ivil Appeal No 549 of 1966
Appeal by special leave from the order dated October 23 1964 of the Punjab High Court Circuit Bench at Delhi in Civil Revision No 438 D of 1964
VA Seyid Muhammad and SP Nayar for the appellant
SV Gupte and AK Nag for respondents Nos 1 and 2
AG Ratnaparkhi for respondent No 5
225 The Judgment of the Court was delivered by Ramaswami J
This appeal is brought by Special leave against the judgment of the Punjab High Court in Civil Revision No 438 D of 1964 by which the revision petition of the appellant against the order of Shri DR Khanna Subordinate Judge 1st Class Delhi dated 20th April 1964 in Suit No 128 of 1 963 was dismissed in limine
Suit No 128 of 1963 was an application by the Union of India under sections 5 122313 32 and 33 of the for obtaining a declaration that the reference of the claim of the respondent firm in respect of excess quantity of timber alleged to have been delivered and certain other matters was not covered by the arbitration agreement and for leave to revoke the authority of the Arbitrators and Umpire
The petition was rejected by the Subordinate Judge by his order dated 20th April 1964
By a savingram dated 21st December 1953 the Union of India hereinafter called the appellant entered into a contract of purchase of 101750 cubic feet of teak logs at Rs 912 Vet cft
to be delivered FOR Halisahaar and Lillooah both in West Bengal near Calcutta
The consignee was the District Controller of Stores Eastern Railway
The formal acceptance of tender confirming the savingram and containing the other terms of the contract was issued on 13th January 1954
Besides the quantity of teak logs originally contracted to be supplied the respondent firm subsequently supplied a quantity of 167695 cft
Burma teak squares at the same rate and the contract was accordingly amended on 13th December 1957
It was provided in clause 17c of the acceptance of tender that the respondent firm was to offer the timber for inspection at its own premises at Halisahaar and Lillooah
Although the delivery time was extended from time to time upto 26th January 1958
the respondent firm supplied only 772189 cubic feet of timber and the contract in respect of the unsupplied quantity was cancelled on 20th june 1958 and that the supplied quantity was repurchased by Government from third party at a loss of Rs 15454136 on 23rd July 1958
Including this item the appellant made a claim of Rs 35008599 against the respondent firm out of which it recouped Rs 179366 from the sums due to the respondent firm leaving a balance of Rs17071999
The contract in question is governed by the arbitration agreement contained in clause 21 of the form WSB 133 which states as follows  Arbitration In the event of any question or dispute arising under these conditions or any special conditions of contract or in connection with this contract except as to any matters the decision of which is specially provided for 226 by these conditions the same shall be referred to the award of an arbitrator to be nominated by the Purchaser and an arbitrator to be nominated by the Contractor or in case of the said arbitrators not agreeing then to the award of an Umpire to be appointed by the arbitrators in writing before proceeding on the reference and  the decision of the arbitrators or in the event of their not agreeing of the Umpire appointed by them shall be final and conclusive and the provisions of the Indian  and of the Rules thereunder and any Statutory modification thereof shall  be deemed to apply to and be incorporated in this contract
Upon every and any such reference the assessment of the costs incidental to the reference and award respectively shah be in the discretion of the arbitrators or in the event of their not agreeing of the Umpire appointed by them In pursuance of the arbitration clause the respondent firm appointed one Mr TR Sharma as its arbitrator and the appellant appointed Mr RR Desai Deputy Legal Adviser Ministry of Law Government of India as its nominee
Mr PS Bindra a retired District Judge was appointed as the Umpire by order of the Sub Judge dated 2 8 1961
Both the parties filed their respective claims before the arbitrators
The respondent firm claimed a sum of Rs 7350000 while the appellant contended that the respondent committed breach of the contract by not supplying the stipulated quantity of timber under the contract and as such claimed damages to the extent of Rs 300000
The case of the respondent firm was that in order to cover up possible rejection a quantity of timber much in excess of the contracted quantity was despatched to the consignees and the excess quantity measuring 3400 tons ie 170000 cubic feet was still lying with the Lillooah consignnee and 1500 tons ie 75000 cubic feet with the Halisahaar consignee and had not been returned despite repeated requests
The respondent firm claimed return of this quantity of timber and compensation for its deterioration
It was alternatively contended that in case the Government failed to return the whole or part of the excess timber then payment for that quantity at the market rate should be made
The appellant in its reply denied the allegation relating to the delivery and retention of excess quantity
It was specifically denied that 4900 tons or any quantity was due to be returned to the respondent firm or that it was entitled to recover Rs 7350000 or any amount as claimed
It was contended that in terms of the contract the respondent firm was to offer inspection of the store at its own premises at Lillooah and Halisahaar but instead doing so the respondent firm started to despatch the logs to the DCO s Lillooah and Halisahaar to be 227 inspected at the consignees  premises
This was done for its own convenience and at its own risk
The inspected stores were retained by the consignee while the rejected stores were to be removed by the respondent firm from the consignee s premises at their own expense
It was submitted that the dispute raised by the respondent firm was outside the scope of the arbitration agreement and that the arbitrators had no jurisdiction to entertain such a claim
After hearing the parties the Subordinate Judge rejected the application of the appellant by his order dated 20th July 1964
It is necessary at this stage to quote the relevant clauses of the contract
