# 195a GAYA ELECTRIC SUPPT1Y CO., LTD. Feb. 8 v. • THE STATE OF BIHAR

- **Citation:** [1953] 1 S.C.R. 572
- **Court:** Supreme Court of India
- **Decided:** 1950-12-18
- **Case number:** Civil Appeal No. 175 of 1951
- **Bench:** Mehr Chand Mahajan, Das, Ghulam Hasan
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/195a-gaya-electric-suppt1y-co-ltd-feb-8-v-the-state-of-bihar-177
- **Pages:** 10

## Headnote

Indian Arbitration Act (X of 1940), s. 34-Contract containing
arbitration clause-Rescissio1~ of contract and suit by one partyApplication for stay of rnit-Scope of arbitration clause-Construction of cla«se.
If the arbitration agreement is broad and comprehensive and
embraceEI' any dispute between the parties in respect of the agreement, or in respect of any provision in the agreement, or in respect of anything arising out of it, and one of the parties seeks to
avoid the contract, the dispute is referable to arbitration if the
avoidance of the contract arises out of the terms of the contract
itself.
Where, however, the party seeks to avoid the contract for
reasons dehors it, the arbitration clause cannot be resorted to as
it goes along with other terms of the contract. In other words,
a party cannot rely on a term of the contract to repudiate it and
still say the arbitration clause should not apply.
Where, however, an arbitration clause is not so comprehen·
sive and is not drafted in the broad language namely "in respectt
of" any agreement, or "in reSpect of something arising out of it",
that proposition does not hold good.
The arbitration clause is a
written submission agreed to by the parties in a contract and like
every written submission to arbitration must be considered
according to its language and in the light of the circumstances
in which it is made.
Disputes which arose between the State of Bihar and an
Electric Supply Company whose licence bad been revoked by the
State were settled by an agreement which provided that the State
should make an advance payment of Rs. 5 lakbs to the company,
'<nd the company should hand over the undertaking to the State.
The undertaking was to be valued within 3 months and if any
money was'found due to the company as per the Government
valuation over 5 lakbs it will be paid to the company and if the
valuation \Vas less than 5 lakhs the company would refund the
excess received by it.
The agreement contained an arbitration
clause which ran as follows: '' In the case of any difference or dispute between the parties over the valuation as arrived at by the
Government and that arrived at by the company any such difference
or dispute including the claim for additional compensation of 20%
shall be referred to arbitration."
The company instituted a suit
against the State alleging that the State had failed to make its
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s.6.R.
SUPREME COURT REPORTS
573
valuation and to make payment of the excess within the time
1953
fixed and as time was of the essence of the contract, it had rescinded the agreement, and praying for a declaration that the Gaya Electric
undertaking belonged to it, for damages and appointment Qf a Supply Co., Ltd.
receiver. The State applied under s. 34· of the Arbitration Act
v.
for stay of the suit:.
The State of
Held, that the scope of the arbitration clause was very
Bihar.
narrow; it conferred jurisdiction on the arbitrator only on the
question of valuation of the undertaking pure and simple .
Questions relating to the breach of contract or its rescission were
outside the scope of the clause and the suit could not be stayed
under s. 34.
Heyman v. Darwins Ltd. ([1942] A.O. 356) referred to.
Harinagar 811,gar 111.ills Ltd. v. Skoda (India) Ltd. (A.LR. 1948
Cal. 230) 'and Governor-General in Council v. Associated Livestock
Farrn, Ltd. ([1937] 41 O.W.N. 563) distinguished.

## Text

57'2
SUPREME COURT REPORTS
(1953]
195a
GAYA ELECTRIC SUPPT1Y CO., LTD.
Feb. 8.
V.
•
THE STATE OF BIHAR.
[MEHR CHAND MAHAJAN, DAS, and GHULAM
HASAN JJ.]
Indian Arbitration Act (X of 1940), s. 34-Contract containing
arbitration clause-Rescissio1~ of contract and suit by one partyApplication for stay of rnit-Scope of arbitration clause-Construction of cla«se.
If the arbitration agreement is broad and comprehensive and
embraceEI' any dispute between the parties in respect of the agreement, or in respect of any provision in the agreement, or in respect of anything arising out of it, and one of the parties seeks to
avoid the contract, the dispute is referable to arbitration if the
avoidance of the contract arises out of the terms of the contract
itself.
Where, however, the party seeks to avoid the contract for
reasons dehors it, the arbitration clause cannot be resorted to as
it goes along with other terms of the contract. In other words,
a party cannot rely on a term of the contract to repudiate it and
still say the arbitration clause should not apply.
