RENUSAGAR POWER COMPANY LTD. v. GENERAL ELECTRIC COMPANY AND ANR.

p. 474 Copy page pinpoint

1958-Towards a Uniform Judicial Interpretation' wherein at pp. A 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 differred 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 B to the liability on the bills of exchange, the dispute being whether or not the bills should be paid having regard to the cross-claim to be decided in arbitration and the latter holding that there was none as English law clearly did not allow reliance on unliquidated cross- claims to set-off a claim on a bill of exchange and on that basis the House of Lords by majority held that the .action on the bills of c exchange should not be stayed. Reliance was also placed on three decisions of Asian High Courts iu Bihari-Diwan Singh v. Jaffe & SonJ( 1), Dhiraj Lal v. Sir Jacob Behrans & Sons(') and M/s Vasanji Navj v. K.P.C. SpinnerJ( 8 ) in all .of which more or less the same view has been taken that when a suit on a negotiable instrument issued in payment of price of goods sold under a contract and accepted by D ·the seller is brought the action should not be stayed because of the arbitration clause contained in the original commercial contract; in the last case the Madras High Court has observed 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 E the defendant in favour of the plaintiff the arbitration clause could not come into play as the suit was on dishonoured cheques and there was no dispute as regards the quality of the goods or quan- tum 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 conten- tion. First, that the claim obviously arises in tort out of wrongful G 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 tortfeaser, stake-holder or constructive trustee and hence is not (I) AIR 1922 Lahore 353 (2) 1933 Allahabad 74 H (3) AIR 1983 Mad. 31

RENUSAGAR co. v. GENERAL ELECTRIC Co. (TulzopurkJr J.) 475 covered by the arbitration clause; and secondly that if the first two claims are not covered by the arbitration clause this claim would A also fall outside its purview. It was pointed out that it cannot be said to be any incidental claim for interest because compensation is claimed at the market rate of 18 per cent. In support of this contention Counsel relied upon two deicions, namely; (I) Monro v. Bognar Urben f!istrict Counci/(1 ) where the Court of Appeal took the view that where the actfon brought was for damages for fraudu- B lent 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) G!iell'ardiand v. Shirn Jute Bailing ltd.( 2 ) where the Calcutta High Court has held that where the suit was c wholly based on tort, then that action was not to be coniidcred 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 wlrnt the substance of the plaint was and not how the claim D was framed. - For the reasons which we shall presently indicate we are un- able 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 E June 30, 1967 or that the obligation to pay such interest after that date is to be found only in the promissory notes. Admittedly, interest on the purchase price at the agreed rate up to June 30, 1967 was capitalized and included in the principal amount of each of the instalments represented by the concerned promissory note as mentioned in the Schedule of Payments given in Art. III-A 3 (b) of the Contract and the question is whether the obligation to pay further interest after that date till payment is provided for only in the promissory notes or also in the contract. Undoubtedly the form of the promissory note attached as Exhibit 'B' to the Contract as also the promissory notes that were actually executed clearly contain a recital that Renusagar "Promises to pay to G.E.C. interest thereon (i.e. on the capitalized principal) from June 30, 1967 semi- annually at the rate of 6! % per annum on the last day of June and (I) (1914·15] Reprint At!. E.R. 523. (2) A.I.R. 1950 Cal. 56~.

476 SUPREME COURT REPORTS (198 5] J S.C.R.

A December in each year until paid". But Counsel for G.E.C. has in our opinion rightly relied upod two provisions in the Contract which clearly show tint 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' B I "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-i-o/c) per annun1 on the outstanding principal balance, commncing thirty(30 c 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 Con- tract which provides for interest boing payable on the outstanding principal balance after June 30, 1967. Counsel for Renusagar, however, argued that the contract and aforesaid clause merely provide for the execution of promissory notes "'hich, it is provided shall bear interest after June 30, 1967 and the argument proceeded further to say that if Renusagar had failed to executive promissory notes as required (i.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 Renu- F sagar 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 fC'lilure to execute the promissory notes as required bnt the question is what the contract provides for. It c:mnot be disputed that the aforesaid sub-clause in the Contract provides for not merely the execution of promissory notes but that the promis- sory 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 exe- cute such notes also shows that the obligation to pay interest after H June 30, 1967 till payment has been provided for by the contract.

RENUSAGAR co. v. GEN!:1lAL ELrlCTRJC co. (Tulzapurkar, J.) 477

Article XIV-B, (w hich deals with the topic of taxes and pro- A posed exemption from income-tax to be obtained by G-E.C.) (relevant portion) runs thus:·

"Seller intends to apply to the Central Government of India for exemption from income tax on the interest B income <including capitalized interest and interest thereon) received by seller on the principal amounts of the promis- sory notes. Purchaser will assist Seller in expediting Seller's application fo r exemption and wiH furnish such info rma- tion in support ·thereof as may be required by Seller or the Central Government oflndia ......... " c The above provision clearly shows that the partks to the contract were contemplating to obtain from the Government of India income- tax exemption on the interest income which G. E .C. was going to -receive from Renusagai und : r the Contract and the clause indicates the things each party was required to do in that connection but the important aspect of the provision is that the 'interest income', on which tax exemption was being sought, is said to include capitalized Jnterest and intf'resl thereon that is to say interest 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 b e found in the contract clearly show that the promissory notes are not sole a nd 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 th at date till p.iyment. f .

Reference was ma de to the fact that the Bank Guarantee endorsed on each promissory note is restricted only to the payment of principal and interes t on the note as per its terms and does not extend to or cover any residuary payment obligation contained in the Contract, de hors 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 woul~ 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 contents and not upon what is not to be found in the bank guarantee. similarly, counsel for Renusa~ar a1s·9 referre<;l to the fayt ihat G.~. C. p

478 SUPREM!t COURT REPORTS [1985] 1 S.C.R.

A h:.ts filed a suit (Suit no. 786/1982) against the UCO Bank io the Calcutta High Court to recover 2.1 million U,S. Dollars for the cn- terest as being due un<ler the promisso ry n..Hcs read with the guarant<.' e. But here again that fact is neither here nor there because the suit against the UCO Bank has to be on the pronotes ;ead with the gu.arantee, the Contract not being a document to which UCO B ~ank is a par.ty. But things will have to .be seen in different perspec- tive when claims are made by G.E.C. against Renusagar and in that !t behalf 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 arc-(in fact, only the first claim of 2.1 c 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 ther-:of is stated as: ''Re: Interest payable under the Contract No. IGE 9584 between GEC and Renu- sagar" and the substance of the entire pleading, on careful scrutiny, ·n 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 figure s and it is also clear that the reference to the Contract is not way of any 'antecedent or historical fact. It is, therefore, clear that the Contract contains • the obligation to pay future interest from June 30, 1967 onwards till E payment and that these. two claims have been preferred by G.E.C. before the Court of Arbitration of J.C.C. as arising not merely "out of" but under the Contract.

