TaxTMI 
TaxTMI 
TaxTMI 
1984 (8) TMI 295
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....under sec. 33 of the Arbitration Act, 1940 could be stayed ? If, so whether the Ist Respondents have made out a case for staying the Appellants' suit No. 832 of 1982 ? 2. Whether the three claims referred by the Ist Respondents to the Court of Arbitration of the 2nd Respondents are beyond the scope of the Arbitration Clause being Article XVII contained in the Contract dated August 24, 1964 or they are "arising out of or related to" the said Contract ? The facts giving rise to the aforesaid two questions may be stated. The Appellants, Renusagar Power Company Limited (for short 'Renusagar') are a company incorporated under the Companies Act, 1956 having their Registered Office at Renukoot, District Mirzapur in Uttar Pradesh. The Ist Respondents, General Electric Company (for short 'G.E.C.') are a company incorporated under the laws of the State of New York and carry on their business inter alia at 570, Lexington Avenue, New York, U.S.A. The 2nd Respondents are the International, Chamber of Commerce (Court of Arbitration) (for short 'I.C.C.') having their registered office in Paris, France. By a Contract in writing dated August 24, 1964 (bearing Ref. IGE. 9584) G.E.C. agreed' to sel....
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....-6-1968, the fourth on 31-12-1968 and so on with the last instalment falling due on 31-12-1974. The obligation to make such payment was to be evidenced by 4-series (A-B-C-D) of 16 unconditional negotiable promissory notes to be executed by Renusagar. It was further agreed that in case G.E.C. received an exemption from the Government of India from payment of Income-Tax on interest receivable by it from Renusagar then the interest for that portion of the period shall be computed at 6% instead of 6.5% per annum and that the concerned promissory notes would be replaced or substituted by fresh promissory notes for amounts reflecting the adjustment in payment of interest necessitated by the grant of tax exemption. The Contract further provided under Art. XIV-B that should G.E.C.'s application for exemption be denied Renusagar may withhold the Indian Income-tax applicable to any payments of interest but shall furnish G.E.C with tax receipts on all with held amounts paid to the Government of India. Such provision was obviously made with a view to enable G.E.C. to obtain corresponding credit for the sum in their U.S. Tax Assessment. The Contract also required Renusagar to furnish guarantee ....
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....alments under the 5th series were payable on the same dates as the corresponding promissory notes of the earlier four series. It was expressly clarified in the letter of June 11. 1965 that except for the modifications made by it all other terms and conditions of the Contract IGE 9584 shall apply; in other words the Arbitration Clause of the 1964 Contract became applicable to the said supply of structural steel. During the implementation of the Contract two events occurred giving rise to G.E.C.'s three claims against Renusagar that are sought to be referred to arbitration of I.C.C namely. (1) grant of tax exemption by the Government of India to G.E.C. in respect of interest on purchase price receivable by it from Renusagar and the revocation thereof and (2) re-scheduling of dates of payment of purchase price agreed to by the parties but not approved by the Reserve Bank and the Government of India. As regards the former, it appears that by two orders dated September 3, 1965 and June 7, 1967 passed under s. 10(15) (iv) (c) of the Indian Income Tax Act 1961 the Government of India granted exemption to G.E.C. from payment of Indian income-tax on the interest receivable by it from Renus....
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....ax a no- objection certificate and from the Reserve Bank its approval (vide Two Letters both dt. 3-6-1981) for making the remittance to G.E.C. of U.S. $ 21,30,785.52 (calculated on 6% tax free basis to which G.E.C. became entitled as a result of Delhi High Court's decision). It is this sum of 2.1 Million Dollars (U.S) being the Unpaid Regular Interest, wrongly deducted and wrongly withheld and kept with themselves by Renusagar from 1970 onwards which is the first claim referred by G.E.C. to the arbitration of I.C.C. As regards the latter it may be stated that on account of the alleged delays in the shipment and erection schedule Renusagar requested G.E.C to grant deferment in the payment schedule and as a result of the negotiations that ensued, Renusagar and G.E.C., inter alia, purported to amend the dates of payment of the purchase price evidenced by the promissory notes and certain decisions in that be half were recorded in a Memorandum dated December 30, 1966 and letters dated January 5, 1967, October 4, 1967 and October 9, 1967; this purported re-scheduling of the dates of payment of the purchase price as arrived at by the aforesaid documents was sought to be reflected by the p....
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....culated on the basis of 6.5% subject to tax) to G.E.C., which liability if calculated on 6% tax free basis, to which G.E.C. became entitled as a result of the Delhi High Court's decision, comes to US. $ 7,84,151.84. This liability for Delinquent Interest is the second claim referred by G.E.C to the arbitration of I.C.C. The third claim for Compensatory Damages which G.E.C. has made against Renusagar and which is sought to be referred to arbitration arises out of non-payment of the aforesaid two claims of Unpaid Regular Interest and Delinquent Interest for over 12 years, the quantum being calculated by way of interest on those two amounts at the market rate of 18% per annum amounting to U.S. $ 4,160,534.88 up to 31 3.1982 (to be extended till date of actual payment). According to G.E.C. for a long period of 12 years Renusagar has illegally and wrongfully retained these two funds with itself and has enjoyed the use thereof for its own private advantage has correspondingly totally deprived G.E.C. of their use for which Renusagar must compensate. G.E.C. has also asserted that such compensatory damages are due to it from Renusagar because Renu sagar must be regarded as stake-holder or ....
