# UNION OF INDIA v. SALWEEN TIMBER CONSTRUCTION (INDIA) & ORS

- **Citation:** [1969] 2 S.C.R. 224
- **Court:** Supreme Court of India
- **Decided:** 1968-09-25
- **Case number:** Civil Appeal No. 549 of 1966
- **Bench:** J. C. Shah, V. Ramaswami, A. N. Grover
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/union-of-india-v-salween-timber-construction-india-ors-4489
- **Pages:** 8

## Headnote

Arbitration-Arbitration clause in
contract-Dispute whether arises
out of contract-Test for determining.
There was a dispute between the appellant and respondent re,garding
the supply of timber. In pursuance of the clause in the contract which
provided that in the event of any question or dispute arising under the:
contract or in connection with the contract it should be referred to arbitration, the dispute was so referred.
One of the items in dispute was a
claim by the respondent that there was an excess supply of timber to
cover up possible rejection; which .should be returned by the appellant
with compensation for deterioration, or that payment should be made
for it at. the market value. The appellant contended that tho terms of
the 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 contract or
in connection with the contract.
On the question whether the arbitrators had jurisdiction to adjudicate
A
B
c
D
upon the claim,
E
HELD : The test for determing 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.
Since
it
was
necessary to have
recourse to the terms of the contract for the purpose of deciding the
matter in dispute, the matter was within the scope of the arbitration
clause and the arbitrators had jurisdiction to decide it.
F
Ruby General Insurance Co.
Ltd. v. Peary
Lal Kumar,
[1952]
S.C.R. SOI, followed.
Piercy v. Young, 14 Ch.D. 200 and Turnock v. Sartoris 43 Ch.D.
150, explained.

## Text

UNION OF INDIA
v.
SALWEEN TIMBER CONSTRUCTION (INDIA) & ORS.
September 25, 1968
[J. C. SHAH, V. RAMASWAMI AND A. N. GROVER, JJ.]
Arbitration-Arbitration clause in
contract-Dispute whether arises
out of contract-Test for determining.
There was a dispute between the appellant and respondent re,garding
the supply of timber. In pursuance of the clause in the contract which
provided that in the event of any question or dispute arising under the:
contract or in connection with the contract it should be referred to arbitration, the dispute was so referred.
One of the items in dispute was a
claim by the respondent that there was an excess supply of timber to
cover up possible rejection; which .should be returned by the appellant
with compensation for deterioration, or that payment should be made
for it at. the market value. The appellant contended that tho terms of
the 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 contract or
in connection with the contract.
On the question whether the arbitrators had jurisdiction to adjudicate
A
B
c
D
upon the claim,
E
HELD : The test for determing 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.
Since
it
was
necessary to have
recourse to the terms of the contract for the purpose of deciding the
matter in dispute, the matter was within the scope of the arbitration
clause and the arbitrators had jurisdiction to decide it.
F
Ruby General Insurance Co.
Ltd. v. Peary
Lal Kumar,
[1952]
S.C.R. SOI, followed.
Piercy v. Young, 14 Ch.D. 200 and Turnock v. Sartoris 43 Ch.D.
150, explained.
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 549 of
1966.
Appeal by special leave from the order dated October 23,
1964 of the Punjab High Court, Circuit Bench at Delhi in Civil
Revision No. 438-D of 1964.
V. A. Seyid Muhammad and S. P. Nayar, for the appellant.
S. V. Gupte and A. K. Nag, for respondents Nos. 1 and 2.
A. G, Ratnaparkhi, for respondent No. 5.
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UNION v. SALWEEN TIMBER (Ramaswami, J.)
