the suit. The Union obtained special leave to appeal before this Court. In the appeal, the Union raised a single contention that the arbitration agreement expressly covered a dispute arising from a refusal to fulfil obligations under the contract, even though the refusal was not based on any right conferred by the contract’s terms.

The arbitration agreement is set out in clause 21, which, as 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 thereunder and any Statutory modification thereof shall be deemed to apply to and be incorporated in this contract.” The clause is broad and encompasses disputes arising not only under the express covenants of the contract but also under any general or special conditions or any matter connected with the contract. Nevertheless, before a court may grant a stay of proceedings under section 34 of the Arbitration Act, three conditions must be satisfied: (i) a subsisting and binding arbitration agreement that is enforceable between the parties must exist; (ii) the subject‑matter of the dispute in the suit seeking stay must fall within the scope of that arbitration agreement; and (iii) the application for a stay must be made by a party to the arbitration agreement, or a person claiming under that party, at the earliest stage of the suit, that is, before filing the written statement or taking any other step in the proceeding. If these conditions are met, the court may grant a stay provided it is satisfied that the applicant has been, at all material times before the commencement of the proceedings, ready and willing to do everything necessary for the proper conduct of the arbitration and that there is no sufficient reason not to refer the matter in accordance with the agreement. The evidence recorded by the trial court showed that there was no dispute between the Company and the Union arising under the contract that formed the basis of the present suit. The Union had, in fact, accepted liability for the amount claimed by the Company in the suit.

In the suit filed by the Company, the Union was ordered to pay the amount claimed by the Company. The Union, however, refused to make the payment, maintaining that a separate amount was due from the Company to the Union under a distinct contract. The Union did not attempt to set off that separate amount under any term of the contract on which the Company based its claim. Consequently, the dispute raised by the Union did not relate to the liability created by the contract that contained the arbitration clause; instead, it concerned an alleged liability of the Company under another contract, a contract that had already been referred to arbitration. The Union offered no defence to the action filed by the Company; it did not contest that the sum of Rs 10,625 was due to the Company under the contract relied upon by the Company. The Court observed that for an arbitration clause to be enforced, a genuine dispute must exist between the parties to the arbitration agreement; without such a dispute, no reference to arbitration can be made. The Union argued that its mere refusal to pay the amount due created a dispute “in connection with the contract” within the meaning of clause 21 of the arbitration agreement. The Court could not accept that contention. While a dispute concerning the Union’s liability to pay under the contract would indeed be a dispute under and connected with that contract, a claim that the Union, although liable under the contract, would withhold payment in order to apply the sum toward a separate claim arising under an independent contract cannot reasonably be treated as a dispute “under or in connection with” the contract that gave rise to the liability now in issue. The Court referred to the decision of the Calcutta High Court in Uttam Chand Saligram v. Jewa Mamooji, I L R 46 Cal., noting that the arbitration clause in that case was described as wide‑ranging, covering not only disputes arising under the covenants of the contract but also disputes under general or special conditions or any matter connected with the contract. The Court further explained that, before a judicial authority may grant a stay of proceedings under section 34 of the Arbitration Act, three conditions must be satisfied simultaneously: (i) a subsisting and binding arbitration agreement capable of enforcement must exist between the parties; (ii) the subject‑matter of the dispute in the proceeding sought to be stayed must fall within the scope of that arbitration agreement; and (iii) the petition for stay must be presented to the judicial authority by a party to the arbitration agreement, or a person claiming under such a party, at the earliest stage of the proceeding, that is, before the filing of the written statement or any other step in the proceeding. Where these conditions are met, the judicial authority may, at its discretion, grant a stay.