Secondly, the promissory notes, on the terms of the Contract, F cannot be regarded as amounting to payment in discharge of the obligation arising under the Contract. It was submitted that since it is one of the modes of payment indicated in the Contract the exe- cution of the notes should be held to be payments by way of dis- charging the obligation under the Contract.' T.he snap answe: to this submission is that since the Contract also mdicates the opemng of a G Letter or Credit as yet another mode of payment, the mere fact of the Letter of Credit having been opened 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 ope~ate,s as an absolute discharge of the debt or not. In Bhashyam & Ad1ga s H treatise ol) tbe Negotiable ·Instruments Act (14th Edn.) the law on

RENUSAGAR co. v. GENERAL ELECTRIC co. (Tu/zapurkar, J.) 479

·- this aspect has, in our view, been correctly summarised at page 774 thns: A

"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 B 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 pro- mise 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 paymant." c

In Commissioner of Income-Tax v. Kameshwar Singh of Darbh- anga (') the Privy Council has enunciated the legal principle very D clearly at page ll 5 of the Report thus:

"A debtor who gives his creditor a promissory note for the sum he owes can in no sense be said to pay his creditor; he merely gives him a document or voucher of debt possessing certain legal attributes. So far then as this item of Rs. E 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 CJu,JOi\ has been quoted with approval by the Bombay High Court in Keshav Mills Co. Ltd. v. Commissioner of Tncome Tad 2 ) It was a case where chques 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 G

• through Chagla, C.J. observed thus:--

"Now, I should have thought that ordinarily the payment of a debt by a cheque never results in the discharge of the (1) A.I.R. 1933 P.C. 108. (2) A.I.R. 1950 Bom. 1~6,

480 SUPREME COURT REPORTS [ i985] I S.C.R.

A 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 of the liability. The same would be the position B with regard to the hundis. But I can well imagine a case where there may be an arrangement between a creditor and a debtor that the receipt of a cheque or a hundi by a creditor may result in an unconditional discharge of the

- debt, and in the event of the cheque or hundi not being c honoured the creditor would have no right to sue on the original cause of action but only on the cheque or the hundi. That would be a pure question of fact. The Privy Council has taken the same view of the law as is to be found in Commissioner of Income Tax .v Kameshwar Singh." (supra) D It may be stated here that even in the two decisions of this Court on which Counsel for Renusagar have placed reliance the aforesaid principle of law has been accepted but all that has happen- ed is that each case turned on its own facts and special circumstances on the basis of which this Court held that the parties had intended 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 Oga/e Glass Works Ltd. case (supra) the question that arose for determination on this aspect of the matter was whether the assessee (seller) conld be said to have received income (sale proceeds) in F British Indian within the meaning of sec.4(l)(a) of the Indian Income-Tax Act, 1922 when the Government oflndia (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 submit- ted 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 intended that remittances should be by post, (c) thta

RENUSAGAR co. v. GENERAL ELECTRIC co. (Tulzapurkar, J.) 481 the assessee had by making a request in that behalf constituted the post office his agent, (d) that accordingly the Govt. had sent cheques in payment of the bills by post, (e) that the assessee had sent formal stamped receipts only after the receipt of the cheqnes and not in advance along with the bills submitted by him and (f) very im- portantly the drawer of the cheques was the Government ofindia 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 pay- ment. In H.P. Gupta v. Hiralal (supra) the question was whether the posting of a divdiend warrant cheque by the Company at Delh -- .l (where its Registered Office was situated) for dispatching it to the c 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. I 956 and Art. 132 of the Articles of Association of the Company as both the D said provisions entitled the Company to pay the dividendieither in cash or by posting a cheque or warrant at the registered address of a shareholder. The Court pointed out that Art.132, which con- sitituted an agreement between the Company and its shareholder had the effect that if the warrant (cheque) was sent by post at the latter's registered address that will be equivalent to payment. E Bearing the aforesaid general principle in mind that a bill or ' a promissory note can never go in the discharge of a debt unless it is a part of a contract that it shall be so, it will have to be seen whether the promissory notes executed by Renusagar in this case were intended to operate as payments by way of absolute discharge F of the obligation under the Contract or only as conditional pay- ments. In our view the terms of the Contract, far from showing that these were payments in discharge of the original obligation, clearly indicate that the parties had intended that these were to operate as conditional payments. If Art. III of the Contract, which deals with the topic 0f Payment of price for the sale of goods and ser- G vices, is carefully analysed the following 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 ")awful money". of USA: "

482 SUPREME COURT REPORTS [1985] 1 S.C.R,

A (b) that because the Contract so provides even the pro-notes also recite that the principal and interest thereunder are "paya~le in lawful money of the USA";

(c) that Art. lJI-A (3) which deals with pro-notes provides for payment of the remaining 90% of the price "in accor- B dance with the following Schedule 'f Payments" and expressly states that "the obligation to make such pay· r.1ents is to be evidenced by four series of purchaser's • unconditional negotiable promissory notes", which clear- ly shows that the pro-notes are not payments but are intended merely to be the evidence of the obligation to c 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 pur· chaser these have been made subject to several conditions D such as-(!) the amounts thereof were payable only on the assumption that deliveries of items of equipment were completed within 15 months of Contract Effective Date and interest at the rate of 6£% was to become 6% on receipt of income-tax exemption (Art. III-A(3) (b),