225
The Judgment of the Court was delivered by
Ramaswami, J. This appeal is brought by special leave
against the judgment of the Punjab High Court in Civil Revision
No. 438-D of 1964 by which the revision petition of the appellant
against the order of Shri D. R. Khanna, Subordinate Judge, 1st
Class, Delhi dated 20th April, 1964 in Suit No. 128 of 1963 was
dismissed in limine. Suit No. 128 of 1963 was an application
by the Union of India under sections 5, 12(2), 31 (3), 32 and
33 of the Arbitration Act, 1940 for obtaining a declaration that
the reference of the claim of the respondent firm in respect of
excess quantity of timber alleged to have been delivered and certain other matters was not covered by the arbitration agreement
and for leave to revoke the authority of the Arbitrators and the
Umpire.
The petition was rejected by the Subordinate Judge by
his order dated 20th April, 1964.
By a savingram dated 21st December, 1953 the Union of
India (hereinafter called the appellant) entered into a contract
of purchase of 1,01,750 cubic feet of teak logs at Rs. 9/12/- per
D
c.ft. to be delivered F.0.R. Halisahaar and Lillooah, both in West
Bengal near Calcutta.
The consignee was the District Controller
of Stores, Eastern Railway.
The formal acceptance of tender
confirming the savingram and containing the other terms of the
contract was issued on 13th January, 1954. Besides the quantity
of teak logs originally contracted to be supplied, the respondent
E
firm subsequently supplied a quantity of 1676.95 c.ft.
Burma
teak squares at the same rate and the contract was accordingly
amended on 13th December, 1957.
It was provided in clause
17 ( c) of the acceptance of tender that the respondent firm was
to offer the timber for inspection at its own premises at Halisahaar
and Lillooah.
Althou~h the delivery time was extended from
time to time, upto 26th January, 1958, the respondent firm supF
plied only 77,211.89 cubic feet of timber and the contract in
respect of the unsupplied quantity was cancelled on 20th June,
1958 and that the supplied quantity was repurchased bv Government from third party at a loss of Rs. 1,54,541.36 on 23rd July,
1958.
Inclurlin~ this item the appellant made a claim of
Rs. 3,50.085.99 aqainst the respondent firm out of which it reG - couped Rs. 1, 79,366 from the sum~ due to the respondent firm
leaving a balance of R~. 1.70,719.99. The contract in question
is governed bv the arbitration agreement contained in clause 21 of
the form W.S.B. 133 which states as follows :-
H
"Arbitration :
In the event of any question or dispute arising under
these conditions or any special conditions of contract
or in connection with this contract (except as to any
matters the decision of which is specially provided for
226
SUPREME COURT REPORTS
[1969] 2 s.c.R.
by these conditions) the same shall be referred to the
award of an arbitrator to be nominated by the Purchaser and an arbitrator to be nominated by the Contractor, or in case of the said arbitrators not agreeing
then to the award of an Umpire to be appointed by the
arbitrators in writing before proceeding on the reference
and the decision of the arbitrators, or in the event of
their not agreeing, of the Umpire appointed by them,
shall be final and conclusive and the provisions of the
Indian Arbitration Act, 1940, and of the Rules thereunder and any Statutory modification thereof shall be
deemed to apply to and be incorporated in this contract.
A
B
Upon every and any such reference, the assessment
c
of the costs incidental to the reference and award respectively shall be in the discretion of the arbitrators or
in the event of their not agreeing of the Umpire appointed by them."
In pursuance of the arbitration clause the respondent firm
appointed one Mr. T. R. Sharma as its arbitrator and the appellant appointed Mr. R. R. Desai, Deputy Legal Adviser, Ministry
of Law, Government of India as its nominee.
Mr. P. S. Bindra,
a retired District Judge was appointed as the Umpire by order of
the Sub-Judge dated 2-8-1961.
Both the parties filed their respective claims before the arbitrators.
The respondent firm claimed a sum of Rs. 73,50,000 while the appellant contended that the
respondent committed breach of the contract by not supplying the
stipulated quantity of timber under the contract and as such
claimed damages to the extent of Rs. 3,00,000. The case of the
respondent firm was that in order to cover up possible rejection,
a quantity of timber much in excess of the contracted quantity
was despatched to the consignees and the excess quantity measuring 3,400 tons i.e. 1,70,000 cubic feet was still lying with the
Lillooah consignee and 1,500 tons i.e. 75,000 cublic feet with the
Halisahaar consignee and had not been returned despite repeated
requests. The respondent firm claimed return of this quantity of
timber and compensation for its deterioration.