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.... under s. 3 of the Foreign Awards (Recognitation and Enforcement) Act, 1961 seeking stay of suit No. 832 of 1982 and all proceedings therein and a prayer for vacating the ad interim reliefs obtained by Renusagar was also made. Both the matters, G.E.C's. stay petition under s. 3 and Renusagar, Notice of Motion for confirmation of ad interim reliefs were heard together and disposed of by Mr. Justice Pendse by a common judgment and order dated April 19-20, 1983. On a consideration of the rival contentions that were urged before him the learned Judge negatived Renusagar's contention that the Arbitration Clause in the original 1964 Contract could not be availed of by G.E.C. as a fresh agreement creating new rights and liabilities had come into existence by reason of Oct. 1968 Amendment which did not provide for arbitration on two grounds namely that the Oct. 1968 Amendment had kept alive all other terms and conditions of the 1964 Contract including Arbitration Clause and in any case the Oct. 1968 Amendment had fallen through for lack of Government's approval; he also took the view that though the first two claims sought to be referred to arbitration by G.E.C. were based on the promisso....
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.... claim for damages arising out of tort and such a claim was in any case not covered by the suit Contract and fell outside the scope of the Arbitration Clause; and fourthly, in any event, Renusagar had made out a prima facie case by raising serious triable issues in the suit which should enable it to claim an injuction restraining the arbitration proceedings. Though G.E.C. had raised a contention that the question of the Arbitrator's jurisdiction had to be decided according to American Law counsel for G.E.C. made a concession that for the purposes of the appeals the Court should proceed on the basis that question was to be decided according to Indian Law. Proceeding on that basis the court of Appeal negatived all the contentions and ultimately confirmed the trial Judge's order whereby Renusagar's suit was stayed and the ad interim reliefs were vacated. In support of these appeals preferred against the judgment and order of the Court of appeal dated October 19- 20-21, 1983 Counsel for Renusagar have basically raised two contentions: (1) that under s.3 of the Foreign Awards (Recognition and Enforcement) Act, 1961 (for short 'the Foreign Awards Act), having regard to its scope, a suit....
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....el the aforesaid submissions are founded on the well- settled position in law-English and Indian that questions or issues which pertain to the existence, validity or effect (scope) of an arbitration agreement contained in the underlying commercial Contract are matters which relate to the jurisdiction of the Arbitrator and are not within the competence of the Arbitrator however widely worded the Arbitration agreement may be but these have to be decided by the Court in an application under s.33 or in a suit which is of that nature as is the case here. On the other hand Counsel for G.E.C. contended that the schemes of the Foreign Awards Act and the Indian Arbitration Act 1940 are not identical, that there are various material differences which have a bearing on the issue whether a suit seeking determination of the effect (scope) of an arbitration agreement can or cannot be stayed in a petition under s.3 of the Foreign Awards Act and that the answer to the said question will depend upon proper construction to be placed on s.3 in the light of the scheme of that Act; Counsel urged that since all the ingredients of s.3 have been satisfied the stay of Renusagar's suit will be obligatory. A....
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....ithin the Arbitration Clause or not. However, Counsel further contended that the issue pertaining to the scope and effect of the arbitration agreement, if raised in an application under sec. 34 of the Arbitration Act the Court has to decide it and the Court's decision thereof will naturally be binding on the Arbitrators even though the issue was within the competence of the Arbitrators because of the wide wording of the Arbitration Clause and that is why the Court of Appeal has rightly expressed the view that since it has decided the issue whether the three claims "arise out of" or are "related to" the contract affirmatively it will be binding on the Court of Arbitration of I.C.C. and it will be futile for that court of Arbitration to go into that question again. By way of elaborating the second contention Counsel submitted that the under-lying commercial Contract (I.G.E. 9584) for supply and sale of goods and services contains no obligation to pay any interest after June 30, 1967 (i.e. after the 30th month from the Contract Effective Date) whether at 6-1/2% or 6% but that such obligation to pay interest after June 30, 1967 is only to be found in the promissory notes and G.E.C.'s ....
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....t to have been paid under the Contract is so closely connected with the contract that it is clearly "in relation to it"; all the three claims thus fall within the scope of the Arbitration Clause. Counsel seriously disputed that the promissory notes executed by Renusagar were or are in discharge of the obligation to pay the price and interest thereon under the Contract or that these notes constitute independent and separate contracts by themselves but contended that these are a part of the Contract and the two are so in severable and inextricably bound together that the obligation under the Contract can never be deemed nor intended to have been completely discharged by the mere execution of the notes and in support of this contention several aspects of and circumstances emerging from the Contract were relied upon by him. Counsel urged that real nature of the claims preferred before the Arbitrators and not the nomenclature or description thereof by any party would be relevant and decisive and in this behalf was quick to point out that Renusagar, though it now contends that such interest arises "under the promissory notes" has described it as payable "under the contract" in para 4 of ....
