TMI Blog1984 (8) TMI 295X X X X Extracts X X X X X X X X Extracts X X X X ..... were heard together and parties did put before the Court-Trial Court, the Appeal Court and even before us the entire material such as each wanted to rely upon and sought a decision on the concerned issue and we are satisfied that the finding recorded by both the lower courts on the issue is correct; and in that view of the matter the prayer for injunction restraining arbitration sought by Renusagar could not be granted and was rightly refused. - Civil Appeal No. 2434-35 of 1984 - - - Dated:- 16-8-1984 - V. D. TULZAPURKAR and R. S. PATHAK, JJ. JUDGMENT Appeals by Special leave from the Judgment and Order dated the 19th to 21st day of October, 1983 of the Bombay High Court in Appeal Nos. 404 405 of 1983. F.S. Nariman, S.S. Ray, I.M.Chagla, P.L. Dubey, A.P.Chinoy, E.B. Desai, N.P. Bharucha, N.R. Khaitan, Anil Kumar Sharma Praveen Kumar for the appellants. N.A. Palkhivala, K.S. Cooper, S.F. Dastur Dr. Y.S. Chitale, S.S. Shroff, S.A. Shroff Mrs. P.S. Shroff for Respondents in CA. No. 1488 of 1984. K.S. Cooper, J.J. Bhatt, Amit Desai, S.A. Shroff and Mrs. P.S. Shroff for the Respondent in CA. No. 1489 of 1984. The Judgment of the Court was delivered by these two ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt would be fully operational by the end of 30th Month from the Contract Effective Date. The parties therefore, agreed that substantial payment of the purchase price by Renusagar should commence when the plant became operational, i.e. by June 30, 1967; it was also agreed that no interest would be payable by Renusagar during the delivery period, that interest shall be paid during the erection period (i.e. 16th to 30th Month) and thereafter till payment but the interest during the erection period would be capitalised and added on to the principal. Accordingly, Art. III of the Contract stipulated that initially 10% of the total Contract Base price (the amount coming to U.S. $ 1,319,500) should be paid either in cash or by means of a Letter of Credit within 30 days of the Contract Effective Date and that the balance of 90% of the purchase price plus interest at 6-1/2% per annum from 16th to 30th Month aggregating to U.S. $ 12,776,058,75 ($ 11,875,500. for principal plus $ 900,558,75 being the capitalised interest at the aforesaid rate for the aforesaid period) should be paid in accordance with the schedule of payments set out therein. The schedule for the payment of the said balance of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be entered in any court of competent jurisdiction." Pursuant of the said Contract Renusagar made the initial payment 10% of the Contract Base price and also issued in all 64 promissory notes (16 in each of the four series) all dated 31-12-1964 but with due dates of payment synchronizing with the dates indicated in the Schedule of payments and forwarded the same to the Escrow Agent under the Escrow Arrangement mentioned in Art.III-B whereunder the Notes were to be released to G.E.C. in numerical sequence and in amounts determined by the Escrow Agents by applying certain (rather complicated) formulae specified in sub- clauses (a) to (e) of Clause-B. Renusagar also furnished a guarantee executed by the UCO Bank irrevocably guaranteeing to G.E.C. and to any subsequent holder in due course of the Notes the full and prompt payment of the principal and interest on the Notes. Subsequently by an agreement recorded in G.E.C.'s letter dt. June 11, 1965 and as approved by the Central Government the said 1964-Contract (IGE-9584) was extended to include the supply of unfabricated structural steel to Renusagar for approximately U.S. $ 300,000 on the same conditions in regard to payment as contai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n furnishing security of Rs. four lakhs (which Renusagar did) the tax exemption continued with the result that there was no necessity to deduct any amount from interest payable to G.E.C. nor to deposit the same as tax with the Indian Government. Even so, Renusagar by its letter dated June 30, 1970 informed G.E.C. that it would continue to calculate interest at 6.5% and make payment to G.E.C. after withholding and keeping in reserve the tax liability out of the amount due to it. The amount so withheld came to 73% of interest payable to G.E.C. on the instalments of purchase price after 1970 and Renusagar only made payment of interest to the tune of 7% to G.E.C. Surprisingly, the interest at 73% which represented the tax deducted at source was not even made over by Renusagar to the Indian Government which resulted in depriving G.E.C. of the benefit of getting the corresponding credit in their U. S. Tax Assessments. Ultimately the Delhi High Court by its judgment and order dated November 17, 1980 allowed Renusagar's writ petition and quashed the impugned order dt. Sept. 11, 1969 revoking the tax exemption. In the correspondence that ensued Renusagar not merely acknowledged that the amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the dates of payment on the ground that it would result in larger out-flow of foreign exchange and advised Renusagar to effect payments as per the original schedule including instalments which had since fallen due. The result was that the original schedule of payment remained operative and there was delay on the part of the Renusagar to make payment of certain instalments on due dates. Such delays occurred in respect of four instalments, namely, instalments No.1 evidenced by promissory note No.1 was payable on 30.6.1967 but was paid (in instalments) by July 1970; instalment No.2 evidenced by promissory note No.2 was payable on 31.12.1967 but the same was paid (in instalments) by December 1972; instalment No.4 evidenced by promissory note No.4 was payable on 31.12.68 but was paid (in instalments) by December 1973; and instalment No. 5 represented by promissory note No. 5 was payable on 30.6.1969 but was, in fact, paid (in instalment) by February 1976. On account of the delays in the payment of instalments of purchase price together with interest Renusagar became liable to pay delinquent interest to G.E.C. In the correspondence on the subject Renusagar accepted the liability to pay s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Court of arbitration of I.C.C. in pursuance of Art. XVII of the Contract were threatened and this was followed by a letter dated March 2, 1982 addressed to the Secretariat, Court of Arbitration of I.C.C. containing a Request for Arbitration being undertaken by