It was alternatively contended that in case the Government failed to return the
whole or part of the excess timber, then payment for that quantity at the market rate should be made. The appe!lant in its reply
denied the allegation relating to the delivery and retention of
excess quantity. It was specifically denied that 4,900 tons or anv
quantify was due to be returned to the respondent firm or that it
was entitled to recover Rs. 73,50,000 or any amount as claimed.·
It was contended that in terms of the contract the respondent firm
was to offer inspection of the store at its own premises ·at Lillooah
and Halisahaar but instead doing so, the respondent firm started
to despatch the logs to the DCO's Li]looah and Halisahaar to ~
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UNION v. SALWEEN TIMBER (Ramaswami, J.)
227
inspected at the consignees' premises.
This was done for its own
convenience and at its own risk.
The inspected stores were retained by the consignee while the rejected stores were to be removed by the respondent firm from the consignee's premises at
their own expense.
It was submitted that the dispute raised by
the respondent firm was outside the scope of the arbitration agreement and that the arbitrators had no jurisdiction to entertain such
a claim.
After hearing the parties, the Subordinate Judge rejected the application of the appellant by his order dated 20th July,
1964.
It is necessary at this stage to quote the relevant clauses of the
contract.
Clause 13 ( 1) provides :
"Inspection and Rejection : Facilities for Test and
Examination:-The Contractor shall afford at his own
expense the Inspector all reasonable accommodation
and facilities for satisfying himself that the stores are
being or have been manufactured in accordance with
the particulars and for this purpose the Inspector shall
have fu]J and free access at any time during the contract
to the Contractor's work and may require the
Contractor to make arrangements for anything to be
inspected at his premises or at any other place and the
Contractor shall reserve a similar right as regards any
sub-contract he may make.
The Contractor shall pay all costs connected with
such tests and provide, without extra charge, all materials, tools, Jabour and assistance of every kind which
the Inspector may consider necessary for any test and
examination other than special or independent tests
which he shall require to be made on the contractor's
premises, and shall pay all the costs attendant thereon,
failing these facilities (in regard to which the Inspector
wili be the sole judge) at his own premises for making
the tests, the Contractor shall bear the cost of carrying
out such tests elsewhere".
Clause 13 ( 4) reads as follows :-
"Inspection and rejection : The whole of a consignment may be rejected, if, on inspectioo, a portion upto
4 per cent of the consignment (at the sole discretion of
the Inspector) is found to be unsatisfactory."
Clause 13 ( 5) states :
"Rejection: If any stores are rejected as aforesaid
then, without prejudice to the foregoing provisions, the
Secretary, Department of Supply shall be at liberty to :-
228
SUPREME COURT REPORTS
(1969] 2 s.c.R.
(a) allow the contractor to resubmit stores m
replacement of those
rejected within a time
specified by the Secretary, Department of Supply, the contractor bearing the cost of freight
in such replacement without being entitled to
any extra payment, or
(b) buy the quantity of the stores rejected or others
of a similar nature elsewhere at the risk and cost
of the contractor without affecting the contractor's liability as re,gards supply of any further
consignment due under the contract, or
A
B
( c) terminate the contract and recover from the conc
tractor the loss the purchaser thereby incurs".
On behalf of the appellant Dr. Seyid Mohammad presented
the argument that the dispute regarding the respondent's claim in
respect of the excess quantity of timber measuring 4,900 tons said
to have been tendered but not inspected was not a dispute 'arising
under the contract" or 'in connection with the contract' and hence
the arbitrators had no jurisdiction to adjudicate upon that claim.