E (ii) these were to lie in Escrow Arrangement to be released to the seller syncronising with the stated progress of supply of goods according to certain formulae (Art. III-DJ. (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.IIl-D): (iv) each one-contains a default clause saying "upon default in the prompt and full pay- ment 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 pay- ment by way of discharging the obligation under the contract but the notes were clearly intended to operate as conditional payments. H Thirdly the very factors and circumstances enumerated a1?ov~

ll.ENUSAGAR co. v. GENEllAL ELECTllIC co. (Tu/zapurkar, J.) 48~

in connection with the promissory notes and particulary, the fact A that these notes were as between the seller and the purchaser subject to several conditions.leading to variation and adjustment and replace- ment and the default clause contained in each, clearly indicate that these were not intended to constitute or separate contracts by them- selves but that they were a part and parcel of one integrated transac- tion embodied in the contract; in fact the aspects mentioned in (d) B above clearly show that the promissory notes were and are meant to be governed at all times by various other terms of the Contract and could be modified and substituted under given conditions as set out in the Contract. Hence it is impossible to ac.cede to the proposition that a dispute of nonpayment of interest on the instalments whether regular or delinquent-is not a dispute "relating to the Contract." In fact, as stated earlier, both the claims-2.1 million U.S. dollars and U.S. $7,84,151.84-arise "under the Contract" and have been pre- ferred by G.E.C. before the Court of Arbitration of l.C.C. expressly on that basis and not under the promissory notes. In view of this conclusion of ours it is unnecessary to deal with the further submis- sion 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 npon in support thereof. Similarly this conclusion of ours also makes it unnecessary for us to deal with the alternative submis- sion 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 Cont- ract, 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 has lain in tort it "arises out of" or is "related to" the Contract, that is to say, whether it arises out of the terms of the Contract or is consequential upon any breach thereof. As explained earlier, this claim is based on and is consequential upon and by way of corollary 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 H

484 SUPR~ME COURT REPORTS (1985] 1 S.C.R

A 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 il 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 aclaim :'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 c 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, is clearly satisfied with regard to the third claim in the instant case.

0 We may, at this stage, refer to a passage in Russel on Arbitra- tion and a few decided cases which fortify our aforesaid conclusion. In Russel on Arbitration (20th Edn.) the following statement of law occurs at page 90:

"Claims in tort may be so intimately connected with a con- tract that a clause of appropriate width designed primarily to make contractual disputes arbitrable will nevertheless render such claims in tort arbitrable as well." In Woo/fv. Collis Removal Service (1) the defendants had con- tracted to remove plaintiff's furniture and effects from London to their store in Marlow and there safely to keep and take care of them, but, according to the plaintiff, the defendants had, in breach of the Contract, removed the goods to a different destination where some were lost and others damaged. Alternatively the plaintiff claimed that the goods were Jost and damaged owing to the negli- rence 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 couriter- G claim to any claim made by the contractors" the same shall be re - ferred to the decision of the two arbitrators. The question was whe- ther the claim for damages was covered by this clause. The Court

H (I) (1947] 2 All. E.R. 260

RENUSAGAR co. v. GENERAL ELECTRIC co. (Tulzapurkar, J.) 485 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 con- tains an arbitration clause, if there was sufficient close connection between that claim and the transaction under the contract it will be B covered by the arbitration clause. In Astra Vencedor Compania Naviera SA of Panama v. Maba ..

... , naft G m b H(1) the arbitration clause contained in a Contract of charterparty ran: "any dispute arising during the execution of this charterparty" shall be settled by two arbitrators, one to be appointed by the Owners and the other by the charterers. The relevant char c terers ordered the vessel to a Dutch port not named in the bill o- lading whereby satisfactory bills of lading were not available in time and disputes arose as to unloading. By action of the relevant char- terers the vessel was arrested and released on a bank guarantee' Later, under a charter quite unconnected with the relevant charterers the vessel happend to be again in a Dutch port and was arrested again as a result of disputes as to the satisfactory nature of the ori- ginal bank guarantee. The owners arbitrated a claim for damages i 1 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 L under consideration. In that case disputes arose concerning the first defendant's remuneration receivable from the plaintiff under G a contract for services and one of the claims put forward by the first defendant was for a sum of money on a quantum meruit basis for services rendered, it being alleged that the agreement had cea- sed to have any application to those services. The disputes were (I) [1971] 2 All. E.R. 1301 ff

486 stlPRilMli COt!R T REP OR TS t\985] 1 S.C.R.

A referred to the arbitration of second defindant under a clause which was very wide and covered " any dispute or difference which shall arise or occur between the parties hereto in relation to anything or matter arising out of or under this agreement". A question arose as to whether a claim based on quantum meruit would fall within B the arbitration clause and Sellers, J. held that it did observating as under:

"It is true that a quantum meruit is a quasi-contract and arises, in a sense, on an implied contract and not on any express agreement, but, in my view, in the circun1- c stances of this case (although it may not be in all cases) the quantum meruit is an incident which arises out of the con- tract. It is not a remedy for breach or arising on frustra- tion, but it is an incident, in my view, which does arise as a con.J·equence of rhe 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 quantnm meruit."

In Alliance Jute Mills Co. Ltd. v. Lal Chand Dharanchand and Another(') 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. I had sold, through a broker, certain quantities of fibre to the appellant-mill and after effecting delivery of the goods Respondent No. 1 had submitted bills to the appellant-mill again through the broker ; the appellant-mill, however, claimed reduction in price on account of shortage in weight and submitted claims in that respect. Since the price was not paid, Respondent No. I referred the claim to the arbi- G tration of Bengal Chamber of Commerce and Industry. The appel- lant-mill informed the Chamber of Commerce and Industry that it had filed a suit upon the whole of the subject matter of the refe- rence and served a Notice under s. 35 of the Arbitration Act. In suit so filed against Respondent No. 1 and the broker apart from

H (I) AIR 1978 Cal. 19

RENUSAGA'.ll co. v. GENERAL ELECTRIC co. (Tulzapurkar, J.) 487 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 ls damages for the alleged libel published by respondent No. l and the broker. In an application for stay of the suit under s. 34 of the Arbitration Act. 1940, one of the <:[uestions raised was whether the arbitration clause was wide enough to include the claim for da- mages 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 in- to the question of tort the Court would necessarily have to go into c the terms and conditions of the Contract relating to payment and that the claim in tort was directly and inextricably connected with the terms and conditions of the Contract· and as such came within the scope of the arbitration clause which was wide enough to cover the same. In this view of the matter Court stayed the suit under s.34 of the Arbitration Act. D

Lastly, we would refer to the decision of this Court in Union of fndia v. Salween Timber Construction (India) & Ors.(1! where the Court has laid down the test for determining the question whether the arbitrators wou Id have jurisdiction to adjudicate upon a claim made by one of the parties to a Contract, though not strictly arising "under" it. Jn that case a dispute arose between the appellant ' (Union of India) and the respondent rega1ding the supply of timber made by the respondent under a contract between the parties. 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 F 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 i~ G 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 arbitra- tors had jurisdiction to adjudicate upon that claim this Court,

(I) [1969] 2 S.C.R. 224 H

488 SUPREME COURT REPORTS (1985] l S.C.R,

A relying upon its earlier decision in Ruby General Ins11rm1ce 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 te.ms of the contract D 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.

