1. Suit for recovery of balance payment under a contract — Application for stay of suit under Section 34, Indian Arbitration Act — Refusal to pay based on separate contract. (Para 1 , 2 )
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1963 Supreme(SC) 91
SUPREME COURT OF INDIA
B.P. SINHA, C.J.I., J.C. SHAH AND N. RAJAGOPALA AYYANGAR, JJ.
Union of India, Appellant
Versus
Birla Cotton Spinning and Weaving Mills Ltd., Respondent.
Civil Appeal No. 609 of 1961, dated 27-3-1963. 689
Advocates appeared
Mr. N. S. Bindra, Senior Advocate, (Mr. R. H. Dhebar, Advocate, with him), for Appellant; Mr. G. B. Pai, Advocate, and M/s J. B. Dadachanji, O. C. Mathur and Ravinder Narain, Advocates of M/s. J. B. Dadachanji and Co., for Respondent.
Advocates:
C.R.PAI, J.B.DADACHAN, J.R.DADACHANJI, N.S.BINDRA, O.C.MATHUR, R.H.Dhebar, Ravindra Narayan
C.R.PAI, J.B.DADACHAN, J.R.DADACHANJI, N.S.BINDRA, O.C.MATHUR, R.H.Dhebar, Ravindra Narayan
A refusal to pay an admitted liability under a contract, based on a claim arising from a separate independent contract, does not constitute a dispute "under or in connection with" the contract containing the arbitration clause, and thus cannot justify a stay of suit under Section 34 of the Arbitration Act.
Headnote:(A) Indian Arbitration Act, 1940 - Section 34 - Stay of suit - Arbitration agreement - Scope of "dispute arising under or in connection with the contract" - For an order of stay under Section 34, three 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 (Para 3).
(B) Arbitration - Existence of dispute - Where a party admits liability to pay under a contract but refuses payment on the ground that an amount is due from the other party under a distinct and independent contract, such a refusal does not constitute a dispute "under or in connection with" the contract containing the arbitration clause (Paras 4, 5).
Facts of the case:
A company supplied goods to the government under a contract and subsequently filed a suit for the recovery of the balance payment. The government refused to pay the balance, asserting that an amount was due from the company under a separate, independent contract. The government applied for a stay of the suit under Section 34 of the Arbitration Act, invoking the arbitration clause contained in the contract under which the company's claim for payment was based.
Findings of Court:
The government accepted liability to pay the amount claimed under the contract in suit. The dispute raised by the government was not in respect of the liability under the terms of the contract containing the arbitration clause, but in respect of an alleged liability of the company under another distinct contract. Consequently, there was no dispute arising under the contract on which the suit was filed.
Issues: Whether the refusal to pay an admitted liability under a contract, based on a claim arising from a separate independent contract, constitutes a dispute "under or in connection with" the contract containing the arbitration clause, thereby justifying a stay of the suit under Section 34 of the Arbitration Act.
Ratio Decidendi: A dispute that a party is not liable to pay the price under the terms of a contract is a dispute under or in connection with that contract. However, a plea that a party, though liable to pay under the terms of the contract, will not pay because it desires to appropriate the amount towards another claim under another independent contract cannot reasonably be regarded as a dispute "under or in connection with" the contract under which the liability sought to be enforced has arisen. For the enforcement of an arbitration clause, a dispute must exist; in the absence of a dispute between the parties to the arbitration agreement regarding the specific contract, there can be no reference to arbitration.
Result: Appeal dismissed.
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Table of Contents
2. Whether refusal to pay an admitted liability based on a claim under an independent contract constitutes a dispute under or in connection with the contract containing the arbitration clause. (Para 2 , 3 , 5 )
3. Refusal to pay an admitted liability due to a claim under a separate, unrelated contract does not constitute a dispute arising under or in connection with the contract. (Para 4 , 5 , 6 , 8 )
4. For an arbitration clause to be invoked, a genuine dispute must exist under or in connection with that specific contract, not a claim under an independent agreement. (Para 4 , 5 )
5. Appeal dismissed with costs. (Para 9 )
6. What conditions must co-exist for a judicial authority to grant a stay of proceedings under Section 34 of the Indian Arbitration Act?
There must be a subsisting and binding arbitration agreement, the subject-matter in dispute must be within the scope of that agreement, and the petition must be made at the earliest stage of the proceeding, typically before filing the written statement. (Para 3 )
7. Does a refusal to pay an admitted debt based on a claim under a separate contract constitute a dispute in connection with the original contract?
No. A plea that a party is liable under the terms of a contract but will not pay because it desires to appropriate the amount toward a claim under another independent contract is not a dispute under or in connection with the original contract. (Para 5 )
8. Is the mere refusal to pay sufficient to trigger the enforcement of an arbitration clause?
No. For the enforcement of an arbitration clause, a dispute must actually exist between the parties to the agreement. In the absence of a dispute regarding the contract's terms or obligations, there can be no reference to arbitration. (Para 4 )
Judgment
SHAH, J..: 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 P. 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 P. 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 P. as interest from October 12, 1956 till date of suit with 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 P. 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.
2. 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 conduct of the arbitration under Cl. 21 contained in form No. WSB-133. The Company resisted the petition contending that there was no dispute concerning the contract which was covered by any valid submission or arbitration clause and which attracted the application of S. 34 of the Arbitration Act. The Subordinate Judge held that before S. 34 could be invoked the suit must raise 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 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.
3. 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 ever though the refusal was not founded on any right arising under the terms of the contract. The arbitration agreement is contained in C1. 21, which in 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 thereunder and 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 may be made under S. 34 of the Arbitration Act, the following conditions must