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....e relevant rules of I.C.C. (particularly Rules 8.3 and 8.4) in terms confer jurisdiction upon the arbitrations to decide questions as to the existence or validity of the arbitration agreement contained in the commercial contract, Counsel for G.E.C. principally relied upon the language used in the aforesaid arbitration clause contained in the Contract itself for contending that it was of widest amplitude and would cover both the questions (i) and (ii). According to him, the English Courts as well as this Court have held that the words "under the contract" are wide but the words 'arising out of" the contract are still wider and the words "relating to" or "in relation to" "in respect of" or "in connection with" or "concerning" the contract have the widest possible content. In view of the authorities to which we were referred, we find considerable force in this contention of Counsel for G.E.C. In Govt. of Gibralter v. Kenney & Anr(1), the arbitration clause covered: ".... any dispute or difference which shall arise or occur between the parties hereto in relation to any thing or matter arising out of or under this agreement..." and Sellers, J. has observed at page 26 of the Report tha....
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....ew that all questions which could be decided in an application filed under s. 20 of the Arbitration Act, 1940 (and such questions involve dealing with objections to the existence, validity or effect (i.e. scope) of the agreement itself) would be encompassed by a clause which contains the words "arising out of" or "in relation to" the contract. The relevant observations at pp. 1040-41 of the Report run thus : "We may dispose of here a supplementary argument that the dispute till now is about the legal existence of the agreement including the arbitration clause, and that this is not a dispute arising out of, or in relation to a cotton transaction. Reference was made to certain observations in Heyman v. Darwins Ltd. In our opinion, the words of the Bye-law "arising out of or in relation to contracts" are sufficiently wide to comprehend matters, which can legitimately arise under s. 20. The argument is that, when a party questions the very existence of a contract, no dispute can be said to arise out of it. We think that this not correct, and even if it were, the further words "in relation to" are sufficiently wide to comprehend even such a case." In Khardah Company Ltd. v. Raymon & Co....
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.... to be wide enough to include a determination of the ambit of the arbitrator's authority the learned law Lord cited the decision in Willesford v. Watson(1). In that case a mining lease contained an agreement to refer the disputes between the lessors and lessees to arbitrators or their umpire and the arbitration clause was very widely worded so as to include inter alia any dispute "touching these presents or any clause or matter or the thing herein contained or the construction hereof", in other words a dispute between the parties as to whether the instrument, according to its true construction did or did not warrant a particular thing to be done thereunder, was referable to and within the scope and authority of the arbitrators and at page 477 of the Report Lord Selborne, L.C. observed (which observations have been quoted with the approval by Lord Porter in Heyman v. Darwins Ltd.) thus: "It struck me throughout that the endeavour of the Appellants has been to require this Court to do the very thing which the arbitrators ought to do-that is to say, to look into the whole matter, to construe the instrument, and to decide whether the thing which is complained of its inside or outside ....
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....ry contract whose validity is in question, it has, as held by us in Kharda Co. Ltd. case, no existence apart from the impugned contract and must perish with it." Four propositions emerge very clearly from the authorities discussed above: 1. Whether a given dispute inclusive of the arbitrator's jurisdiction comes within the scope or purview of an arbitration clause or not primarily depends upon the terms of the clause itself; it is a question of what the parties intend to provide and what language they employ, 2. Expressions such as 'arising out of" or "in respect of" or "in connection with" or "in relation to" or "in consequence of" or "concerning" or "relating to" the contract are of the widest amplitude and content and include even questions as to the existence, validity and effect (scope) of the arbitration agreement. 3. Ordinarily as a rule an arbitrator cannot clothe himself with power to decide the questions of his own jurisdiction (and it will be for the Court to decide those questions) but there is nothing to prevent the parties from investing him with power to decide those questions, as for instance, by a collateral or separate agreement which will be effective and oper....
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.... quantum of 73% of the regular interest which was wrongly deducted and wrongly withheld and retained by Renusagar from 1970 onwards allegedly for payment of income-tax notwithstanding the Delhi High Court's judgment in effect retrospectively restoring the tax exemption granted in favour of G.E.C.; the second claim represents interest claimed by G.E.C. on account of the delay that occurred in the payment of four instalments of purchase price together with interest on their due dates as per the original Schedule of Payment, while the third claim is by way of compensation for illegally and wrongfully retaining and enjoying the use of the first two funds by Renusagar and depriving G.E.C. the use thereof for 12 long years. Whereas Renusagar has contended that none of these claims falls within the purview of the arbitration clause G.E.C. has claimed that all of them do within the wide language of that clause. As regards the first two claims Counsel for Renusagar have pointed out that admittedly the first claim substantially (approx. 80%) and the second claim entirely are for interest due after June 30, 1967 (i.e. after 30th month from the Contract Effective Date) and according to Counsel....