it seeking reliefs as set out in the notice to Renusagar. After I.C.C. took cognizance of the Request for Arbitration by G.E.C. it called upon Renusagar to nominate its Arbitrator, file its reply and remit certain sums towards the administrative expenses and arbitration fees. On June 11, 1982, Renusagar filed suit No. 832/1982 in the Bombay High Court on its Original Side against G.E.C. and I.C.C. seeking a declaration that the claims referred to the arbitration of I.C.C. by G.E.C. were beyond the scope purview of the arbitration agreement contained in Art. XVII of Contract I.G.E. 9584 dated August 24, 1964 and that G.E.C. was not entitled to refer the same to the arbitration; a consequential prayer for injunction restraining G.E.C. and I.C.C. from proceeding further with the reference was also made and an injuction was also sought against I.C.C. restraining it from requiring Renusagar to make any deposit towards adminis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that since all the ingredients of s. 3 of the Foreign Awards (Recognition and Enforcement) Act, 1961 had been satisfied it was obligatory upon the Court to stay the suit and G.E.C. was entitled to that relief. He therefore, allowed the Arbitration Petition 96/1982, granted the stay of suit and all the proceedings therein and vacated all the interim reliefs which were granted earlier by the ad interim order. Renusagar preferred two appeals being Civil Appeal Nos. 404-405 of 1983. At the hearing of the appeals Counsel for Renusagar raised four contention: firsts, according to him an Arbitrator had no jurisdiction to decide the limits of his own jurisdiction and since in the case of international arbitration the jurisdiction of the Arbitrator had to be decided according to the law of the Forum where the question is raised in the instant case being the Indian Law) the jurisdiction of the Arbitrator, according to that law, had to be decided by the Court and not by the Arbitral Tribunal; secondly, the dispute sought to be referred related substantially to the claim for interest and that claim had to be (and was so stated in the Notice of intention to arbitrate) founded on the promissory ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch a suit can never be stayed under s.3 of the Foreign Awards Act and that, therefore, the petition under s.3 (which is really in the nature of s.34 application under the Arbitration Act, 1940) is totally misconceived and liable to be dismissed; Counsel further submitted that the suit filed by Renusagar is not "in respect of any matter agreed to be referred to arbitration" as required by s.3 and, therefore, the stay sought for by G.E.C. should be refused; Counsel further urged that the Court acting under s.3 (like the Court acting under s.34 of the Arbitration Act) being a Court of limited jurisdiction cannot determine the question of the existence, validity or effect of the arbitration agreement (which is the only issue to be tried in Ranusagar's suit) and it is for the Court trying the suit to decide the question raised in the suit and, therefore, a stay, if granted under s.3, would finally determine the suit or render it almost dead for all practical purposes and, therefore, no relief on the stay petition can be granted which will have such effect; Counsel finally submitted that the question raised in the suit relating to the effect (scope) of the arbitration agreement, which i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or validity (i.e. legal existence) of the arbitration agreement if contained in the underlying commercial Contract and this must be so, for, if the existence or validity of the underlying commercial Contract is successfully challenged the arbitration clause which is the part and parcel thereof must perish with it and therefore the Arbitrator will have no jurisdiction to decide the issue of the existence or validity of the agreement; but even here it is well settled that if the arbitration agreement so widely worded is separate and independent from the commercial Contract the arbitrator will have jurisdiction to decide the questions about the existence or validity of the commercial contract; but Counsel urged that these principles have no application whatsoever to a case where the issue relates to the scope and effect of the arbitration agreement contained in the underlying commercial contract and the arbitration agreement is wide enough to include such an issue, for, in such a case the Arbitrator will have jurisdiction to decide that issue. This being the well settled legal position Counsel urged that since in the instant case the Arbitration Clause contained in the underlying com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry notes; as regards the claim for compensatory damages, it being a liability arising in tort for wrongful retention of the first two funds and since it was being enforced on the basis of Renusagar's status as a stakeholder or constructive trustee the same is clearly outside the scope of the arbitration agreement. Such being the precise nature of the three claims that have been referred by G.E.C. to arbitration, counsel urged that since the issue of arbitrability of these claims is being raised in Renusagar's suit it is but proper that till the issue raised in the suit is finally decided by the Court the arbitration proceedings should be injuncted. On the other hand Counsel for G.E.C. vehemently disputed that the Commercial Contract (IGE 9584) contains no obligation to pay any interest on unpaid purchase after June 30, 1967 or that such obligation to pay interest after that date is only to be found in the promissory notes; he pointed out that such obligation is to be found in the Contract itself and could be readily inferred from Art. III(A)3(c) read with Art.XIV-B and as such the first two claims for Unpaid Regular Interest and Delinquent Interest due after June 30, 1967, preferre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated the ad interim injunction and stay ed Renusagar's suit. It will be convenient to deal with the second question raised by counsel for the appellants in these appeals first, namely, whether on merits the three claims referred by G.E.C. to the Court of Arbitration of I.C.C. are beyond the scope/purview of the arbitration clause being Article XVII contained in the Commercial Contract IGE 9584 ? The answer to this question must depend upon (a) what disputes are covered by the arbitration agreement and (b) what is the real nature of these claims under the reference. Aspect (a) Obviously depends upon the language used in the arbitration agreement whose construction would be relevant for deciding both the questions (i) whether it embraces even questions of its existence, validity and effect (scope) (particularly the last which bears on the arbitrability of the three claims) and (ii) whether the three claims fall within its scope or purview; in other words, is the language of the arbitration agreement wide enough to cover either of the questions or both. The arbitration clause in the Commercial Contract has already been set out in extenso in the earlier part of the judgment and the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wide language that had been used in the arbitration clause (words being "in respect of") and the distinction between matters "arising out of" and "under the agreement" has been put in the clearest terms by Lord Porter at page 399 of the Report thus :- "In such a case (case of repudiation) the question of damage has still to be determined and the question whether there has been repudiation may be still in issue. Are these disputes under the contract-I use the word "under" advisedly since expressions such as "arising out of" or "concerning" have a wider meaning ? I think they are." Incidentally, while laying down the ratio in the case as indicated above, Viscount Simon L.C. also stated the law as to the circumstances under which an arbitration clause in a commercial contract would become unenforceable thus :- "If the dispute is whether the contract which contains the clause has ever been entered into at all, that issue cannot go to arbitration under the clause, for the party who denies that he has ever entered into the contract is thereby denying that he has ever joined in the submission. Similarly, if one party to the alleged contract is contending that it is void ab initio (becau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the arbitrator cannot clothe himself with jurisdiction the question of his jurisdiction must ultimately depend on the wording of the Arbitration Clause. At page 392 of the Report the learned law Lord has observed thus: "I think it essential to remember that the question whether a given dispute comes within the provisions of an arbitration clause or not primarily depends on the terms of the clause itself. If two parties purport to enter into a contract and a dispute arises whether they have done so or not, or whether the alleged contract is binding on them, I see no reason why they should not submit that dispute to arbitration. Equally I see no reason why, if at the time when they purport to make the contract they foresee the possibility of such a dispute arising, they should not provide in the contract itself for the submission to arbitration of a dispute whether the contract ever bound them or continues to do so. They might, for instance, stipulate that, if a dispute should arise whether there had been such fraud, misrepresentation or concealment in the negotiations between them as to make an apparent contract voidable, that dispute should be submitted to arbitration. It may re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not in dispute." It is true that this distinction been has noted for purposes of procedural aspects arising under the three sections but the several authorities discussed above. Particularly Heyman v. Darwins Ltd. and Willesford v. Watson (which has been digested and annotated at two places in Russel on Arbitration at pp.91 and 171) have made the distinction substantively. In Balabux Agarwalla v. Sree Luchminarain Mfg. Co.(1) Das, J. has clearly envisaged the possibility of disputes as to the existence, validity or effect of an arbitration agreement being properly referred to the arbitration of an arbitrator by means of a collateral or subsequent agreement between the parties and the learned Judge has pointed out that there was nothing in the scheme of ss.31 or 33 of the Arbitration Act, 1940 to indicate that such disputes can never form the subject matter of an arbitration agreement or must always be decided by the Court as opposed to an arbitrator. In Waverly Jute Mills Co. v. Raymon Co.(2) at p.224 of the Report the following statement of law appears: "A dispute as to the validity of a contract could be the subject-matter of an agreement of arbitration in the same manner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... el for Renusagar. We are conscious that Counsel for Renusagar have strongly disputed the correctness of proposition No. 4 above, but we propose to deal with their caveat against it together with the authorities relied upon by them in support thereof later. At this stage it will suffice to observe that since the parties to the underlying Commercial Contract here have used the expressions "arising out of" or "related to this contract" in the arbitration clause contained in the Contract, there can be no doubt that the parties clearly intended to refer the issue pertaining to the effect (scope) of the arbitration agreement to the Court of Arbitration of I.C.C. in other words, the issue about arbitrability of the three claims under reference has been referred. Turning to aspect (b) which is really the crux of the matter on merits, we shall have to ascertain the precise nature of the three claims in order to determine whether they fall within the arbitration clause which uses expressions of the widest possible amplitude and content. While narrating the chronological events in the earlier part of our judgment we have indicated what these three claims are and how they have arisen. The th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the promissory notes". Counsel pointed out that Article III of the Contract provides for payment of the total purchase price in three modes, the third mode being by executing promissory notes and urged that since the requisite promissory notes were executed by Renusagar these notes must be regarded as having been executed in the complete discharge and satisfaction of the obligation under the Contract and that the sole obligation which survives since after the execution of the notes is the one which arises under the notes. In support of this contention counsel relied upon two decisions of this Court, namely, (1) M/s. Ogale Glass Works Ltd. case where the posting of cheques by a purchaser by way of remitting the bills payable to the seller was held to amount to payment (that is, in discharge of the obligation to pay the price for goods purchased) and (2) H.P. Gupta v. Hira Lal where the posting of