Where, however, an arbitration clause is not so comprehen·
sive and is not drafted in the broad language namely "in respectt
of" any agreement, or "in reSpect of something arising out of it",
that proposition does not hold good.
The arbitration clause is a
written submission agreed to by the parties in a contract and like
every written submission to arbitration must be considered
according to its language and in the light of the circumstances
in which it is made.
Disputes which arose between the State of Bihar and an
Electric Supply Company whose licence bad been revoked by the
State were settled by an agreement which provided that the State
should make an advance payment of Rs. 5 lakbs to the company,
'<nd the company should hand over the undertaking to the State.
The undertaking was to be valued within 3 months and if any
money was'found due to the company as per the Government
valuation over 5 lakbs it will be paid to the company and if the
valuation \Vas less than 5 lakhs the company would refund the
excess received by it.
The agreement contained an arbitration
clause which ran as follows: '' In the case of any difference or dispute between the parties over the valuation as arrived at by the
Government and that arrived at by the company any such difference
or dispute including the claim for additional compensation of 20%
shall be referred to arbitration."
The company instituted a suit
against the State alleging that the State had failed to make its
'·
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)
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s.6.R.
SUPREME COURT REPORTS
573
valuation and to make payment of the excess within the time
1953
fixed and as time was of the essence of the contract, it had rescinded the agreement, and praying for a declaration that the Gaya Electric
undertaking belonged to it, for damages and appointment Qf a Supply Co., Ltd.
receiver. The State applied under s. 34· of the Arbitration Act
v.
for stay of the suit:.
The State of
Held, that the scope of the arbitration clause was very
Bihar.
narrow; it conferred jurisdiction on the arbitrator only on the
question of valuation of the undertaking pure and simple .
Questions relating to the breach of contract or its rescission were
outside the scope of the clause and the suit could not be stayed
under s. 34.
Heyman v. Darwins Ltd. ([1942] A.O. 356) referred to.
Harinagar 811,gar 111.ills Ltd. v. Skoda (India) Ltd. (A.LR. 1948
Cal. 230) 'and Governor-General in Council v. Associated Livestock
Farrn, Ltd. ([1937] 41 O.W.N. 563) distinguished.
CIVIL APPELLATE JURISDICTION:
Civil Appeal
No. 175 of 1951.
Appeal by Special Leave from the Order and
Decree dated the 30th March, 1-051, of the High
Court of Judicature at Patna (Ramaswami and Rai
JJ.) in Miscellaneous Appeal No. 19 of 1951 arising
out of the Order dated the 18th December, 1950, of the
Court of the Additional Sub-Judge· Second at Gaya
in Title Suit No. 47 of 1950.
N. 0. Chatterjee (Rameshwar Nath, with him) for the
appellant.
M. 0. Setalvad, Attorney-General for India, and
Mahabir Prasad, Advocate-General of Bihar (R. J. Um-
\
rigar with them) for the respondent.
1953.
February 3: The Judgment of the Court
was delivered by
MAHAJAN J.-This appeal by special leave arises
out of an application made by the State of Bihar
against the Gaya Electric Supply Co. Ltd. under
section 34 of the Indian Arbitration Act for stay of
proceedings in a suit .filed by the company on 28th
September, 1950. The facts relevant. to this enquiry
are these.
514
SUPREME COURT REPORTS
[1953]
~
A licence for the supply of electric energy in the
Gaya Electric town of Gaya was obtained by one Khandelwal in the
Supply Go., Ltd.year 1928 under the Indian Electricity A.ct, 1910.
v.
Wtth the required sanction of the Government the
The State of ·licence was transfocred to the company in 1932.
By
. B•har.
a notification dated 23rd June, 1949, the licence was
Mahajan J. revoked by the Government with effect from 9th July,
1949. 'l'hereupon the company filed a suit against
the State for a declaration that the revocation of the
licence was arbitrary, mala fide and ultra vires. During
the pendency of the suit negotiations started between
the company and the State for a settlement of the
dispute and ultimately on 28th October, 1949, a deed
of agreement was arrived at between them. The
effect of the . agreement and the correspondence referred to therein was substantially as follows:-
.(a) That the company would withdraw the suit
No. 58 of 1949 unconditionally on 25th October,
1949.
(b) 'rhat within three days of the withdrawal of
the suit the State of Bihar would make an advance
payment of rupees five lakhs to the company, and
simultaneously the company would formally hand
over the possession of the undertaking to an authorized officer of the Government.
(c) That both parties will make their respective
valuations with"in three months of taking over the
undertaking and any balance of money found due to
the company as per Government valuation will be
paid to the company and in case of over-payment,
the excess paid to the company on account of
the "on account payment" of rupees five lakhs
will be refunded to the Government.