As stated earlier since this third claim for compensatory damages is directly, closely and inextricably connected with the terms and conditions of the Contract, the payments to be made thereunder c arid 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. Bognar Urban District Council (supra) and Ghewarchand Rampuria v. Shiva Jute Bailing Ltd. D (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 ob- tained 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 f was totally unconnected with the Contract; the High Court actually recorded a finding that the cause of action in the suit had no connec- ' tion direct or indirect with the Contract itself and the reference to the Contract was only a link in the story to show how the goods came to be in the possession of the defendants and the claim was not based in any way on or related to the contract itself. In the final G analysis the question as to whether a claim based on tort is a claim dr, hors the contract which contains the arbitration clause or is dir- ectly or inextricably connected with the contract has to be decided on

H the facts of each case and the language used in the arbitration clause

(I} [1952] S.C.R. SOJ. 'l I

ltENtJSAGAR co. v. GENERAL ELECTRIC co. (Tulzapurkar, J.) 489

Having regard to the aforesaid discussion we are clearly of the view that all the three claims referred by G.E.C. to the Court of Arbitration of l.C.C. do "arise out of" and are "related to" the Commercial Contract (in fact the first two claims arise "under the Contract") 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 arbitra- bility 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 c this stage we are categorically negativing the cornentions 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. D 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 mis-conceived and that no case has E been made out for staying Renusagar's suit which is in the uftture of a petition under s. 33 of the Arbitration Act. In this behalf sub- missions of Counsel may be analysed thus :

(a) That two decisions- one of the Calcutta High Court in Balabux Agarwal/o's case (supra) and the other of this F Court in Gaya Electric Supply Co's case('), !Jave settled the legal position under Arbitration Act 1940 that a Court acting under s. 34 is a Court of lin1ited jurjsdiction per· forming a limited function and that a petition under s. 33 .... (which raises issues regarding the existence, validity or G effect of an arbitration agreement) cannot be stayed by invoking s. 34 of that Act, unless, there be a fresh arbitra- tion 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

(I) [1953] S.C.R. 572 579, 580. H

490 SUPl!.BMB COURT REPORTS (1985] J S.C.R. A invoked to stay a suit which is in the nature of a s. ~3 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 (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. should be refused ; in other words, Counsel urged that the phrase "in respect of my matter c agreed to be referred arbitration" occurring in s. 3 should be construed to cover only disputes or claims on merits referred to the arbitrators and not issues as to the existenc:, validity or effect of the arbitration agreed, (particularly its scope that is the atbitrability of the claims) and for placing such narrow construction on the relevant phrase occuring in s. 3 Counsel mainly relied on a decision of this Court in Shiva Jute Baling Ltd. v. Hindley Co.(1) where this Court, while construing s. 35 in the context of s. 33 and s. 34 of the Arbitration Act, has on the facts in the case held that • there could be no identity of the subject matter under reference to the arbitrator and the subject matter of a s. 33 petition, that is to say, the issues and prayers that from the basis of an application under s. 33 could not be 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) F and M/s. R.N. Ganekar & Co' s('J 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 G arbitration clause in question here and that the suit is 'in respect of a matter agreed to be referred to the arbitra- tion', 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

(I) [ 1960] I S.C.R. S09. H (2) [19UJ 1 s.c.a. 309 at 313-J14.

RBNUSAGAR co. v. GENERAL ELECTRIC co. (Ta/zapurkar, J.) 491

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 arbi- trators' own jurisdiction to rest finally with the arbitrators and in support reliance was placed on a number of deci- sions English, American and Indian iparticularly decision in Attorney-General for Manitoba v. Kally & Ors.(1), Da/mia Dairy(') case, Backer Auto Radio(') case, MuRicipa/ Board v. Eastern U.P. Electric Supply Co. Ltd & Ors('), M/s. Jagan Nath Phoo/ Chand v. Union of India & Ors.,(6) R. Prince & Co. v. Governor Genera/ in Council('), Va/labh c Pitti v. Narsingdas(') as well as certain passages in Russell on Arbitration 20th Edn. at pages 91-92 and II 1-112 and Albert Jan Van Dan Berg's Treatise on New York Con- vention at pages 311-312.

(d) That a stay, if granted as sought by G.E.C., would render D Renusagar's suit dead for all practical purposes, and, there- fore, 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.(') case. E

492 SUREME COURT REPORTS (1985] J S.C.R.

A 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 analogous provisions that are to be found in the Arbitration Act, 1940 or the manner in which such similar or analo- gous provisions have been construed by our Courts. Tht Statement of Objects and R~asons shows that 1he Act seeks lo achieve speedy B settlement of disputes arising from international trade through arbitration. The Act is a successor ta the Arbitration (Protocal ·& Convention) Act, 1937. The earlier Act was intended to effectuate the purposes of Geneva Convention of 1927 ; it was, however, felt that the Geneva Convention hampered the speedy settlement of dis- putes through arbitration and hence no longer met the requirements c ofthe international trade due to certain deffects and, therefore, in order to remedy, inter-alia, those defects, a craft Convention was prepared by the International Chamber of Commerce, which was considered by the United Nations Economic and Social Council in consultation with the Governments of the various countries and non- governmental organisations and finally a new International Conven- D tion on tbe 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 ' E the said New York International Convention on the Recognition and Enforcement of Foreign Arbitral Awards to which India is a party. Article JI 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 all 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 canse of facilitating international trade and promotion thereof by providing for speedy settlement of disputes arising in such trade through arbitration, any expression or phrase occurring therein should receive, consisting with its literal and grammatical sense, a liberal construction. Moreover, an examination of the relevant pro- visions 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 tt materia I bearin$ on the question under consideration and as such

RENUSAGAR co. v. GENERAL ELECTRIC co. (Tulzapurkar, J.) 493

decisions on similar or analogous provisions contained in the Arbitra- A tion Act may not help in deciding the issue arising under the Foreign Awards Act because just as the Arbitration Act, 1940 is a consolidat- ing enactment governing.all domestic awards the Foreign Awards Act constitutes a complete code by itself providing for all possible contin- gencies 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 pro,ier construction of B • 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 :- c "3. Stay of proceedings in respect of matters to be referred 01 arbitration.-Notwitbstanding anything contained in the Arbitration Act, 1940, or in the Code of Civil Procedure, 1908, if any party to an agreement to which Article II of the Conven- tion set forth in the Schedule applies, commences any legal proceedings in any court against any other party to the agree- D ment, in respect of any matter agreed to be referred to arbitra- tion in such agreement, any party to such legal proceedings may, at any time after appearance and before filing a written statement or taking any other step in the proceedings, apply to the Court to stay the proceedings and the Court, unless satisfied that the agreement is null and void, inoperative or incapable of being performed or that there is not, in fact, any dispute bet- ween the parties with regard to the matter agreed to be referred, shall make an order staying the proceedings".