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.... of Art. III (3) (a) of the Contract, as destroying the arbitrability of the claims thereunder, the contention being that if parties agreed that the balance price of 90% should be paid by executing "unconditional negotiable promissory notes" the parties could never intend to make the claims arising thereunder arbitrable. In support of this contention Counsel strongly relied on certain observations of Lord Wilberforce in NOVA (Jersey) Knit Ltd. v. Kammgarn Spinnerei to the effect that if bills of exchange were to contain an arbitration clause they would not be valid bills, as also on Byles on Bills of Exchange: 25th Edn. at p. 10 where the above observation in that case has been digested. Reference was also made to Albert Jan Van Den Berg's treatise New York Convention of 1958-Towards a Uniform Judicial Interpretation' wherein at pp. 147-148 the learned author has made a reference to this Nova (Jersey) case with his own comments on how the Court of Appeal and the House of Lords have differed on the question whether there can be said to be an arbitrable dispute in regard to a bill of exchange, the former holding that there was in the case a dispute as to the liability on the bills of....
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....ognor Urban District Council where the Court of Appeal took the view that where the action brought was for damages for fraudulent mis-representation and referred to matters wholly outside the powers of the arbitrator with which he could not possibly deal, the defendants could not get the action stayed because it could not be said that the dispute was upon or in relation to or in connection with the contract and (2) Ghewarchand v. Shiva Jute Bailing Ltd. where the Calcutta High Court has held that where the suit was wholly based on tort, then that action was not to be considered to be in relation to or in connection with a contract merely because it was shown that had there been ever no contract there would not have been any cause of action and what the Court had to look into was what the substance of the plaint was and not how the claim was framed. For the reasons which we shall presently indicate we are unable to accept any of the above submissions urged by Counsel for Renusagar. As regards the first two claims, in the first place it is not possible to hold that the Commercial Contract does not contain any obligation to pay interest on the unpaid purchase price after June 30, 196....
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....e. bearing interest after June 30, 1967) G.E.C. would not have become entitled to receive or claim interest after June 30, 1967 but would have had only a right to call upon Renusagar to execute such pro- notes and or two claim damage for failure to fulfil contractual obligations. It is impossible to accept this argument. The question is not what rights G.E.C. would have had on Renusagar's failure to execute the promissory notes as required but the question is what the contract provides for. It cannot be disputed that the aforesaid sub-clause in the Contract provides for not merely the execution of promissory notes but that the promissory notes would also bear interest after June 30, 1967. Further the very fact that the failure of Renusagar to execute promissory notes as required,... of course as required by the Contract, would have conferred a right on G.E.C. to call upon Renusagar to execute such notes also shows that the obligation to pay interest after June 30, 1967 till payment has been provided for by the contract. Article XIV-B, (which deals with the topic of taxes and proposed exemption from income-tax to be obtained by G.E.C.) (relevant portion) runs thus: "Seller intends....
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....ars for the interest as being due under the promissory notes read with the guarantee. But here again that fact is neither here nor there, because the suit against the UCO Bank has to be on the promotes read with the guarantee, the Contract not being a document to which UCO Bank is a party. But things will have to be seen in different perspective when claims are made by G.E.C. against Renusagar and in that behalf it is the substance of G.E.C.'s pleading (Notice of Intention to Arbitrate that will have to be looked into and not how the claims described therein. True, at one place in the Notice of Intention to Arbitrate the two claims are-(in fact, only the first claim of 2.1 million U.S. Dollars is) said to be "on the promissory notes" but much cannot be made of that fact because at the commencement of that Notice the subject-matter thereof is stated as: "Re: Interest payable under the Contract No. IGE 9584 between GEC and Renusagar" and the substance of the entire pleading, on careful scrutiny, shows how the first two claims have arisen under the Contract and how under the terms thereof and in the correspondence their amounts got adjusted and quantified at certain figures and it is ....
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....m a document or voucher of debt possessing certain legal attributes. So far then as this item of Rs. 17,34,596 (represented by a promissory note given to the assessee by his debtor) is concerned the assessee did not receive payment of any taxable income from his debtor or indeed any payment at all." The aforesaid statement of law enunciated by privy Council has been quoted with approval by the Bombay High Court in Keshav Mills Co. Ltd. v. Commissioner of Income Tax. It was a case where cheques and hundis were issued in payment of price for goods sold and delivered and the question was whether such cheques and hundis amounted to payments resulting in unconditional discharge of the liability to pay the price, and the Division Bench speaking through Chagla, C.J. observed thus:- "Now, I should have thought that ordinarily the payment of debt by a cheque never results in the discharge of the debt. The cheque merely represents an order by the drawer of the cheque to his banker to pay the amount to the person named in the cheque, and till that payment is made the debt is not discharged. Therefore, the sending of the cheque, as I said before, ordinarily is not an unconditional discharge ....