(d) That in the case of a,ny difference or dispute
between the parties over the payment of the balance
which may be found due after valuation such dispute
shall .be submitted to the sole arbitration of a single
arbitrator who should be a high government officer of
the provincial government of rank equal to or higher
than a Divisional Commissioner and his award shall
be binding and final on both parties.
' .. . \.
S.C.R.
SUPREME COURT REPORTS
515
The arhitration clause is c6ntained in a letter dated
1953
13th October, 1949, and was substantially accepted
by the company in its letter dated 17t_h <?ctober_, 19j9. s:;:~ ~
1
:~t~~d.
As set out by the State Government rn 1ts application
v.
under section 34, it runs as follows :-
The State of
"In the case of any differsnce or dispute between
Bihar.
the parties over the valuation as arrived at by the
Government and that arrived at by the company,·
such difference or dispute, including the claim for
additional compensation of 20 % shall be referred to
arbitration ... "
·
In pursuance of the agreement the respondent
took over the undertaking on 28th October, 1949,
and also made a payment of rupees five lakhs to the
company.
On the 19th January, 1950, the company sent a ·
statement of valuation of the assets amounting to
Rs. 22,06,072 to the Chief Electrical
Engineer,
Bihar. The Chief Electrical Engineer characterized
the valuation of 22 lakhs by the company as fantastic
and stated that according to a rough valuation the
amount would be approximately five lakhs and that
the final valuation would be settled after the company
had furnished a detailed history of the plants and
machineries.
The company declined to give any
further details and stated that time was of the essence
of the contract and it would be extended from 28th
January, to 15th February, 1950. On 6th April,
1950, the Chief Electrical Engineer intimated that
the valuation amounted to Rs. 5,56,221. No reply
to this letter was received and th·e State Government
intimated to the company that as difference and dis·
pute had arisen relating to valuation, Mr. M. S. Rao,
I.C.S., was being appointed as sole arbitrator to
decide the dispute.
On 28th September, 1950, the company instituted
the suit, the subject-matter of the application for
sbay, after necessary notice under section 80 of the
Code of Civil Procedure. In the plaint it was alleged
lihat as the State Government had failed and neglected to make its valuation or to make payment to the
Mahaja" J,
576
SUPREME COURT REPORTS
(1953]
1953
company by the 15th 'March, 1950, it committed a
G
E ' t . breach of the agreement and by reason of this breach
aya
~eo rto
.
Supply co., Ltd. th" company bad rescmded the agreement and bad
v.
forfeited the sum of five lakbs paid as advance by the
The Stat• of State. 'l'be comp:my prayed inter alia for the reliefs
Bihar.
of declaration that the electrical undertaking be-.
longed to them, for damages, for appointment of
Mahajan J, receiver and for injunction.
On the 9th October,
1950, the State Government filed the present application under section 34 of the Indian Arbitration
Act. It was stated therein that the company had
with a dishonest and mala fide motive and with a view
to avoid the decision of the matter in dispute in
arbitration instituted the suit on incorrect and false
allegations, that the arbitration agreement was still
subsisting and valid and binding on the parties and
could not be taken as having been rescinded as
alleged by the company, that the cause of action as
alleged in the plaint being non-compliance with the
agreement the suit arose out of and related to the
agreement and was covered by the arbitration clause
and that the State Government was ready and willing
to have the dispute
set~led by arbitration.
The
company denied the allegations of mala fides and
pleaded that the arbitration clause was no longer in
existence and that even assuming it to be in
existence, the suit was in no way connected with .the
same and it was contended that the suit should not
be stayed.
'l'he subordinate judge held that the suit was not
in respect of any matter agreed to be referred, and
that the court had no jurisdiction to stay the proceedings. In the result the stay application was
dismissed. Against this order the State Government
appealed to the High Court.
The High Court
held that the dispute in the suit was one which
arose out of or was in respect of the agreement
and that the question in the suit was directly within
the scope of the :ubitration clause. By an order of
this Court dated 22nd May, 1951, the company wa,s
granted special leave under article 136(1) of the
Constitution.
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S.O.R.
SUPREME COURT REPORTS
577
Section 34 of the Indian Arbitration Act runs
1958
thus:-
•
Gaya Electric
"Where a.ny party to an arbitration ....... commen- Supply co., Ltd.
ces any legal proceedings against any other party•to
v.
the agreement ..... . in respect of any matter agreed to be
The State 0!
