Case: Union Of India Vs. Salween Timber Construction (India) &amp; Ors

1. 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 D. R. Khanna, Subordinate Judge, lst Class, Delhi dated 20th April 1964 in Suit No. 128 of 1963 was dismissed in limine. Suit No. 128 of 1963 was an application by the Union of India under Sections 5, 12 (2), 31 (3), 32 and 33 of the Arbitration Act, 1940 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 the Umpire. The petition was rejected by the Subordinate Judge by his order dated 20th April, 1964In the event of any question or dispute arising under these conditions or any special conditions of contract or in connection with this contract (except as to any matters the decision of which is specially provided for by these conditions) the same shall be referred to the award of an arbitrator to be nominated by the Purchaser and an arbitrator to be nominated by the Contractor, or in case of the said arbitrators not agreeing then to the award of an Umpire to be appointed by the arbitrators in writing before proceeding on the reference and the decision of the arbitrators, or in the event of their not agreeing, of the Umpire appointed by them, shall be final and conclusive and the provisions of the Indian Arbitration Act, 1940, and of the Rules thereunder and any statutory modification thereof shall be deemed to apply to and be incorporated in this contractUpon every and any such reference, the assessment of the costs incidental to the reference and award respectively shall be in the discretion of the arbitrators or in the event of their not agreeing of the Umpire appointed by them3. In pursuance of the arbitration clause the respondent firm appointed one Mr. T. R. Sharma as its arbitrator and the appellant appointed Mr. R. R. Desai, Deputy Legal Adviser, Ministry of Law, Government of India as its nominee. Mr. P. S. Bindra, a retired District Judge was appointed as the Umpire by order of the Sub-Judge dated 2nd August, 1961. Both the parties filed their respective claims before the arbirtators. The respondent firm claimed a sum of Rs. 73, 50,000 while the appellant contended that the respondent committed breach of the contract by not supplying in the supulated quantity of timber under the contract and as such claimed damages to the extent of Rs. 3,00,000. 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 3,400 tons i. e., 1,70,000 cubic feet was still lying with the Lillooah consignee and 1,500 tons i. e., 7,500, 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 4,900 tons or any quantity was due to be returned to the respondent firm or that it was entitled to recover Rupees 73,500,00 or any amount as claimed. It was contended that in norms of the contract the respondent firm was to offer inspection of the store at its own premises at Lillooah and Halisahaar but instead of doing so, the respondent firm started to despatch the logs to the DCOs Lillooah and Halisahaar to be 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 consignees 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, 19644. 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 Contractors 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 makeThe 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 contractors premises, and shall pay all the costs attendant thereon, failing 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 elsewhereClause 13 (4) 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 unsatisfactoryRejection : If any stores are rejected as aforesaid then, without prejudice to the foregoing provisions, the Secretary, Department of Supply shall be at liberty to:-(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 contractors liability as regards supply of any further consignment due under the contract, or(c) terminate the contract and recover from the contractor the loss the purchaser thereby incurs.

Court's reasoning:
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 thee 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 caseIn our opinion, the principle applies to the present case and it follows at the dispute between the parties falls within the scope of the arbitration clauseIn 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 toTurnock v. Sartoris, (1889) 43 Ch D. 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. It was held that the disputed matters arose partly under the agreement and were outside the arbitration clause in the lease, and trial, 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.