It may be stated that prior to its amendment by Act 47 of 1973 the words in the old section 3 were : "If any party to a submission made in pursuance of an agreement" which were construed by this Court in V/O Tractoroexport( 1), 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 G 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 re- ference is made and compelling speedy settlement of disputes through agreed arbitration. On a plain reading of the section as it now stands

(I) 11970] 3 S.C.R. 53,

494 SUPREME COURT REPORTS [1985] I s.G:'R.

A two things become very clear. Jn the first place the section opens a non-obstante clause giving overriding effect to the provision con- tained therein and making it prevail over anything to the contrary contained in the Arbitration Act, 1940 or the Code of Civil Proce- dure, 1908. Secondly, unlike s. 34 of the Arbitration Act which confers a discretion upon the Court, the section uses the mandatory II expression "shall" and makes it obligator} upon the Court to pass I the order staying the legal proceedings commenced by a party to the agreement if the conditions specified therein are fulfilled. The condi- • tions required to be fulfilled for invoking sec. 3 are :

c (i) there must be an agreement to which Article II of the Convention set forth in the Schedule applies. (It is not disputed that this is so in the instant case) ; •

(ii) a party to that agreement must commence legal proceed- D ings against another party thereto. (It is again not disputed that Renusagar and G.E.C. are the two parties to the arbi- tration 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 satisfactiop Qf ff ~\mdition (iii) above).

RENUSAGAR co. v. GENERAL ELECTRIC co. ( Tulza/wln J.) 495 As stated above Counsel for Renusagar have urged that conditions A (iii) and (vi) ard not satisfied and hence stay of Renusagar's suit ought to be refused while according to Counsel for G.E.C. all the condi- tions including these two have been fulfilled and it is obligatory upon the Court to stay the suit.

"B Before dealing with the question whether conditions (iii) and (vi) are satisfied in this case or not we would briefly indicate how the ~schemes of the two Acts (Foreign Awards Act and Arbitration Act) materially differ on several aspects having a bearing on the points at issue. An examination of ss. 3, 4 and 7 of the Foreign Awards Act -1 in juxta-position with ss. 32, 33 and 34 of the Arbitration Act brings out these differences. Under s. 32 of the Arbitration Acts suits to challenge the existence or validity of an arbitration agreement or award as also suits to have the effect (scope) of an arbitration agree- ment determined are barred and such questions can be raised only by an application under s. 3j of the Act whereas under the Foreign Awards Act there is no provision similar or akin toss. 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) I 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 is made but that is subject to s. 7 whereunder enforcibllity thereof is made dependent upon satisfaction of certain conditions specified therein : for example, under s. 7(l)(a)(iii) one of such conditions for enforcibility is that that the a.ward should not deal with questions not referred nor should it contain decisions on matters beyond the scope of the agreement. In effect, s. 3 of the Foreign Awards Act so to say 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 H

496 SUPREME COURT REPORTS (1985] l S.C.R.

A right to have legal proceedings stayed:contained ins. 34 of the Arbitra· tion Act is also to be found in the same s. 3. Further the Foreign Awards Act has also taken cognizence of the possibility that there may not be s. 3 petitton 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 B 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 o\ our Courts on similar or analogous provisions contained in the

c 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 Court in Balabux Agrawalla's case (supra) and by this Court in Gaya Electric Supply Co.s case (supra) lhat a Court acting • under s. 34 of the Arbitration Act is a Court of limited jurisdiction performing a limited function and that a petition under s. 33 cannot be stayed by invoking s. 34 of that Act will be of no avail whatever in face of the express provisions contained under s. 3 of the Foreign Awards Act which section, as indicated earlier, combines within its own ambit both sections 33 and 34 of the Arbitration Act and those questions have to be decided by the Court before granting stay. Similarly, the broad principle that an arbitrator has no power to ' determine questions of his own jurisdiction (which include questions regardifig" the existence, validity and effect i.e. scope of the arbitra- tion agreement) and that neither English Law nor Indian Law allows these questions to rest with the arbitrator (for which Counsel for • Renusagar have been contending and we shall deal with it later) wouH be hardly applicable to any foreign award made under the Act, F 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 G 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 II main ~uestion is whQthQr Renusa~1ir's suit can bQ Sllid t\) bQ "respect

RENUSAGAR co. v. GENERAL ELECTRIC co. (Thlzapurkar, J.) 497

of any matter agreed to be referred to arbitration" ? On this, Counsel A for Renusagar put forward a two-pronged submission. Initially it was urged that the arbitration clause in the Contract does not include within its scope the issue of arbitrability of the three claims and so the suit is not liable to be stayed but we have already negatived this part of the submission by holding that the language of the arl:iitration clause is wide enough to embrace the issue of the arbitrability of the B claims. Now the submission is that the phrase "in respect of any matter agreed to he referred to the arbitration" occurring io s. 3 should be construed as covering only the disputes or claims on merits which have been referred to the aubitrators and since Renusagar's suit merely raises the issue of arbitrability of those claims the suit c 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 arbi•ration will depend upon what language is employed D 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. Darwins Ltd. and Das J's view in Balabux Agarwala's case show that the E •• parties can do it.) Secondly, the scheme of ss. 3 and 7 of the Foreign Aw.ards Act, as' discussed earlier. clearly suggests that the relevant phrase would include even questions of existence, validity and effect (scope) of the arbitration agreement .. It is, therefore, not possible to place a narrow construction on that phrase in s. 3 as suggested by F Counsel for Renusagar. The decision of this Court in Shiva Jute Bailing Ltd. case (•upra) and the supporting observations in three other decisions of this Court, namely, Kharda Co's case, Waverly Jute Mills case and M/s. R.N. Ganekar & Co's case (all supra) on which reliance was placed by Counsel for Renusagar are of no avail for two reasons - (i) they deal with a position arising under ss. 33, 34 and •· 35 of the Arbitration Act and the manner in which certain phrases G occurring therein are construed would offer no guidance in construing the relevant phrase occurring in s. 3 of the Foreign Awards Act whkh 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 · pertai!l\'Q 10 ei!tier the existence or the validity of the arbitration H