Bihar.
referred, any party to such legal proceedings may, ......
apply to the judicial authority before whic,h the proMahajan. 'J,
ceedings are pending to stay the proceedings, and if
satisfied that there is no sufficient r~ason why the
matter should not be referred in accordance with the
arbitration agreement and that the applicant was, at
the time when the proceedings were commenced, and
still remains, ready and willing to do all things necessary to the proper conduct of the arbitration, such
authority may make an order staying the proceed-
.
"
mgs.
From the language of the section it is quite clear
that the legal proceeding which is sought to be stayed
must be in respect of a matter which the parties have
agreed to refer and which comes within the ambit of
the arbitration agreement.
Where, however, a suit
is commenced as to a matter which lies outside tbe
submission, the court is bound to refuse a stay. In
the words of Viscount Simon L. 0. in Heyman v.
Darwins Ltd. (1). the answer to the question whether
a dispute falls within an arbitration clause in a contract must depend on (a) what is the dispute, and (b)
what disputes the arbitration clause covers. If the
arbitration agreement is broad and comprehensive
and embraces any dispute between the parties "in
respect of" the agreement, or in respect of any provision in the agreement, or in respect of anything
arising out of it, and one of the parties seeks to avoid
the contract, the dispute is referable to arbitration if
the avoidance of the contract arises out of the terms
of the contract itself.
Where, however, the party
seeks to avoid the contract for reasons dehors it, the
arbitration clause cannot be resorted to as it goes
along with other terms of the contract. In other'
words, a party cannot rely on a term of the con,tra9t
.578
SUPREME COURT REPORTS
[1953)
1968
to repudiate it and still say the arbitration· clause
Gaya Electric should not apply. If he relies upon a contract, he
SupplyOo., Ltd.must rely on it for all purposes.
Where, however
v.
an' arbitration clause is not so comprehensive and i~
The State of not drafted in the broad language which was used ih
Bihar.
the House of Lords case, namely, "in respect of" any
~fahajan J. agreement, or "in respect of something arising out
of it", that proposition does not hold good .. The
arbitration cla,use is a written submission agreed to
by the parties in a contract and like ·every 1written
submission to arbitration must be considered according to its language and in the light of tho circumstances in which it is made.
Now as regards the first question, viz., what is the
present dispute about, the answer is to be gathered
from paragraphs 14 to 17 of the .plaint. It is averred
therein that the Government of Bihar committed
breach of the agreement and failed to make any
valuation of the unde'rtaking or pay the balance of
the compensation money, that time being of the
essence of the contract, the defendant failed and
neglected to complete the valuation within the time
originally fixed or the extended time, and that by
reason of the breach of contract the plaintiff rescinded the agreement and forfeited the sum of rupees
five lakhs and that it is entitled to compensation for
the wrongful deprivation of the use of its property.
No claim has been made in the plaint for the valuation of the undertaking or for the payment of any
compensation for the undertaking; on the other hand,
the claim in the suit is founded on the rescission of
the agreement containing the arbitration clause and
on a breach of that agreement.
These are matters
which may well be said to arise out of the agreement
and if the arbitration clause was broadly worded and
stated that all disputes arising out of the agreement
would be referred to arbitration, it could then probably have been said that the scope of the suit was
within the ambit of the arbitration clause, but the
clause here is differently worded.
The clause here is that if any difference or dispute
~rises between the parties over the payment of the
•
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•
S.C.R.
SUPREME COURT REPORTS
579
balance which may be found due after valuation such
1953
dispnte shall be submitted to the sole arbitration of _a
Gaya Electric
single arbitrator.
The scbeme of the agreement is supply co., Ltd.
that the Government was to make a valuation as laid
v.
·
down in the Indian Electricity Act . within •three
The State of
months of taking over the _undertaking and any
Bihar.
balance of money found due to the company as per
Mahajan J.
Government valuation was to be paid by the Government, and in case of over-payment, the excess paid
to the com2any on account of the "on account payment" of rupees five lakhs mentioned in paragraph 1
had to be refunded to Government. In the case of any .
difference between the parties over the valuation as
arrived at by the Government and that arrived at by
the company, such difference or dispute, including the
claim for i.dditional compensation of twenty per cent.
had to be referred to arbitration.
The scope of this
arbitration clause is a very narrc, w one. It only confers jurisdiction on the arbitrator on the question of
valuation of the undertaking pure and simple and
does not say tbat all disputes arising out of the agreement or in respect of it will be decided by arbitration.
Questions relating to the breach of contract or its
rescission are outside the reach of this clause.
The
arbitrator has not been conferred the power by this
clause to pronounce on the issue whether the plaintiff
was justified in claiming that time was of the essence
of the contract and whether the State Government
committed a breach of the contract by not making a
valuation within the time specified.