a dividend warrant (cheque) by a company at Delhi for despatching it to a shareholder at his registered address (which was Meerut) as per Art. 132 of the Articles of Association was deemed as payment to the shareholder in discharge of the company's obligation and a criminal complaint for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that even if the suit was traced to the original contract and the plaint referred to antecedent facts which gave arise to the issue of the cheques by the defendant in favour of the plaintiff the arbitration clause could not come into play as the suit was on dishonored cheques and there was no dispute as regards the quality of the goods or quantum of the sale consideration. It is obvious that this last part of Counsel's submission may hold good only if these two claims are held to arise solely under the promissory notes and that the notes are held to be in complete discharge of the obligation under the Commercial Contract and constitute independent and separate contracts by themselves but not otherwise. As regards the third claim Counsel urged a two-fold contention. First, that the claim obviously arises in tort out of wrongful retention of monies under the first two claims for long 12 years and Renusagar is being saddled with this liability in its capacity as a tort-feaser, stake- holder or constructive trustee and hence is not covered by the arbitration clause; and secondly that if the first two claims are not covered by the arbitration clause this claim would also fall outside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id". But Counsel for G.E.C. has in our opinion rightly relied upon two provisions in the Contract which clearly show that the obligation to pay such interest after June 30, 1967 till payment has been provided for by the Contract. Article III-A 3 (c) (relevant portion) runs thus: "The notes shall be prepared substantially in the form shown in the attached 'Exhibit B' entitled 'Promissory Note' and shall bear interest, at the rate of 6 1/2% per annum on the outstanding principal balance, commencing thirty(30 months after Contract Effective Date............." It is no doubt true that the promissory notes executed by Renusagar recited the obligation to pay future interest after June 30, 1967 till payment but obviously the promissory notes incorporated such obligation therein because of the aforesaid provision in Art. III-A 3 (c). The aforesaid sub-clause in the Contract itself says that the notes shall bear interest at the rate specified on the outstanding principal balance after June 30, 1967; in other words it is the Contract which provides for interest being payable on the outstanding principal balance after June 30, 1967. Counsel for Renusagar, however, argued that the contract ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the amounts of the promissory notes (which included capitalized interest), which obviously means further interest on outstanding principal balance under the notes from June 30, 1967 onwards till payment. In our view these provisions which are to be found in the contract clearly show that the promissory notes are not sole and exclusive repository of GEC's right to claim and receive future interest on unpaid price after June 30, 1967 but that the contract itself provides for the obligation to pay such interest after that date till payment. Reference was made to the fact that the Bank Guarantee endorsed on each promissory note is restricted only to the payment of principal and interest on the note as per its terms and does not extend to or cover any residuary payment obligation contained in the Contract, de hours the promissory-note. But this is as it normally should be. Since the bank guarantee is in connection with and endorsed on the promissory note it would ordinarily refer to the obligations arising thereunder and not to any obligation arising under any other document and the question whether the Contract contains such obligation to pay future interest must depend upon its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by Renusagar in a Bank in New York City valid for 18 months will have to be regarded as actual payment which is hardly arguable. But the real answer to the submission is that it is always a question of intention of the parties whether a negotiable instrument taken on account of a debt operates as an absolute discharge of the debt or not. In Bhashyam Adiga's treatise on the Negotiable Instruments Act (14th Edn.) the law on this aspect has, in our view, been correctly summarised at page 774 thus: "It is always a question of intention of parties whether a bill or a promissory note or a cheque taken on account of a debt, operates as an absolute discharge of the debt, or only as a conditional payment of it. Generally speaking, a bill or note can never go in discharge of a debt unless it is a part of the contract that it shall be so: for, a mere promise to pay cannot be regarded as an effective payment....... This rule may also be based on the general principle of law that one simple executory contract does not ordinarily extinguish another, the presumption in such cases is that the bill or promissory note is taken only as a conditional payment." In Commissioner of Income-Tax v. Ka ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tended to and agreed to accept and treat the posting of the instruments (cheques in one case and dividend warrant in the other) as actual payment in discharge of the original obligation. For instance in Ogale Glass Works Ltd. case (supra) the question that arose for determination on this aspect of the matter was whether the assessee (seller) could be said to have received income (sale proceeds) in British Indian within the meaning of sec.4(1)(a) of the Indian Income-Tax Act, 1922 when the Government of India (the purchaser of goods) had sent the sale proceeds by means of cheques drawn and posted in Delhi but received by the assessee in Aundhan Indian State ? The answer to the question depended upon whether the posting of cheques in Delhi amounted to payment to the assessee and the Court held that it did by relying upon four or five special circumstances that obtained in the case. Apart from the fact that clause 15 of the Contract itself provided for payment of the sale proceeds by cheques, the Court noticed (a) that in the bills submitted by him to the Government the assessee has expressly asked for payment by cheques, (b) that as per the normal course of business usage parties int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing factors emerge very clearly: (a) that the pro-notes are not expressed to be payments: in fact, it is in terms stated that the "total contract base price shall be paid by purchaser in lawful money of the USA" (Art. III-A) and surely promissory notes are not "lawful money" of USA: (b) that because the Contract so provides even the pro-notes also recite that the principal and interest thereunder are "payable in lawful money of the USA"; (c) that Art. III-A (3) which deals with pro-notes provides for payment of the remaining 90% of the price "in accordance with the following Schedule of Payments" and expressly states that "the obligation to make such payments is to be evidenced by four series of purchaser's unconditional negotiable promissory notes", which clearly shows that the pro-notes are not payments but are intended merely to be the evidence of the obligation to pay the price; (d) that though stated to be "unconditional and negotiable" (perhaps so between the drawer and subsequent assignees in case of negotiation), as between the seller and the purchaser these have been made subject to several conditions such as-(1) the amounts thereof were payable only on the assumpt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w of this conclusion of ours it is unnecessary to deal with the further submission of Counsel for Renusagar based on the so- called factors of unconditional nature and negotiability of the promissory notes as destroying the arbitrability of the claims thereunder as also the case law relied upon in support thereof. Similarly this conclusion of ours also makes it unnecessary for us to deal with the alternative submission made by counsel for G.E.C. that these claims would still fall within the wide expressions occurring in the Contract even on the assumption that the promissory notes are severable from the Contract, that the obligation arising thereunder is different from the one under the Contract and that these notes are in payment of the obligation to pay the price under the Contract. As regards the third claim of compensatory damages it is true that Renusagar is being saddled with this liability as tort-feaser, a stake-holder and/or a constructive trustee, but, in our view, that aspect by itself will not justify a conclusion that the same is not covered by the arbitration clause because the question is not whether the claim lies in tort but the question is whether even though it h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were lost and damaged owing to the negligence of the defendants in using an unsuitable place in which to store them and guarding them inefficiently. The clause providing for arbitration ran: "If the customer makes any claims upon or counterclaim to any claim made by the contractors" the same shall be referred to the decision of the two arbitrators. The question was whether the claim for damages was covered by this clause. The Court of Appeal held that even if the claim in negligence was a claim in tort and not under the contract yet there was a sufficient close connection between that claim and the transaction to bring the claim within the arbitration clause. This authority clearly shows that even though a claim may not directly arise under the contract which contains an arbitration clause, if there was sufficient close connection between that claim and the transaction under the contract it will be covered by the arbitration clause. In Astro Vencedor Compania Naviera SA of Panama v. Mabanaft G m b H(1) the arbitration clause contained in a Contract of charter-party ran: "any dispute arising during the execution of this charterparty" shall be settled by two arbitrators, one to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y view, in the circumstances of this case (although it may not be in all cases) the quantum merit is an incident which arises out of the contract. It is not a remedy for breach or arising on frustration, but it is an incident, in my view, which does arise as a consequence of the contract or `arising out of' it. One has only to look at the pleadings, at the points of claim, and to visualise what is involved in the arbitration to see the close association between the written contract and the claim advanced in this way on a quantum merit." In Alliance Jute Mills Co. Ltd. v. Lal Chand Dharanchand and Another(1) disputes between the parties to a commercial contract were arbitrable under the bye-laws of the East India Jute Hessian Exchange Association and the relevant bye-law ran thus : "All matters, questions, disputes, difference and/or claims arising out of and/or concerning and/or in connection with and/or in consequence of or relating to this contract shall be referred to arbitration...................." Under the commercial Contract Respondent No. 1 had sold, through a broker, certain quantities of fibre to the appellant-mill and after effecting delivery of the goods Respondent N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich should have been returned by the appellant with compensation for deterioration, or that payment should be made for it as the market rate. The appellant contended that the terms of contract did not require the respondent to tender for inspection any quantity in excess of the contracted quantity, that the claim was in detinue relating to an involuntary bailment and not in relation to anything done in the performance, implementation or execution of the contract and, therefore, it was not a dispute arising out of the contractor in connection with the contract. Arbitration Clause in the contract covered any question or dispute arising under the contract or `in connection with the Contract'. On the question whether the arbitrators had jurisdiction to adjudicate upon that claim this Court, relying upon its earlier decision in Ruby General Insurance Co. Ltd. v. Peary Lal Kumar(1) held, that the test for determining the question is whether recourse to the contract by which both the parties are bound, was necessary for the purpose of determining whether the claim of the respondent was justified or otherwise and since it was necessary in the case to have recourse to the terms of the cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) and squarely fall within the widely worded arbitration clause being Art. XVII contained in the Commercial Contract. It is also clear that the arbitration clause embraces even the question of its effect (scope), that is to say, it embraces the issue of the arbitrability of the three claims. Questions whether in law, namely, the