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....stamped receipts only after the receipt of the cheques and not in advance along with the bills submitted by him and (f) very importantly the drawer of the cheques was the Government of India and the drawer was the Reserve Bank of India for whose solvency there could be no apprehension at all in the mind of the assessee. It was in these circumstances that the Court came to the conclusion that the parties had intended to treat the posting of cheques as payment. In H.P. Gupta v. Hiralal (supra) the question was whether the posting of a dividend warrant cheque by the Company at Delhi (where its Registered Office was situated) for dispatching it to the shareholder at his registered address (which was Meerut) amounted to payment to the shareholder in discharge of the Company's obligation to pay the declared dividend and this Court held that it did in view of sec. 205 (5) of the Indian Companies Act. 1956 and Art. 132 of the Articles of Association of the Company as both the said provisions entitled the Company to pay the dividend either in cash or by posting a cheque or warrant at the registered address of a shareholder. The Court pointed out that Art.132, which constituted an agreement ....
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....ed to the seller synchronizing with the stated progress of supply of goods according to certain formulae (Art. III-D). (iii) these were to be replaced by fresh Notes depending on receipt of income-tax exemption (Art.III-A(3)(f) or price modification (Art.III-D) : (iv) each one-contains a default clause saying "upon default in the prompt and full payment the principal or of the interest on this Note when due, all of the notes in each and every series, together with interest to the date of payment, shall immediately become due and be payable and the option and demand of the holder thereof." Having regard to the aforesaid factors that emerge from the various terms specified above it is very clear that the execution of the promissory notes was not intended to nor did it amount to payment by way of discharging the obligation under the contract but the notes were clearly intended to operate as conditional payments. Thirdly the very factors and circumstances enumerated above in connection with the promissory notes and particulary, the fact that these notes were as between the seller and the purchaser subject to several conditions leading to variation and adjustment and replacement and t....
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....llary to the non- payment of the two detained amounts by Renusagar to G.E.C. in breach of the terms of the Contract. In other words, it is clear that before adjudicating upon this claim the adjudicating authority will have first necessarily to adjudicate upon first two claims preferred by G.E.C. and only if it is found that G.E.C. is entitled to receive that first two amounts which ought to have been paid by Renusagar under the terms of the Contract but which Renusagar had failed to pay that this third claim could, if at all, be allowed to G.E.C. In the real sense, therefore, this claim is directly, closely and inextricably connected with the terms and conditions of the Contract, the payments to be made thereunder and the breaches thereof and as such will have to be regarded as a claim :`arising out of" or "related to" the Contract. As we shall point out presently Court in one of its decisions has laid down the test for determining the question in such cases and the test is whether recourse to the contract, by which both the parties are bound, would be necessary for the purpose of determining whether the claim in question was justified or otherwise and this test, as indicated above....
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....ant charterers the vessel was arrested and released on a bank guarantee. Later, under a charter quite unconnected with the relevant charterers the vessel happened to be again in a Dutch port and was arrested again as a result of disputes as to the satisfactory nature of the original bank guarantee. The owners arbitrated a claim for damages in respect of each of the two arrests of the vessel. The charterers argued that these were claims in tort and outside the arbitrator's jurisdiction. The Court held that arbitrator had jurisdiction (1) over the first arrest as it was closely connected with the dispute under the contract, and was indeed a direct consequence of a claim for damage under the contract, and (2) over the second arrest as it was part and parcel of the original arrest. The decision of Sellers, J. in Government of Gibralter v. Kenney and Another (supra) has already been referred by us in the earlier part of our judgment in the context of the distinction made between matters "arising out of" and "under the agreement" and the learned Judge's view that the former expression is wider than the latter but that decision is relevant to the question which is now under consideration....
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....e arbitration of Bengal Chamber of Commerce and Industry. The appellant-mill informed the Chamber of Commerce and Industry that it had filed a suit upon the whole of the subject matter of the reference and served a Notice under s. 35 of the Arbitration Act. In suit so filed against Respondent No. 1 and the broker apart from the declaration sought that the broker had no claims against the appellant-mill in respect of the Contract or in respect of the bills submitted by the broker for the price of goods sold and delivered the appellant-mill had also claimed a decree for Rs. 50,000 as damages for the alleged libel published by respondent No. 1 and the broker. In an application for stay of the suit under s. 34 of the Arbitration Act. 1940, one of the questions raised was whether the arbitration clause was wide enough to include the claim for damages for the alleged libel. The High Court held that the claim in damages for defamation arose "out of" and "in connection with" the non-payment of the bills of respondent No. 1 and in going into the question of tort the Court would necessarily have to go into the terms and conditions of the Contract relating to payment and that the claim in tor....
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....nected with the terms and conditions of the Contract, the payments to be made thereunder and the breaches thereof and since for adjudication thereof recourse to the Contract would be necessary it will have to be held that it is a claim "arising out of" and in any event "related to" the Contract. As regards the two decisions, Monro v. Bognor Urban District Council (supra) and Ghewarchand Rampuria v. Shiva Jute Bailing Ltd. (supra) relied upon by Counsel for Renusagar we would like to point out that both are distinguishable and each turned on its own facts. In the former case the contractor had filed a suit to recover damages for the fraudulent misrepresentation as also to have the contract declared void on the ground that his consent thereto had been obtained by fraudulent misrepresentation and in effect the Court of Appeal held that the alleged fraudulent misrepresentation was not a dispute "upon or in relation to or in connection with the Contract and, therefore, the suit was not liable to stayed nor was the dispute liable to be referred to arbitration. In the latter case the suit was based wholly on tort and tort alone and the action complained of was totally unconnected with th....