Clause 13  1  provides Inspection and Rejection Facilities for Test and Examination The Contractor shall afford at his own expense the Inspector all reasonable accommodation and facilities for satisfying himself that the stores are being or have been manufactured in accordance with the particulars and for this purpose the Inspector shall have full and free access at any time during the contract to the Contractor s work and may require the Contractor to make arrangements for anything to be inspected at his premises or at any other place and the Contractor shall reserve a similar right as regards any sub contract he may make
The Contractor shall pay all costs connected with such tests and provide without extra charge all materials tools labour and assistance of every kind which the Inspector may consider necessary for any test and examination other than special or independent tests which he shall require to be made on the contractor s premises and shall pay all the costs attendant thereonfailing these facilities in regard to which the inspector will be the sole judge at his own premises for making the tests the Contractor shall bear the cost of Carrying out such tests elsewhere
Clause 134 reads as follows  Inspection and rejection The whole of a consignment may be rejected if on inspection a portion upto 4 per cent of the consignment at the sole discretion of the Inspector is found  to be unsatisfactory
 Clause 135 states Rejection If any stores are rejected as aforesaid then without prejudice to the foregoing provisions the Secretary Department of Supply shall be at liberty to  228 a allow the contractor to resubmit stores in replacement of those rejected within a time specified by the Secretary Department of Supply the contractor bearing the cost of freight in such replacement without being entitled to any extra payment or b buy the quantity of the stores rejected or others of a similar nature elsewhere at the risk and cost of the contractor without affecting the contractor s liability as regards supply of any further consignment due under the contract or c terminate the contract and recover from the con tractor the loss the purchaser thereby incurs
On behalf of the appellant Dr Seyid Mohammad presented the argument that the dispute regarding the respondent s claim in respect of the excess quantity of timber measuring 4900 tons said to have been tendered but not inspected was not a dispute arising under the contract 0r in connection with the contract  and hence the arbitrators had no jurisdiction to adjudicate upon that claim
It was stated that the terms of contract did not require the respondent firm to tender for inspection any quantity in excess of the contracted quantity of timber and the alleged placing of unlimited stocks of timber at the disposal of the Government officials far in excess of the quantity ordered was beyond the scope of the contract
It was argued that the claim should be treated as a claim relating to a transaction of involuntary bailment and not to anything done in the performance
implementation or execution of the contract
It was said that the claim for return of these goods and damages for deterioration or in the alternative for their market value was a claim in detinue and the dispute was not hence a dispute arising out of the contract or in connection with the contract  but was a dispute relating to a tort of wrongful detention
We do not think that there is any justification for the argument put forward on behalf of the appellant
In our opinion
the claim made by the respondent firm was a claim arising out of the contract
The test for determining the question is whether recourse to the contract by which both the parties are bound is necessary for the purpose of determining whether the claim of the respondent firm iS justified or otherwise
If it is necessary to take recourse to the terms of the contract for the purpose of deciding the matter in dispute
it must be held that the matter is within the scope of the arbitration clause and the arbitrators have jurisdiction to decide this case
In Herman  lint
vs Darwins Ltd1 the law on the point is very clearly stated in the following passage 1 at 365 229 An arbitration clause is a written submission agreed to by the parties to the contract and like other written submissions to arbitration must be construed according to its language and in the light of the circumstances in which it is made
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 because for example the making of such a contract is illegal the arbitration clause cannot operate for on this view the clause itself also is void
But in a situation where the parties are at one in asserting that they entered into a binding contract but a difference has arisen between them whether there has been a breach by one side or the other or whether circumstances have arisen which have discharged one or both parties from further performance such differences should be regarded as differences which have arisen in respect oF or with regard to or under the contract and an arbitration clause which uses these or similar expressions should be construed accordingly
In Stebbing vs Liverpool  London and Globe Insurance Company Ltd 1 the policy of insurance contained a clause referring to the decision of an arbitrator all differences arising out of this policy
It also contained a recital that the assured had made a proposal and declaration as the basis of the contract and a clause to the effect that compliance with the conditions indorsed upon the policy should be a condition precedent to any liability on the part of the insurers
One of the conditions provided that if any false declaration should be made
e or used in support of a claim all benefit under the policy should be forfeited
In answer to a claim by the assured the insurers alleged that statements in the proposal and declaration were false
When the matter came before tire arbitrator the assured objected that this was not a difference in the arbitration and that the arbitrator had no power to determine whether the answers were true or not or to determine any matters which called in question the validity of the policy
In holding that the arbitrator had jurisdiction to decide the matter Viscount Reading CJ observed If the company were seeking to avoid the contract in the true sense they would have to rely upon some matter outside the contract such as a misrepresentation 1 230 of some material fact inducing the contract of which force and effect are not declared by the contract itself
In that case the materiality of the fact and its effect in inducing the contract would have to be tried