This clause is
therefore no answer to the company's querry "Show
me that I have agreed to refer the subject-matter of
the suit to an arbitrator.''
Besides this clause in the
agreement there is nothing else which can deprive
the court of its jurisdiction to decide the plaintiff's
suit as brought.
Ramaswami J., with whom Rai J. concurred, held
that upon a perusal of the terms of the contract
and of the correspondence it was obvious thH.t no
stipulation was made tha.t the compensation money
75
580
SUPREME COURT REPORTS
[1953]
J95B
should be paid within the period of three months,
and that on the contrary, the intention of the parties
Gaya Electric
h t h
G
Id
.
S P. z 0
Ltd was t a t e
overnment wou
pay compensat10n
up y
o.,
.J
•
v.
monGy only a,fter the award had been made by the
The Stateof arbitrator.
Now this is the very point which would
Bihar.
be in issue in the snit itself, and the learned Judge
was in error in considering and deciding this point in
Mahajan J.
this enquiry under section 84.
The validity of the
plaintiff's contention·in the suit cannot be gone into
by that court exernising jurisdiction und·er this section as its function is a very limited one.
The only
point in such cases to be decided is whether the claim
which is brought-whether it is good, bad or indifferent-comes within the submission to arbitration. H
maybe that there are grounds upon which the defendant would be able to satisfy the proper tr,bunal that
the plaintiff's claim'was frivolous and vexatious, but
those considerations, as pointed out by Banks L. J.
in Monro v. Bognar Urban Council ('), are material
only if the question to be considered is whether the
case made was a frivolous and vexatious one and
ought to have had no weight at all upon the question
of what the plaintiff's claim in fact was and one can
only find out what his claim is by looking at the-plaint.
The learned Judges in the High Court seem to
have thought that the arbitration clause here had
been drafted broadly and that all "disputes arising
out of or in respect of the agreements were referable
to arbitration. 'l'heir reliance on the decision of the
· Calcutta High Court in Harinagar Sugar Mills Ltd.
v. Skoda India Ltd. (9) in support of the decision
indicates the error.
In that case the arbitration
clause wa,s drafted in a comprehensive language and
stated that a dispute arising out of the agreement
had to be referred to arbitration.
Their reference to
the case of Governor-General in Council v. Associated
Livestock Farm Ltd. (') also shows that they were
under the same erroneous impression. In this ca.se
tb e arbitration clause was in these terms:-
(1)
(1915] 3 K.B, 167.
(3) A.I.R. 1948 Cal. •Jo,
(2) (1937) 41 C.W.N. 563.
. •
S.C.R.
SUPREME ootJ:R•r REPORTS
58i
"Any dispute or difference arising out of the con1953
tract shall be referred to the arbitration of the officer G
El t .
sanctioning the con tract whose decision shall be final su::l~ 00~" ~~d.
and binding."
•
v. '
It is obvious that these decisions could have no
The State of
relevance to the arbitration clause as drawn up in the
Bihar.
present case. If the nature of the claim is as we
Mahajo.n J.
have indicated above, it seems plain that it does not
come within the scope of the submission.
In our judgment, therefore, the decision of the
learned Subordinate Judge was right and the Judges
of the High Court were in error in reversing it.
In
the result the only course open to us is to allow the
appeal with costs and to say that the plaintiff's claim
is not within the scope of the submission and that
the petition under section 34 was rightly dismissed by
the Subordinate Judge.
Agent for the appellants :
Agent for the respondent :
Appeal allowed.
Raj inder Narain.
P. K. Chatterji.
RIZWAN-UL-HASAN AND ANOTHER
v.
THE STATE OF UT'rAR PRADESH.
[MEHR CHAND MAHAJAN and DAs JJ.]
Contempt of Courts Act (XII of 1926), s. 3-Proceedings before
Sub-Divisional Magistrate-Application by respondents to District
Magistrate containing allegations against trying Magistrate and the
bona fides of the pending proceedings-Transmission of application
to Sub-Divisional Magistrate for report-Whether amounts to
contempt of Court-Question of prejudice .
. The jurisdiction in contempt of court is not to be invoked
unless tbere is real prejudice which can be regarded as a substantial interference with the due course of justice.
The purport
of the court's action is a practical purpose and the Court will not
exercise its jurisdiction upon a mere question of propriety.
During the pendency of pi·oceedings against A and B under
s. 145, Criminal Procedure Code, in the court of a Sub-Divisional
Magistrate, A and B made an application to the District Magistrate alleging that the proceedings were not bona fide and
1953
Feb. 5.