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....abux Agarwalla's case (supra) and the other of this Court in Gaya Electric Supply Co's case(1), have settled the legal position under Arbitration Act 1940 that a Court acting under s. 34 is a Court of limited jurisdiction performing a limited function and that a petition under s. 33 (which raises issues regarding the existence, validity or effect of an arbitration agreement) cannot be stayed by invoking s. 34 of that Act, unless, there be a fresh arbitration agreement to refer those very issues in regard to the previous arbitration agreement and, therefore, it should similarly be held that s. 3 of the Foreign Awards Act, (which is similar to s. 34 of the Arbitration Act) cannot be invoked to stay a suit which is in the nature of as. 33 petition and Counsel pointed out that Renusagar's suit is precisely a suit of that nature, wherein the effect (scope) of the arbitration clause contained in the commercial contract only has been put in issue and no relief on the merits of these claims is sought. (b) That Renusagar's suit is not a suit "in respect of any matter agreed to be referred to arbitration" as required by s. 3 of the Foreign Awards Act and, therefore, the stay sought by G.E.C....
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....singdas(7) as well as certain passages in Russell on Arbitration 20th Edn. at pages 91-92 and 111- 112 and Albert Jan Van Dan Berg's Treatise on New York Convention at pages 311-312. (d) That a stay, if granted as sought by G.E.C., would render Renusagar's suit dead for all practical purposes, and, therefore, no such relief should be granted which will have the effect of finally determining the suit merely on a prima facie view or a pro tanto finding on the issue of arbitrability of the claims and in support reliance was placed on Strauss & Co's.(8) case. We shall examine each one of these submissions put forward to strengthen the main legal contention urged in the support of these appeals presently. At the out set we would like to observe that the answer to the question whether Renusagar's suit which is in the nature of a petition under s. 33 of the Arbitration Act could be stayed under s. 3 of the Foreign Awards Act must necessarily depend upon a correct construction of the said s. 3 and it is obvious that the provisions of that section will have to be construed by keeping in mind the objective sought to be achieved by that Act and its scheme and not on the basis of similar or....
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....ction. Moreover, an examination of the relevant provisions of this Act and the Arbitration Act, 1940 will show that the schemes of the two Acts are not identical and as will be pointed out at the appropriate stage there are various differences which have a material bearing on the question under consideration and as such decisions on similar or analogous provisions contained in the Arbitration Act may not help in deciding the issue arising under the Foreign Awards Act because just as the Arbitration Act, 1940 is a consolidating enactment governing all domestic awards the Foreign Awards Act constitutes a complete code by itself providing for all possible contingencies in relation to Foreign awards made pursuant to agreements to which Article II of the Convention applies. With these preliminary observations we now turn to the question of proper construction of s. 3 of the Foreign Awards Act. Section 3 of the Foreign Awards Act, 1961 as amended by Act 47 of 1973, (omitting unnecessary words) reads as under :- "3. Stay of proceedings in respect of matters to be referred to arbitration.-Notwithstanding anything contained in the Arbitration Act, 1940, or in the Code of Civil Procedure, ....
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....reto. (It is again not disputed that Renusagar and G.E.C. are the two parties to the arbitration agreement and that Renusagar has commenced legal proceedings against G.E.C. by filing suit No. 832 of 1982 ; (iii) the legal proceedings must be "in respect of any matter agreed to be referred to arbitration" in such agreement. (The question whether this condition is fulfilled here needs to be decided) ; (iv) the application for stay must be made before filing the written statement or taking any other step in the legal proceedings. (Admittedly this condition is fulfilled) ; (v) the Court has to be satisfied that the agreement is valid, operative and capable of being performed ; this relates to the satisfaction about the `existence and validity' of the arbitration agreement. (In the instant case these questions do not arise) ; (vi) the Court has to be satisfied that there are disputes between the parties with regard to the matters agreed to be referred; this relates to effect (scope) of the arbitration agreement touching the issue of arbitrability of the claims. (It will have to be dealt with while considering the satisfaction of condition (iii) above). As stated above Counsel for Re....
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....combines in its own ambit both ss. 33 and 34 of the Arbitration Act ; in other words, questions regarding the existence, validity or effect (scope) of the arbitration agreement which can be decided under s. 33 of the Arbitration Act are required to be decided under s. 3 of the Foreign Awards Acts before a stay of egal proceedings contemplated therein could be granted and the right to have legal proceedings stayed contained in s. 34 of the Arbitration Act is also to be found in the same s. 3. Further the Foreign Awards Act has also taken cognizance of the possibility that there may not be s. 3 petition at all the matter being directly proceeded before the arbitrators and the possibility of the arbitrators giving a decision on an issue not within their competence or jurisdiction and such cases s. 7 contains a safe-guard which prevents any such award from being made enforceable. Such being the scheme under the Foreign Awards Act we would reiterate our view that decisions of our Courts on similar or analogous provisions contained in the Arbitration Act would not be of any help to decide questions arising under the Foreign Awards Act. For instance, the view taken by the Calcutta High Co....