In the present case the company are claiming the benefit of
a clause in the contract when they say that the parties have agreed that the statements in question are material and that they induced the contract
If they succeed in escaping liability that is by reason of one of the clauses in the policy
In resisting the claim they are not avoiding the policy but relying on its terms
In my opinion therefore the question whether or not the statement is true is a question arising out of the policy
The principle has been reiterated by this Court in Ruby General Insurance Co 
Ltd vs Pearey Lal Kumar  Anr1
In that case the appellant company insured a car belonging to respondent No 1 and issued the policy which contained inter alia the following terms  All differences arising out of this policy shall be referred to the decision of an arbitrator to be appointed by the parties 
If the company shall disclaim liability to the insured for any claim hereunder and such claim shall not within twelve calendar months from the date of such disclaimer have been referred to arbitration then the claim shall have been deemed to have been abandoned and shall not be recoverable
The car was lost and company through its Branch Manager dis claimed liability on three different dates
The insured did not take any action in regard to the appointment of an arbitrator until more than twelve months after the last disclaimer by the company
The case of the company was that the insured must be deemed to have abandoned his claim by virtue of the contract of insurance policy while the respondent averted that there was never any valid disclaimer by the company of its liability as the Branch Manager had no authority to disclaim the liability and it could have been disclaimed only by the resolution of the company
The company made an application under section 33 of the Indian praying for a declaration that the reference to arbitration was illegal and the award if made by the arbitrator would not bind the company
It was contended on its behalf that the arbitration clause had ceased to be operative and the question as to the existence and validity of the arbitration agreement was triable by the court under section 33 of the and not by the arbitrator
The argument was rejected by this Court
It was held that the point on which the parties were in dispute was a difference 1 1952 3CR 501
231 arising out of the policy because recourse to the contract by which both the parties were bound was necessary for the purpose of determining the matter in dispute between them
As there was no contention raised by either of the parties that there was no contract entered into at all or that it was void ab initio the arbitrator had jurisdiction to decide the matter referred to him
In our opinion the principle applies to the present case and it follows that the dispute between the parties falls within the scope of the arbitration clause
On behalf of the appellant reliance was placed upon the decision of Court of Appeal in Percy vs Young1 in which it was held that the clause that any differences or disputes that may arise between the partners shah be settled by an arbitrator does not include a dispute whether the partnership has been terminated or whether certain shares have been paid on account to the partnership or to one partner alone
In our opinion the principle does not apply in the present case where the question presented for determination is quite different
Counsel for the appellant also referred to Turnock vs Sartoris2
In that case the lessor was under a covenant to supply his lessee with a specific quantity of water
The lease contained a comprehensive arbitration clause
Dispute having arisen as to the supply of water an agreement was subsequently entered into binding the lessor to take certain steps to secure the supply and varying the rights of the parties in respect of the supply
The lessee brought an action alleging that the steps agreed upon had not been taken and that he had not been fully supplied with water and asking for an action of the damages to be taken
The lessor moved to have the action stayed
lit was held that the disputed matters arose partly under the agreement and were outside the arbitration clause in the lease and that even if all the matters for which damages were claimed could be brought within the arbitration clause it would not be proper to refer them to an arbitration who would not have the authority to construe the agreement to determine its effect upon the lease
It is manifest that the decision has no bearing upon the question presented for determination in the present case
For the reasons
already expressed we hold that the claim of the respondent firm was within the scope of the arbitration clause and the application made by the appellant in Suit No 128 of 1963 was
rightly dismissed by the Subordinate Judge
Accordingly the appeal fails and is dismissed with costs
VPS Appeal dismissed
1 14 oh D 200
2 43 Cn D 150


Summary:
There was a dispute between the appellant and respondent regarding the supply of timber
In pursuance of the clause in the contract which provided that in the event of any question or dispute arising under the contract or in connection with the contract it should be referred to arbitration the dispute was so referred
One of the items in dispute was a claim by the respondent that there was an excess supply of timber to cover up possible rejection which should be returned by the appellant with compensation for deterioration or that payment should be made for it at the market value
The appellant contended that the terms of the contract did not require the respondent to tender for inspection anof 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 contract or in connection with the contract
On the question whether the arbitrators had jurisdiction to adjudicate upon the claim HELD The test for determing the question is whether recourse to the contract by which both the parties are hound was necessary for the purpose of determining whether the claim of the respondent was justified or otherwise
Since it was necessary to have recourse to the terms of the contract for the purpose of deciding the matter in dispute the matter was within the scope of the arbitration clause and the arbitrators had jurisdiction to decide it
Ruby General Insurance Co Ltd vs Peary Lal Kumar 1952 5CR 501 followed
Piercy vs Young and Turnock vs Sartoris 43 Ch
D150 explained