The Court found that the party seeking the reference to arbitration had, at all material times before the suit was instituted, been ready and willing to undertake every act necessary for a proper arbitration, and that there was no adequate reason to refuse a referral in accordance with the arbitration agreement. The record of the Trial Court showed that no dispute existed between the Company and the Union concerning the contract on which the present suit was based. The Union had, in fact, acknowledged its liability to pay the sum claimed by the Company in the suit, but it subsequently refused to make payment on the ground that the Company owed the Union a separate amount under a different contract. That separate amount was not asserted as a set‑off under any term of the contract on which the Company relied for its claim. Consequently, the Union’s objection did not relate to the liability created by the contract containing the arbitration clause; rather, it concerned an alleged liability of the Company under another agreement that had already been referred to arbitration. The Union raised no defence to the Company’s action, because it did not contest that the sum of Rs 10,625 was due to the Company under the contract in question. The Court emphasized that the enforcement of an arbitration clause requires the existence of a genuine dispute; where no dispute exists between the parties to the arbitration agreement, there can be no reference. The Union argued that its mere refusal to pay the amount due created a dispute “in connection with the contract” within the meaning of clause 21 of the arbitration agreement. The Court rejected this contention, observing that a dispute as to whether the Union is liable to pay under the contract is indeed a dispute under that contract, but a claim that the Union, although liable, will withhold payment in order to apply it to a separate claim arising from an independent contract cannot be regarded as a dispute “under or in connection with” the contract whose liability is being enforced. The Court further held that reliance on the Calcutta High Court decision in Uttam Chand Saligram v. Jewa Mammoji, reported in I.L.R. 46 Cal., does not support the Union’s position. In that case, the arbitrator’s award was challenged on the ground that the arbitrator lacked jurisdiction because no dispute existed between the parties, even though the applicant had admitted liability under the contract. Rankin J. had observed that the existence of a dispute is an essential condition for jurisdiction, and that such a dispute may consist either of an acknowledgement of the debt or of a question as to the mode of satisfaction of the debt.

In the earlier arbitration case the Court observed that the applicant seeking to set aside the award argued he was under no duty to pay the amount claimed. The Court highlighted that the applicant’s later correspondence with the arbitral chamber, the statements in paragraphs 5, 6 and 12 of his petition, and paragraph 6 of his responding affidavit all indicated that he was deliberately refusing payment on a purported right, and that the weakness of his claim only further damaged his case. The Union, however, does not withhold payment on a claim of right. Instead, the Union maintains that, while the contract obliges it to discharge the sums due, it refuses to pay because it possesses another, unrelated claim against the Company, a claim that does not arise from the contract that is the subject of the present suit. The Union relied on the Calcutta High Court decision in Chundanmull Jhaleria v. Clive Mills Co. Ltd. (1), I.L.R. (1948) 2 Cal. 297, but that authority does not support the Union’s position. In that case the High Court held that an arbitration clause may be sufficiently broad to cover a dispute concerning whether the contract itself had been frustrated; the present matter does not concern any question of contract frustration.

The Union also relied on the House of Lords decision in Heyman v. Darwins Ltd. (1), L.R. [1942] A.C. 356, but that precedent is inapplicable. The House of Lords ruled that where an arbitration clause unconditionally provides that any difference or dispute arising “in respect of,” “with regard to,” or “under the contract” shall be referred to arbitration, the clause remains effective even if one party asserts that subsequent events—such as repudiation accepted by the other party or frustration—have discharged both parties from further liability. Viscount Simon, L.C., explained that an arbitration clause is a written submission by the contracting parties and must be interpreted according to its language and the surrounding circumstances. He further noted that a dispute concerning whether the contract containing the clause ever existed cannot be submitted to arbitration, because the party denying the contract’s existence also denies the existence of the arbitration clause itself. Consequently, the Union’s reliance on the Heyman principle does not aid its argument that the present issue can be arbitrated.

The Court observed that a party who denies ever having joined in the submission cannot invoke the arbitration clause. In the same way, if a party to the alleged contract alleges that the contract is void ab initio because, for example, its formation was illegal, the arbitration clause is unable to operate, since, on that view, the clause itself would also be void. The Court explained, however, that where the parties are jointly assertive that they entered into a binding contract and a disagreement arises between them as to whether one side breached the contract or whether circumstances have occurred that discharge one or both parties from further performance, such disagreements must be treated as differences that have arisen “in respect of,” “with regard to,” or “under” the contract. Accordingly, an arbitration clause that employs those expressions, or similar language, must be construed to cover such disputes, as noted in L. R. [1942] A. C. 356. The Court then turned to the present matter and held that the Union was not seeking arbitration on a dispute concerning a breach by either side or on whether circumstances had discharged either party from further performance. In substance, there was no dispute between the parties “under,” “in connection with,” or even “with regard to” the contract. The Court found the Union’s plea for a stay of the suit to be frivolous and expressed surprise that such a plea had been raised, maintained, and even after arbitration in a related case had been pursued, presented before this Court, thereby causing large costs to the public exchequer. Accordingly, the appeal failed and was dismissed with costs.