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....the language of the arbitration clause is wide enough to embrace the issue of the arbitrability of the claims. Now the submission is that the phrase "in respect of any matter agreed to be referred to the arbitration" occurring in s. 3 should be construed as covering only the disputes or claims on merits which have been referred to the arbitrators and since Renusagar's suit merely raises the issue of arbitrability of those claims the suit cannot be said to be in respect of any matter agreed to be referred to arbitration; in other words, the submission is that the relevant phrase in s. 3 should be given a narrow construction. In the first place there is nothing in the section which warrants the placing of such narrow construction on the relevant phrase. What matters are agreed to be referred to arbitration will depend upon what language is employed by the parties to the arbitration agreement and as we have indicated earlier there is nothing in law or equity which prevents the parties from referring even the questions of existence, validity or effects (scope) of the arbitration agreement itself to the arbitrators (in fact. Lord Porter's observations quoted earlier from Heymen v. Darwi....
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....tion. According to Counsel both English law as well as Indian law is the same which does not allow questions of arbitrator's own jurisdiction to rest finally with the Arbitrators and in support of this proposition Counsel relied upon the following authorities: (a) Attorney-General for Manitoba v. Kelly and Ors, (supra) where the Privy Council at page 276 of the Report has observed thus : "Whenever there is a difference of between the parties as to the authority conferred on an umpire under an agreed submission, the decision rests ultimately with the Court and not with umpire : Produce Brokers Co. v. Olympia Oil and Cake Co. It would be impossible to allow an umpire to arrogate to himself jurisdiction over a question which, on the true construction of the submission, was not referred to him. An umpire cannot widen the area of his jurisdiction by holding, contrary to the fact, that the matter which he affects to decide is within the submission of the parties." (b) Dalmia Dairy Industries Ltd. v. National Bank of Pakistan (supra) where the enforcibility of the award made by a sole arbitrator pursuant to an arbitration clause contained in the document of guarantee executed by the Nat....
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.... is a difference between the parties as to the authority of the arbitrator under an agreed submission the decision rests with the Court and not with the arbitrator." Observations in similar strain made by the Allahabad High Court in Municipal Board v. Eastern U.P. Electricity Supply Co. Ltd. and Ors. (supra), by the Delhi High Court in M/s. Jagan Nath Phool Chand v. Union of India & Ors. (supra) and by the Bombay High Court in Vallabh Pitti v. Narsingdas (supra) were also relied upon. (e) Russell on Arbitration (20th Edition) : At pages 91-92 the following statement of law occurs : "It can hardly be with in the arbitrator's jurisdiction to decide whether or not a condition precedent to his jurisdiction has been fulfilled. It has indeed several times been said bluntly that an arbitrator has no power to decide his own jurisdiction and in one case where rules of an institution prepared to conduct arbitrations gave the arbitrator such power, the court will ignore this when asked to enforce the award, and decide the question itself" : Dalmia Dairy Industry's case. Again at page 112 the learned author has digested Dalmia Dairy Industry's case thus : "Again some of the rules give the arb....
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....in a position to entertain and decide the same plea finally when the award is sough to be enforced. All that condition (iii) of sec. 3 requires is that the legal proceedings must be in respect of a matter "agreed to be referred to the arbitration" and there is no warrant to add further words namely, "agreed to be referred to the arbitration for final determination". Obviously if the occasion to decide the question of arbitrator's jurisdiction arises at an earlier stage namely in a section-3 petition the Court has to decide it before granting stay of the legal proceedings and such decision of the Court on that question will be conclusive and binding on the arbitrator and the question before him will then become academic. It is thus clear that under the scheme questions of existence, validity of effect (scope) of the arbitration agreement itself, in cases where the arbitration clause embraces within its scope such questions, (unless decided by the Court in a section-3 petition) could be initially determined by the arbitrators, which would be subject to the final decision of the Court. This position under the New York Convention (to give effect to which the Foreign Awards Act was pass....
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....rds on that basis, though it is clear that their provisional or tentative decision on questions of their own jurisdiction would be subject to the final determination by the Court and if the Court takes a contrary view their award will not be given effect to and in our view this is exactly the scheme of the Foreign Awards Act. It may not be out of place to mention here that the statement of Albert Jan van den Berg that many national arbitration laws allow the arbitrator to give a provisional ruling on his competence in order not to delay the arbitration and to alleviate dilatory tactics by obstructing respondents is borne out in regard to the general law of arbitration both English and Indian by several decisions. The position under English law has been summarised in Russel on Arbitration at pages 91-92 where a fuller statement of law (to which we had adverted earlier) appears thus: " It can hardly be within the arbitrator's jurisdiction to decide whether or not a condition precedent to his jurisdiction has been fulfilled. It has indeed several times been said bluntly that an arbitrator has no power to decide his own jurisdiction and in one case where rules of an institution prepa....
