1. This appeal arises from the order of the Subordinate Judge, Trichur, in I.A. No. 886 of 1976 in O.S. No. 136 of 1976. The learned judge dismissed an application tiled by the appellant (defendant in the suit)

under S.34 of the Arbitration Act, 1940.

2. The suit was tiled by the Kerala State Electricity Board to recover from the defendant a sum of Rs. 65,950.13 with future interest by way of damages for breach of contract. It is alleged in the plaint that an agreement was entered into between the plaintiff and the defendant on 7-8-1973 for the construction of temporary buildings at Mukkali in connection with the Silent Valley Hydro-Electric Project. The agreement provided that the contract work was to be completed on or before 9-7-1973 and that all unused materials supplied by the plaintiff to the defendant had to be returned to the plaintiff, failing which the cost of such materials was recoverable from the defendant at a penal rate as stipulated under the contract. It is alleged that the defendant, contrary to the provisions of the contract, failed to complete the work within the stipulated time and furtively removed from the site the unused materials. When the plaintiff came to know of the clandestine removal of materials, a complaint was lodged with the Augali police and Crime No. 16/75 was registered. Augali police investigated into the matter, but sent a final report to the Magistrate of the I-Class at Mannarghat to refer the case as a mistake of fact. In the circumstances the plaintiff tiled the suit for recovery of amounts as per the contract.

3. The defendant filed an application under S.34 of the Arbitration Act, 1940, to stay the legal proceedings on the ground that the subject-matter of the suit was covered by an arbitration agreement and the matter was therefore liable to be referred to the arbitrator.

4. The plaintiff thereupon filed objections to the said application on various grounds. The plaintiff contended that the subject-matter of the suit was. outside the scope of the arbitration clause; the award of the arbitrator would not bind the plaintiff; there was no dispute between the parties which could be referred to arbitration; and in view of the allegations of fraud and misappropriation, the civil court was the proper forum to decide such questions and the arbitrator had no jurisdiction in respect of the same.

5. The learned Subordinate Judge in bis order under appeal held that the subject-matter of the suit was a dispute which fell within the purview of the arbitration clause and that an award made by the arbitrator in terms of the agreement would be binding on the plaintiff as well as on the defendant. The court, however, held that in view of the allegations of fraud, misappropriation and breach of trust, it was the civil court that was the proper forum. For that reason the application under S.34 was dismissed.

6. Clause (22) of the agreement between the parties reads as follows:

"In the event of dispute arising between the contractor and the department regarding the application of the contract, the same shall be submitted for arbitration by a specific Arbitrator or Board as Arbitrator whose award shall be binding on the contractor."

7. The respondent (plaintiff) questions the finding of the learned judge that the subject-matter of the suit is covered by the arbitration clause. Plaintiff's counsel says that the main allegation in the plaint is that the defendant misappropriated the unused materials. It is a tortious act which is outside the purview of the arbitration clause.

8. We shall refer to the relevant allegations in the plaint. In Para.10 of the plaint it is stated:

"As per the conditions of contract all materials supplied to the contractor shall remain the absolute property of the Board and shall not on any account be removed from the work spot and shall at all times be open for the inspection of the Executive Engineer.

...Unused balance, if any, at the time of the completion or determination of