498 SUPRFME COURT REPORTS [1985) I S.C.R.

A agreement and not the effeet (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. B • 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"- matter agreed to b~ referred to the arbitration within the meaning f c of sec. 3, in law, shat is to say under the law of the Forum (being the Indian law in the instant case) the issue of arbitrability of claims cannot be finally determined by the arbitrators but must rest with the Court and therefore Renusagar's suit cannot be stayed under that section. According to Counsel both English law a' well as Indian D 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 .(or Manitoba v. Kelly and Ors, (supra) where the Privy Council at page 276 of the Report has E observed thus : "Whenever there is a difference of between the parties as to the authoritl' 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 cbe impossible to allow an umpire to arrogate to himself jurisdiction over F a question which, on the true construction of the sub- mission, 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 sub- mission of the parties."

(b) Dalrnia Dairy Industries Ltd. v. National Bank of Pakistan G (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 National Bank of Pakistan in favour of Dalmia Dairy Industries Ltd. was resisted by the Bank inter-alia on the ground that the arbi- trator was not entitled to decide the question of his own H jurisdiction when t!)e validity of tbe contract of guarantee

RS'IUS'.GAR Co. v. GESERAL ELECTRIC co. (Tulzapurkar, J.) 499 I itself was disputed, and the Court of Appeal :at pages A 292·293 of the Report observed thus: "Whilst we recognise that in answering issue l(B) differently from the learned Judge ':'le are rejecting this preference on this issue Mr. Sikri's evidence rather than that of Mr. Lall, we reach our conclusion for the reason that we find nothing in the learned Judge's judgment or in Mr. Sikri's evidence or in B the Indian authorities, which seems to us justify departure from the logical conclusion that there is no difference in principal between a contract containing an arbitration clause admittedly concluded but void for initial illegality and a contract containing such a clause admittedly conclu- ded but where it is alleged that either the contract or the c 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 !(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 foot-

- note JO).

(d) R. Prince and Co. v. Governor-General in Council (supra) where following the aforesaid Privy Council decision the F Punjab High Court at page 242 of the Repor~ has observed • thus : "It is well established that an arbitrator or umpire must not go beyo11d 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 an award G extends to matters not within the scope of the submission it must be held to be void to the extent that it .is in excess of the submission. An Arbitrator cannot give himself jurisdiction by a wrong decision as to the facts upon which the limit of his jurisdiction depends and where there is a difference between the parties as to the authority of the arbitrator under an agreed submission the decision rests H

500 SUPREME COURT REPORTS [I 985] 1 S.C.~· \ A 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. B 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 c condition precedent to his jurisdiction has been fulfilled. It has indeed several times been said bluntly that an t arbitrator has no power to decide his own jurisdiction and in one case where rules of an institution prepared to con- duct 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 bas digested Dalmia Dairy Industry's case thus : "Again some of the rules give the arbitrator power to decide whether be bas jurisdic- tion in a particular di,pute. But English court will never give effect to such rules and accordingly, if it is sought to enforce in England an award given after such a decision by the arbitrator, the court will not accept it but will have to determine the question of jurisdiction for itself." • In our view the aforesaid authorities relied on by Counsel for Renusagar do not touch the real question which we have to decide in the case. The question is whether in view of the wide arbitration clause which embraces questions of existence, validity or effect (scope) of the agreement it.elf Renusagar's rnit (which is in respect of a matter agreed to be referred) should be sta)ed so as to enable the • arbitrators to proceed with the .reference and make their award and that question is required to be considered in regard to foreign awards to be made under the Foreign Awards Act and as such must be consi- dered 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 deter-

ilENUSAGAR co. v. GENERAL ELECTRIC co. (Tuizapurkar, [.) 561 mination is subject to the decision of the Court and such decision of the Court can be had either before the arbitration proceedings com- mence 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 the part of any party to such agreement by merely raising a plea of lack of arbitrator's competence-and a frivolous plea at that-and enables c • ·the arbitrator to determine the plea one way or the other and if nega- tived to proceed to make his award with the further safeg•1ard that the Court would be in a position to entertain and decide the same plea finally when the award is sought to be enforced. All that condi- tion (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 D there is no warrant to add further words namely, "agreed to be referred to the arbitration for final determination". Obviously if the occasion to dedecide the question of arbitrator's jurisdiction arise> at an earlier stage namely in a section-3 petition the Court has to decide it before granting stay of the legal pro~eedings and such decision of the Court on that.question will be conclusive and binding on the 1 E arbitrator and the question before him will then become academic rt h thus clear that under the scheme questions of existence, validity ' of effect (scope) of the arbitration agreement itself, in cases where the arbitratioo cla•1se embraces within its scope such questions, (unless decided by the Court in a section-3 petition) could be initially deter- aiin e1 by the arbitrators, which would be subject to the final decision of the Court. This position under the New York Convention (to give F effect to which the Foreign Awards Act was passed) has heen clarified by Albert Jan Van Den Berg in his treatise of New York Convention at page 312-a passage on which Counsel for Renusagar relied. This is what learned author has stated : ,. G "The Convention does not imply that the arbitrator may give a final decision on his competence. Under almost all arbitration laws the arbitrator has no power to give such final decision · as arbitration excludes the competence of the courts, which is considered as a . far-reaching effect, the courts retain the last word in this matter. Many laws, however, allow the arbitrator to give a provisional ruling on his . competence in or!fer not to H

502 SUPREME COURT REPORTS (1985] l S.C.R.

A delay the arbitration and to alleviate dilatory tactics by obstauc- tive respondents. This principle that the court has the last word on the arbitrator's co.npetence is not different for the New York Convention. If ii were otherwise, the Convention would have contained express provisions to tl1at effect in order to make clear that in deviates from the prnailing principles of the B national arbitration laws."