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....istence, validity or effect (scope) is neither invalid nor void. In Heyman v. Darwins Ltd. Lord Wright's observations at p. 385 of the Report clearly suggest that there can be a valid agreement to refer any dispute to arbitration including a dispute as to whether the contract in which the arbitration clause is contained was ever entered into at all, or whether if there was, it had been avoided or ended. As regards Indian law in Fertilizer Corporation of India v. Chemical Construction Corporation(1) the Bombay High Court has clarified this position while dealing with Rules 3 and 4 of Article 13 of the Rules of Conciliation and Arbitration framed by the International Chamber of Commerce under which the arbitrators were clothed with a power to decide, inter alia, a question as to the existence and validity of the Contract. Not only has the High Court held that the conferral of such power on the arbitrators does not render the Rules void but has further gone on to hold that if such a plea is raised by way of a defence in an application for stay of suit under s. 34 of the Arbitration Act it will be for the Court to consider the validity of the arbitration agreement itself and if in the ....
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....greement contained in an underlying Commercial Contract is fundamentally different from an inquiry into the scope and effect of such agreement in as much as the former goes to the root of the arbitration agreement whereas the latter pre-supposes that the arbitration agreement exists in fact and in law and the inquiry is then undertaken as to its true scope and effect; (b) that indisputably, decided cases have made this distinction between the two concepts, e.g. in Jawahar Lal Barman's case (supra) this Court has noted this distinction for the purposes of procedural aspects arising under ss. 31(2), 32 and 33 of the Arbitration Act, 1940, but the English cases particularly Heyman v. Darwins Ltd. (supra) and Willesford v. Watson (supra) have made that distinction substantively; (c) that certain observations made by this Court in para 6 of its judgment in Water Supply Service India (P) Ltd. v. The Union of India and Others(1) on which Counsel for Renusagar have relied in support of their contention that existence of an arbitration agreement is the same as the effect (scope) thereof, do not, in our view, have the effect of equating the question of the scope of the arbitration agreement ....
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....ide the agreement, and directed the parties to go to arbitration by staying the suit. It would be debatable whether in such a case where the Court has expressly declined to decide the dispute involved between the parties and has directed the parties to go to arbitration, the arbitrator's decision on the question of his jurisdiction would again be subject to Court's decision. Would it not be a case similar to the case falling within the principle of a specific question of law being expressly referred to an arbitrator whose decision thereon finally binds the parties: But as stated at the out set, the aforesaid question on which we have expressed our view, does not arise for decision in this case. It was next contended by Counsel for Renusagar that a stay, if granted as sought by G.E.C. in a petition under s. 3, it would render Renusagar's suit dead for all practical purpose and there will be nothing left to be decided in the suit either because the suit is stayed indefinitely or alternatively because the decision on the issue would operate as red judicata in the suit, and, therefore, no relief of stay should be granted which will have such effect merely on a prima facie view or a pro....
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....t before granting the stay the Court has to satisfy itself that arbitration agreement exists factually and legally and that the disputes between the parties are in regard to the matters agreed to be referred to arbitration (these aspects fall within the phrase 'if satisfied that there is no reason by the matter should not be referred' occurring therein) and decided cases have taken the view that the Court must satisfy itself about these matters before the stay order is issued. In other words, Court under s.34 must finally decide these issues before granting stay. In Phagwandas v. Atmasing on a consideration Act the Bombay of the scheme underlying ss. 32,33 and 34 of the Arbitration High Court has taken the view that is a defendant who applies for stay s. 34 has to say that there is an arbitration agreement that if the plaintiff says that there is no agreement then the issues arises between the parties and there nothing in s. 34 to prevent the Court from deciding that issue to enable it to pass an order under that Section. The same position under s. 4(1) of the English Arbitration Act, 1950 has been affirmed in a judgment of the Court of Appeal in England in Modern Building Wale Ltd....
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.... raised in this application under s. 34 of the Arbitration Act, the Court has undoubted jurisdiction to decide it for the purpose of finding as to whether or not there is a binding arbitration agreement between the parties to the suit." The Court actually sent the case back for a decision of that question with a direction that if the Court came to the conclusion that the respondent was, in fact, a party to the contracts, the suit shall be stayed and the appellant would be allowed to proceed by way of arbitration but, if, on the other hand, the finding was adverse to the appellant the application for stay will be dismissed. Counsel for Renusagar pointed out that the suit did not merely raise the issue that the respondent was not a party to the contract- notes and that therefore, there was no arbitration agreement between the parties but also claimed relief on merits, namely, an injunction restraining the appellant from claiming damages in respect of the said contracts and, therefore, the direction to stay the suit in case the finding on the main issue went a against the respondent, had some meaning but in the instant case before us no relief on merits has been claimed by Renusagar ....