law of the Forum, the arbitrators will have jurisdiction and power to decide the arbitrability of the claims or not and whether Renusagar's suit is liable to be stayed or not will be considered by us next but at this stage we are categorically negativing the contentions of Counsel for Renusagar that on merits the three claims are beyond the scope or purview of the arbitration clause or that the arbitration clause on its own language does not embrace the issue of arbitrability of the three claims. We shall now deal with the principal legal contention raised in support of these appeals by Counsel for Renusagar that under s. 3 of the Foreign Awards Act, 1961, having regard to its scope, a suit in the nature of a petition under s. 33 of the Arbitration Act, 1940 can never be stayed, that G.E.C.'s Arbitration Petition (No. 96 of 1982) in that behalf is totally ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e subject-matter of the reference to the arbitrators ; Counsel also relied upon three more decisions of this Court in Khardah Company's case (supra), Waverly Jute Mills' case (supra) and M/s. R.N. Ganekar Co's(2) case where, according to Counsel, observations supporting the above view have been made. (c) That even of the assumption that arbitrability of the three claims is factually covered by the wide language of the arbitration clause in question here and that the suit is `in respect of a matter agreed to be referred to the arbitration', in law, that is to say, under the law of the Forum (being the Indian Law in the instant case) the issue of arbitrability of the claims raised in the suit cannot be finally determined by the arbitrators but must rest with the Court and, therefore, Renusagar's suit cannot be stayed under s. 3 ; in this behalf Counsel urged that both English Law as well as Indian Law is the same (the latter being the law of Forum here) and does not allow questions of arbitrators' own jurisdiction to rest finally with the arbitrators and in support reliance was placed on a number of decisions English, American and Indian (particularly decision in Attorney-General ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Governments of the various countries and nongovernmental organisations and finally a new International Convention on the Recognition and Enforcement of Arbitral Awards was adopted at New York on 10th June, 1958. The Convention was duly ratified by the Government of India and was deposited with the Secretary-General of the United Nations on 13th July, 1960. The present Act was enacted, as its long title indicates, to give effect to the said New York International Convention on the Recognition and Enforcement of Foreign Arbitral Awards to which India is a party. Article II of the Convention provides for recognition by Contracting States of agreements, including arbitral clauses in writing, by which the parties to the agreement undertake to submit to arbitration and or any differences which have arisen or which may arise between them in respect of defined legal relationship, whether contractual or not, concerning a subject-matter capable of settlement by arbitration and s. 2 of the Act defines the expression "foreign award" accordingly, i.e. closely following the language of Article II of the Convention. It is obvious that since the Act is calculated and designed to subserve the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere construed by this Court in V/O Tractoro export, case as prescribing a requirement that there must be an actual reference made to the arbitrators before any party to the arbitration agreement could invoke the section and Parliament immediately stepped in and amended the section by substituting in their place the words : "if any party to an agreement" thereby facilitating the stay of legal proceedings even before any actual reference is made and compelling speedy settlement of disputes through agreed arbitration. On a plain reading of the section as it now stands two things become very clear. In the first place the section opens a non-obstante clause giving overriding effect to the provision contained therein and making it prevail over anything to the contrary contained in the Arbitration Act, 1940 or the Code of Civil Procedure, 1908. Secondly, unlike s 34 of the Arbitration Act which confers a discretion upon the Court, the section uses the mandatory expression "shall" and makes it obligatory upon the Court to pass the order staying the legal proceedings commenced by a party to the agreement if the conditions specified therein are fulfilled. The conditions required to be fulfil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred and such questions can be raised only by an application under s. 33 of the Act whereas under the Foreign Awards Act there is no provision similar or akin to ss. 32 and 33 (and that is why a suit of the nature filed by Renusagar qua the arbitration agreement covered by the Convention is maintainable) but by virtue of ss. 3 and 7 the same purpose is served though by different procedure. Sections 3 and 7 read together disclose a scheme that so far as questions of existence, validity and effect (scope) of the arbitration agreement are concerned, the determination thereof by the arbitrators is also subject to the decision of the Court and this decision of the Court can be had either before the arbitration proceedings commence or during their pendency, if the matter is decided by the Court in a s. 3 petition, as in the present case, or can be had under s. 7 after the award is filed in the Court and is sought to be enforced under s. 6. True, section 4(2) declares that a foreign award shall be treated as binding `for all purposes' on persons as between whom it is made but that is subject to s. 7 where under enforcibility thereof is made dependent upon satisfaction of certain condition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or (for which Counsel for Renusagar have been contending and we shall deal with it later) would be hardly applicable to any foreign award made under the Act. if the scheme of the Act emerging from a combined reading of ss. 3 and 7 clearly shows that so far as the questions of existence, validity and effect (scope) of the arbitration agreement are concerned, the determination thereof by the arbitrators is subject to the decision of the Court and that this decision of the Court can be had under s. 7 even after the award is made and filed in the Court but before it is made enforceable ; s. (7)(a)(i) and (iii) show that the award can be challenged