Secondly, even the aforesaid authorities on \\hich reliance has been placed by Counsel for Renusagar (excepting perhaps the American decision in Becker Auto-Radio case; merely Jay down that the deci- sion on questions of arbitrator's jurisdiction (assuming no distinction c is made between questions regarding the existence or validity of the agreement on the one hand and effect (scope) thereof on the other) restsfi,;al/y 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 staled, as pointed out by Coumel for G.E.C. that the D 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 Jaw, as we shall indi- cate later, gives a different picture.] These authorities do not suggest that the arbitrator or umpire may not decide these questions even provisionally or tentatively, In other words, there is nothing in the general law of arbitration either English or Indian which prevents the arbitrators or an umpire from deciding questions of their own juris- diction provisionally or tentatively and to proceed to make their awards on that basis, though it is clear that their provisional or tenta- F tive decision on questions of their own jurisdiction would be subject to the final determination by the Court and if the Court takes a cont- rary 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 G of Albert Jan van den Berg that many national arbitration Jaws ·• allow the arbitratar to give a provisional ruling on bis competence in order not to delay the arbitration and to alleviate dilatory tactics by · obstructing respondents is borne out in regard to t,he 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 Jaw (to which we had adver- H ted earlier) appears thus :

RENUSAGAR co. v. GENERAL ELECTRIC co. (Tu/zapurkar, J.) 503

"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 bis own jurisdiction and in one case where rules of an institution prepared to con- duct arbitrations gave the 'arbitrator such power, the Court will ignore this when asked to enforce the award, and decide the question itself. However, an arbitrator is always entitled to enquire whether or not he has jurisdiction. An umpire faced with a dispute wheiber or not there was a contract from which alone his jurisdiction, if any, can arise can adopt one of a . number of courses. He can refuse to deal with the matter at c • all and leave the parties to go to court, or he can consider the matter and if he forms the view that the contract upon which the claimant is relying and from which, if established, alone his jurisdiction can arise is in truth the contract, be can proceed accordingly." (The first part of the statement is baseci on Dal mia Dairy Industry's(') case (supra) while the latter part is D based on Brown v. Oesterrei-chischer Wa/dbesitzer R. Gmbh and Per Roskill J. in Luanda Exportadora and Ors. v. Tamari & Sons & Others,(')

So far as Indian Law is concerned the position is clarified in Val/abh Pilfi v. Narsingdas (supra) ... a decision on which Counsel for E Renusagar relied where the Bombay High Court bas 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 consi- der the question of jusisdiction, not to giv" final and binding judgment on that question but in order to determine what course they should F 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 jurisdic\ion 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 Pannal/a/ G

Sagoremull v. Fatey Chand Mura/idlwr( 3) and that after deciding the

504 SUl>REMB COURT RBPORts (1985) 1 S.C.R, A question in issue he affirmed the award and ~assed a decree in terms terms thereof. Similarly, it may be pointed out that there is no difference between English law anj Indian law on the point that an arbitration agreement which empowers an arbitrator to decide the question of its existence, validity or effect (scope) is neither invalid nor void. In Heyman v. Darwins Ltd. Lord Wright's observations B at p. 385 of the Report clearly suggest that there can he a valid agree- ment 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 Jndia v. c Chemical Construction Corporation(') the Bombay High Court bas clari- fied this position whib 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 a/ia, a question as to the existence and vali- dity of the Contract. Not only has the High Court held that the con feral of such power on the arbitrators does not render the Rules void but has further gone on to bold 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 opinion of the Court the contract which contains the arbitration clause is valid no question is likely to arise before the arbitrators on that point and even if such question were to arise the arbitrators will be concluded by the deci- sion of the Court. We may point out that following this decision in ' Fertilizer Corporation's case (supra) the Court of Appeal in Da/mia Dairy industries' case (supra) has held that the Rules of I.C.C enabl- F ing the Arbitral Tribunal to decide its own jurisdiction were not void (vide page 290 of the Report) and it has further noted 1·1ithout dis- approval the further observations of the Bombay High Court that if the court once itself decides the question that the arbitrators had jurisdiction then that point would hardly be raised before the arbitra- tors and if it were the arbitrators would l<_e bound by the decision of the Court on the point. G In view of the position 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

ff (I) 75 Bombay Law Reporter 335,

1\BNUSAOAR Co. v. <iBNBRAL BLBCTRIC co. (1'u/zapurkar, J.) 505 I within its scope the questions of its existence, validity or effect (scope),. A the decided cases have made a distinction between questions as to tbe 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 B 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 agree\l°ent .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 c of his own jurisdiction will have to be regarded as provisional or ~entative, subject to final determination of that question by the Court. However, on a consideration of the rival authorities that have been cited at the Bar bay Counsel on either side we are inclined to accept the contention of Counsel for G.E.C. for the following reasons : ,_ (a) that conceptually a challenge to the existence or validity of the arbitration agreement contained in an underlying Commercial Con- tract 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, t e.g. in Jawahar Lal Barman's case (supra) this Court has noted this distinctiqn for the purposes of procedural aspects arising under ss. 31(2), 32 and 33 of the Arbitration Act, 1940, but the English c~ses particularly Heyman v. Darwins Ltd. (supra) and Wil/esford 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(') 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 agree- G • .· ment with the question of its existence ; in that case the application made under s. 5 of the Arbitration. Act to revoke the arbitration was obviously mis-conceived inasmuch as the ground on which th revocation was sought was that the disputes sought to be referred t~ arbitration were not within the purview of the arbitration clause and

(I) AIR 1971 SC 2083 at 2085. H

505 SUPRBMB CO'JRT REPORTS (1985] l S.C.R.

A it was in that context that the observations were made in para 6 of the judgment to say that such a dispute was as regards the existence of the arbitration agreement ; in fact, the ratio of the decision was that the controversy raised in the case fell within the scope of s. 33 of the Arbitration Act and not s. 5 ; in any case, in our view, the incidental observation in para 6 of the judgment in that case on B which Counsel for Renusagar have relied cannot outweigh the dis- tinction which has been noticed by this Court in its well-considered .udgment in Jawahar Lal Barman's case (supra) ; (d) that an anal}sis • 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 c jurisdiction are cases in which the question of either the existence or the validity of the arbitration agreement was involved, whereas when- ever the question of arbitrator's jurisdiction deprnded 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 Wil/esjord v. D Watson (supra)-which decision has been annotated aod digested in Russell on Arbitration (10th Edn.)-is a clear authority for the pro- position 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 'E would not decide but would leave it to the arbitrator to decide the q~estion whether the matter in dispute between the parties fell within the arbitration agreement. In fact, the Court of Appeal in that case ' repelled every endeavour on the part of the appellants to require the Court to do the very thing which lay within the competence of the arbitrators-that is to say, to look into the whole matter, to construe the instrument and to decide whether the thing complained of was inside or outside 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 jurisC:iction 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 deci- sion thereon finally binds the parties : But as stated at the out set, the •foresaid 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