It was stated that the terms of contract did not require the respondent finn to tender for inspection any quantity in excess of the
contracted quantity of timber and the alleged placing of unlimited
stocks of timber at the disposal of the Government officials far in
excess of the quantitv ordered was beyond the scope of the contract.
It was argued that the claim should be treated as a claim
relating to a transaction of involuntary bailment and not to anything done in the performance, implementation or execution of
the contract. It was said that the claim for return of these goods
and damages for deterioration or in the alternative
for
their
market value was a claim in detinue and the dispute was not hence
a dispute "arising out of the contract" or 'in connection with the
contract' but was a dispute relatin~ to a tort of wrongful detention.
We do not thiPk that there is anv iustification for the argument put forward on hehalf of the appellant.
In our opinion, the
claim made by the re0.pondent firm was a claim arisjng out of the
contract. The test for determining the question is whether recourse
to the contract by wrich both the parties are bound is necessary
for the purpose of determining whether the claim of the respondent firm is justified or otherwise. If it is necessary to take recourse to the terms of the contract for the purpose of deciding the
matter in dispute. it must be held that the matter is within the
scope of the arbitration clause anif the arbitrators have jurisdiction to decide this ca<e. In Hevman & Anr. v. Darwins Ltd.(')
the law on the point is very clearly stated in the following passage ;
(1) [1942! A.C. 356 at 366,
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UNION v. SALWEEN TIMBER (Ramaswami, I.)
229
"An arbitration clause is a written submission agreed
to by the parties to the contract, and, like other wntten
submiss10ns to arbitration, must be construed according to its language and in the llght of the circumstances
in which it is made. If the dispute is whether the contract which contains the clause has ever been entered
into at all, that issue cannot go to arbitration under the
clause, for the party who denies that he has ever entered into the contract is thereby denying that he has
ever joined in the submission.
Similarly, if one party
to the alleged
contract is contending that it is void
ab initio (because, for example, the making of such a
contract is illegal), the arbitration clause cannot operate,
for on this view the clause itself also is void. But, in a
situation where the parties are at one in asserting that
they entered into a bmding contract, but a difference has
arisen between them whether there has been a breach by
one side or the other, or whether circumstances have
arisen which have discharged one or both parties from
further performance, such differences should be regarded as differences which have arisen 'in respect of' 01
"with regard to'', or '"under" the contract, and. an arbitration clause which uses these, or similar expressions
should be construed accordingly".
In Stebbing v. Liverpool & London and Globe Insurance Company Ltd. ( 1 ) the policy of insurance contained a clause referring
to the decision o,f an arbitrator "all differences arising out of this
policy". It also contained a recital that the assured had made a
proposal and declaration as the basis of the contract, and a clause
to the effect that compliance with the conditions indorsed upon
the policy should be a condition precedent to any liability on the
part of the insurers.
One of the conditions provided that if any
false declaration should be macie or used in support of a claim all
benefit under the policy should be forfeited.
In answer to a claim
by the assured, the insurers alleged that statements in the proposal
and declaration were false.
When the matter came before the
arbitrator, the assured objected that this was not a difference in the
arbitration and that the arbitrator had no power to determine
whether the answers were true or not, or to determine any matters
which called in question the validity of the policy.
In holding
that the arbitrator had jurisdiction to decide the matter, Viscount
Reading, C.J. observed :
"If the company were seeking to avoid the contract
in the true sense they would have to rely upon some
matter outside the contract, such as a misrepresentation
'(1) [t917] 2 K.B. 433.
230
SUPRE~E COURT REPORTS
[1969] 2 S.C.R.
of some material fact, inducing the contract, of which
force and effect are not declared by the contract itself.
In that case the materiality of the fact and its effect in
inducing the contract would have to be tried.
In the
present case the company are claiming the benefit of a
clause in the contract when they say that the parties
have agreed that the statements in question are material and that they induced the contract. If they succeed .
in escaping liability that is by reason of one of the
clauses in the policy.