on these grounds which implies that the arbitrators have decided those questions while making their award. Turning now to the question whether in this case conditions (iii) and (vi) indicated above are satisfied or not we would like to observe that the two conditions are inter-related and in substance bear upon the same aspects and, therefore, could be dealt with together. The main question is whether Renusagar's suit can be said to be "respect of any matter agreed to be referred to arbitration" ? On this, Counsel for Renusagar put forward ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onstrued would offer no guidance in construing the relevant phrase occurring in s. 3 of the Foreign Awards Act which will have to be construed on its own language and in the light of the scheme of the Foreign Awards Act and (ii) though the ratio in Shiva Jute Bailing Ltd. case has been expressed rather broadly it cannot be forgotten that in each one of the four cases the question pertained to either the existence or the validity of the arbitration agreement and not the effect (scope) thereof, (i.e. not the issue of the arbitrability of the claims) and, therefore, the ratio in that case as also the supporting observations made in the other three cases will have to be understood as being applicable to the actual issue that arose on the facts of each on of them. We therefore, conclude that both the conditions (iii) and (vi) are satisfied in the instant case. The next contention-and this has been, if one may so, the crux of the entire submission of Counsel for Renusagar in the case-is that arbitrability of the three claims falls within the wide ambit of the arbitration clause and that therefore Renusagar's suit is in respect of a matter agreed to be referred to the arbitration within t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch a clause admittedly concluded but where it is alleged that either the contract or the arbitration clause or both have become void because of subsequent illegality. It seem to us to follow that even where the arbitration clause is framed as widely as in the present claim and bears the construction which we have upheld in our answer to issue 1(A), Indian law will not allow effect to be given to it so as to allow an arbitrator appointed thereunder finally to determine his own jurisdiction." (e) Becker Auto-Radio case (supra) where the United States Court of Appeals (3rd Circuit) has expressed the view that the question of arbitrability of a dispute is for the Court to decide (para 7 at page 44 of the Report read with footnote 10). (d) R. Prince and Co. v. Governor-General in Council (supra) where following the aforesaid Privy Council decision the Punjab High Court at page 242 of the Report has observed thus : "It is well established that an arbitrator or umpire must not go beyond the submission and although there is a presumption in favour of the validity of the award and the onus of proving that the arbitrator has exceeded his jurisdiction rests on the person alleging it, if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Foreign Awards Act and as such must be considered in light of the scheme of that Act and will necessarily be governed by the provisions thereof. As explained earlier the scheme that emerges on a combined reading of ss. 3 and 7 of the Foreign Awards Act clearly contemplates that questions of existence, validity or effect (scope) of the arbitration agreement itself, in cases where such agreement is wide enough to include within its ambit such questions, may be decided by the arbitrators initially but their determination is subject to the decision of the Court and such decision of the Court can be had either before the arbitration proceedings commence or during their pendency, if the matter is decided in a section 3 petition or can be had under sec. 7 after the award is mane and filed in the Court and is sought to be enforce by a party thereto. In the face of such schemes envisaged by the Foreign Awards Act which governs this case it will be difficult to accept the contention that the arbitrators will have no jurisdiction to decide questions regarding the existence, validity or effect (scope) of the arbitration agreement. In fact the scheme makes for avoidance of dilatory tactics on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss provisions to that effect in order to make clear that in deviates from the prevailing principles of the national arbitration laws." Secondly, even the aforesaid authorities on which reliance has been placed by Counsel for Renusagar (excepting perhaps the American decision in Becker Auto-Radio case merely lay down that the decision on questions of arbitrator's jurisdiction (assuming no distinction is made between questions regarding the existence or validity of the agreement on the one hand and effect (scope) thereof on the other) rests finally or ultimately with the Court and not with the Arbitrator or Umpire. [As regards the American decision in Becker Auto-Radio case it may be stated, as pointed out by Counsel for G.E.C. that the point was not decided but the statement or observation was made on concession of the parties; and as regards statement of law at pages 91-92 in Russell on Arbitration it must be pointed out that the passage pressed into service by Counsel is merely a half portion of the statement of law but the fuller statement of law, as we shall indicate later, gives a different picture.] These authorities do not suggest that the arbitrator or umpire may not decide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Luanda Exportadora and Ors. v. Tamari Sons Others,(2) So far as Indian Law is concerned the position is clarified in Vallabh Pitti v. Narsingdas (supra)...a decision on which Counsel for Renusagar relied where the Bombay High Court has held that the jurisdiction of the arbitrators to decide the question of existence of the contract which contains an arbitration clause is not wholly taken away by mere denial of its existence; that the arbitrator may consider the question of jurisdiction, not to give final and binding judgment on that question but in order to determine what course they should adopt; that they may in a case hold that they have no jurisdiction and direct the party who affirms the jurisdiction to obtain a decision of the Court under the Arbitration Act but on the other hand if they are satisfied that they have got jurisdiction they may proceed with the arbitration and make their award; but a decree in terms of such award may not be made by the