RENUSAGAR co. v. GENERAL El ECTR!C co. (Tu!zapurkar, J.) 507 granted as sought by G.E.C. in a petition under s. 3, it wonld 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 alterna tively 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 tanto finding on the issue of a1 bitrability of the claims, in support Counsel relied upon a decision of the Allahabad High ·Court in Srrauss Company's case (supra)-a case arising under the earlier Indian Arbitration Act 1899-where that High Court has expressed the view that ''a stay order under s. 19 of the Arbitration Act, when !lie arbi- tration h;;s in fact taken place, is sufficient finally to dispose of the c suit". In other words, the contention was that a section 3 petition could not be a proper stage to decide the issue of arbitrability of the claims but the same should be decided in the suit when it will be finally tried. If regard be had to the provisions ofs. 3 as well as the legal position arising un 1er decided cases the contention will be D found to be devoid of any substance. It may be that a stay of the

. suit either under rs. 3 of the Foreign Awards Act or under s. 34 of the Arbitration Act, I 940 may have the effect of finally disposing of the suit for all practical rroposes as pointed out by tl1e 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 E f 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 condi· tions 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 F regard to the matters agreed to be referred to arbitration (condition (v) and (vi) mentioned earlier). In other words, the section itself I 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 G on these issues (whichever may be raised) and the Court has to record its finding thereon after considering such material. It may be stated that though s.34 of the Arbitration Act, 1940 confers a discretion upon the Court in the matter of granting stay of legal proceedings where there is an arbitration agroement, it cannot Jle disputed that before granting the stay the <;:ourt h~s to satisfy *elf H

sos SUPREME COURT REPORTS [1985] I S.C.R. Athat 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 fa]] within the phrase 'if satisfied that ~here is no reason by the matter should not be referred' oc-curring therein) and decided cases have taken the view that the Court must satisfy itself about these matters before the stay order is issued. In B other words, Court under s.34 must finally decide these issues before granting stay. In Fhagwandas v. Atmasing(1) 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 a defendant who applies for st~y s. 34 has to say that there

c 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'Jenable 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 D Ltd. v. Limmer and Trinidad Co. Ltd.(') The Court of Appeal held that where a party claimed that proceedings should be stayed because there was an arbitration agreement in force the Court was under a duty to construe the terms of the contract iu order to d<cide whether there was a valid arbitration clause and that question had to be determined . at an interlocutory stage because !t had to be done before the defen- E dant took any step in the action. In Anderson Wright Ltd. v. Meran & Co.(') the respondent (Moran & Co.) sold certain goods to the \ appellant under a number of similar contracts, which contained a wide arbitration clause. Respondent, howeveri described himself as broker when signing the contracts. The appellants wanted to claim damages from the respondent for non-delivery of the goods under the - F contract-notes and desired to refer the same to the arbitration. To prevent this arbitration 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 restrain- ing the appellant from claiming damages in respect of the said G- 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

(!) AIR 19<5 llom.!494. (2) [1975] 2 All E.R. 549. Ji (3) [195511 s.c.R. 862.

RENUSAGAR co. v. GENERAL ELECTRIC co. \Tulzopurkar, J.) 509 scope of the arbit.ration agreement but no opinion was expressed on A the question whether there was a binding arbitration agreement bet- ween 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 B • first of all whether there is a binding arbitration agreement between the parties or not. At page 870 of the Report the Court has observed thus: "In this ca;e it is certainly not admitted that the respondent was a party to the contract. In fact, that is the subject-matter of • controversy in the suit itself. But, as has been said already, the c question having been 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 a;bitration agreement between the parties to the suit." D 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 fiading was adverse to the aµpellant the application for stay .!ill be dismissed. Counsel for E 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 there- fore, there was no arbitration agreement between the parties but also claimed relief on merits, namely, an injunction restraining the appel- lant 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 against the respondent, had some meaning but in • the instant case before us no relief on merits bas been claimed by Renusagar in its suit which merely raises the issue of arbitrability of the claims. In our view, this distinction is neither valid nor rele.vant to the question under consideration. Not valid because the only issue which the suit (filed by Moran & Co.) raised was whether there waq binding arbitration agreement between the parties or not and an adverse decision thereon in a sec. 34 application would have had the effect of disposing of the suit for all practical purposes, the conse- quential relief automatically falling to the ground along with such adverse decision. Not relevant because the question of issue is whether a sec. 34 application is proper stage for deciding such "{$We lhough it mar have the effec\ of the issue becoming res-judicata in

510 SUPREME COURT REPORTS (1985] I s.c.R. A the suit. What is of significance is that the decision of this Coor t does show that notwithstanding the fact that a finding on the issue that the respondent WJS a party to the contracts would have operated as rcs-judicata in the respondents' suit, the Court directed that issue to be decided in a s. 34 petition for stay. Jn deciding the question under s. 34 in this manner the Court expressed its entire agreement B with the view enunciated by Mr. J11stice S.R. Das in Khushiram v. Hantumal\ 1 ) 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 forma- tion, existence or validity of the contract containing the arbitration

c clause, the Court is not bound to refuse a stay but may in its discre- tion, 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. Jn the instant case the issue pertained to the arbitrability of the three claims under the Arbitration clause in the contract and depended upon the proper construction thereof in light of the condu_ct of the parties and s"rrounding circumstances and no prejudice was caused to any of the parties as both Renusagar's application for injunction and GE C.'s stay petition under sec. 3 were heard together and parties did put before the Court-Trial Court, the /\ppeal Court and even even before us-the en tire material such as each wanted to rely .upon and sought a decision on the concerned issue and we are satis fled that the finding recorded by both the lower c runs en 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. The triable issue raised in the suit having been found upon ~gainst Renusagar no question of balance of convenience .• survives. We would reiterate that the Court's decision on the issue of rbitrability of three claims will have to be regarded as final, conclu- G sive anJ binding and that issue would not arise before the Court of arbitration of I.C.C. and even if it is raised it would be purely academic.· Jn the result both the appeals filed by Renusagar against G.E.C. are djsmissed with costs.

S.R. Appeals dismissed.

H I) [1948] 53 C.W.N. 505 at 51 8.