In resisting the claim they are
not avoiding the policy but relying on its terms.
In
my opinion, therefore, the question whether or not.the
statement is true is a question arising out of the policy".
The principle has been reiterated by this Court in Ruby General
Insurance Co. Ltd. v. Pearey Lal Kumar & Anr. ('). In that case
the appellant company insured a car belonging to respondent No.
1 and issued the policy which contained, inter alia, the following
terms:- ·
"All differences arising out of this policy shall -be
r&erred to the decision of an arbitrator to be appointed
by the parties .... If the company shall disclaim liability
to the insured for any claim hereunder and such claim
shall not within twelve calendar months from the date
of such disclaimer have been referred to arbitration
then the claim shall have been deemed to have been
abandoned and shall not be recoverable''.
The car was lost and company through its Branch Manager disclaimed liability on three different dates.
The insured did not
take any action in regard to the appointment of an arbitrator until
more than twelve months after the last disclaimer by the company.
The case of the company was that the insured must be deemed to
have abandoned his claim by virtue of the contract of insui;ance ·
policy while the respondent averred that there was never any valid
disclaimer by the company of its liability as the Branch Mamger
had no authority to disclaim the liability and it could have been
disclaimed only by the resolution of the company. The company
made an application under s. 33 of the Indian Arbitration Act
praying for a declaration that the reference to arbitration was
illegal and the award if made by the arbitrator would not bind
the company. It was contended on its behalf that the arbitration
. clause had ceased to be operative and the question as to the existence and validity of the arbitration agreement was triable by the
court und1)r sec. 33 of the Arbitration Act and not by the arbitrator. The argument was rejected by this Court. It was held that
the point on which the parties were in dispute was a difference
(1)[1952] ll.C.R. 501.
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UNION v. SALWEEN TIMBER (Ramaswami, J.)
231
arising out of the policy, because recourse to the contract by which
both the parties were bound was necessary for the purpose of
determining the matter in dispute between them. As there was no
contention raised by either of the parties that there was no contract
entered into at all or that it was void ab initio the arbitrator had
jurisdiction to decide the matter referred to him. In our opinion,
the principle applies to the present case and it follows that the dispute between the parties falls within the scope of the arbitration
clause.
On behalf of the appellant reliance was placed upon the deci-
, sion of Court of Appeal in Piercy v. Young(') in which it was
held that the clause "that any differences or disputes that may
arise between the partners shall be settled by an arbitrator" does
mot include a dispute whether the partnership has been terminated,
or whether certain shares have been paid on account to the partnernhip or to one partner alone. In our opinion, the principle
docs not apply in the present case where the question presented
for determination is quite different.
Counsel for the appellant
also referred to Turnock v. Sartoris('). In that case the lessor
was under a covenant to supply his lessee with a specific quantity
of water. The lease contained a comprehensive arbitration clause.
Dispute having arisen as to the supply of water, an agreement was
subsequently entered into, binding the lessor to take certain steps
to secure the supply and varying the rights of the parties in respect
of the supply. The Jessee brought an action alleging that the
steps agreed upon had not been taken and that he had not been
fully supplied with water and asking for an action of the damages
to be taken. The lessor moved to have the action stayed. Jit was
held that the disputed matters arose partly under the agreement
and were outside the arbitration clause in the lease and that even
if all the matters for which damages were claimed could be
brought within the arbitration clause it would not be proper to
refer them to an arbitration who would not have the authority to
construe the agreement to determine its effect upon the lease.
It
is manifest that the decision has no bearing upon the question
presented for determination in the present case.
For the reasons already expressed, we hold that the claim of
the respondent firm was within the scope of the arbitration clause
and the application made by the appell.ant in Suit No. 128 of _1963
was rightly dismissed by the Subordmate Judge.
Accordmgly,
the appeal fails a;nd is dismissed with costs.
V.P.S.
(I) 14 Ch. D. 200.
(2) 43 Cn. D. 150.
Appeal dismissed.