Court if at the time when one is sought the Court decides question of jurisdiction otherwise. The High Court pointed out that a similar view was taken by Bachawat, J. in Pannallal Sagoremull v. Fatey Chand Muralidhar(3) and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which arises from the aforesaid discussion it is really unnecessary for us to go into and decide the question whether, in cases where the arbitration clause contained in the underlying Commercial Contract is so widely worded as to include within its scope the questions of its existence, validity or effect (scope), the decided cases have made a distinction between questions as to the existence or validity of the agreement on the one hand and its effect (scope) on the other and have held that in the case of the former those questions cannot be decided by the arbitrators, as by sheer logic the arbitration clause must fall along with the underlying Commercial Contract which is either non-existent or illegal, while in the case of the latter it will ordinarily be for the arbitrators to decide the effect (scope) of the arbitration agreement as is contended for by Counsel for G.E.C., because both under the scheme of the Foreign Awards Act as well as under the general law of arbitration obtaining in England and in India, the decision of the arbitrator on the question of his own jurisdiction will have to be regarded as provisional or tentative, subject to final determination of that questio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arman's case (supra); (d) that an analysis of several decisions cited at the Bar, we venture to suggest, shows that almost all the decision which articulate the principle broadly by saying that an arbitrator has no power to decide questions of his own jurisdiction are cases in which the question of either the existence or the validity of the arbitration agreement was involved, whereas whenever the question of arbitrator's jurisdiction depended upon the scope or effect of the arbitration agreement Courts appear to have readily directed the parties to go before the arbitrators; and (e) in any event the decision of the Court of Appeal in Chancery in Willesford v. Watson (supra)-which decision has been annotated and digested in Russell on Arbitration (20th Edn.)-is a clear authority for the proposition that where the arbitration clause was very widely worded so as to include within its scope any dispute "touching the construction of" the contract which contained the arbitration clause, the Court would not decide but would leave it to the arbitrator to decide the question whether the matter in dispute between the parties fell within the arbitration agreement. In fact, the Court of Appea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration Act, 1940 may have the effect of finally disposing of the suit for all practical proposes as pointed out by the Allahabad High Court. But that is no reason why the relief of stay should be refused by the Court if the concerned legal provision requires the Court to do so. Here we are concerned with s. 3 which makes it obligatory upon the Court to stay the legal proceedings if the conditions of the section are satisfied and what is more the section itself requires that before any stay is granted the Court should be satisfied that the arbitration agreement is valid, operative and capable of being performed and that there are disputes between the parties with regard to the matters agreed to be referred to arbitration (condition (v) and (vi) mentioned earlier). In other words, the section itself indicates that the proper stage at which the Court has to be fully satisfied about these conditions is before granting the relief of stay in a s. 3 petition and there is no question of the Court getting satisfied about these conditions on any prima facie view or a pro tanto finding thereon. Parties have to put their entire material before the Court on these issues (whichever may be raised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the respondent filed a suit for a declaration that he was not a party to the said contracts, he having signed the same as broker and that he had incurred no liability thereunder and he further prayed for the consequential relief of an injunction restraining the appellant from claiming damages in respect of the said contracts. The appellant applied for the stay of the suit under s. 34 of the Arbitration Act. Learned trial Judge granted stay of the suit. The Appellate Bench of the High Court took the view that the only matter in dispute between parties was whether the respondent was a party to the contract or not and that this dispute was outside the scope of the arbitration agreement but no opinion was expressed on the question whether there was a binding arbitration agreement between the parties (which was the only issue in the suit, the relief on merits being consequential) since that would, in the opinion of the Appellate Court, create a bar of res judicata against one of the party. This Court, however, held that it was incumbent upon a Court, when invited to stay a suit under s. 34 of the Arbitration Act, to decide first of all whether there is a binding arbitration agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt was a party to the contracts would have operated as res-judicata in the respondents' suit, the Court directed that issue to be decided in a s. 34 petition for stay. In deciding the question under s. 34 in this manner the Court expressed its entire agreement with the view enunciated by Mr. Justice S.R. Das in Khushiram v. Hantumal that where on an application made under sec. 34 of the Arbitration Act for stay of a suit, an issue is raised as to the formation, existence or validity of the contract containing the arbitration clause, the Court is not bound to refuse a stay but may in its discretion, on the application for stay, decide the issue as to the existence or validity of the arbitration agreement even though it may involve incidentally a decision as to the validity or existence of the parent contract. If this is the position under s. 34 of the Arbitration Act which confers discretionary power upon the Court a fortiori the Court acting under s. 3 of the Foreign Awards Act must decide such issues at that stage when the grant of stay is obligatory. In the instant case the issue pertained to the arbitrability of the three claims under the Arbitration clause in the contract and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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