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PETITIONER: RUBY GENERAL INSURANCE CO. LTD.

       Vs.

RESPONDENT: PEAREY LAL KUMAR AND ANOTHER.

DATE OF JUDGMENT: 25/02/1952

BENCH: FAZAL ALI, SAIYID BENCH: FAZAL ALI, SAIYID BOSE, VIVIAN

CITATION:  1952 AIR  119            1952 SCR  501  CITATOR INFO :  RF         1962 SC1810  (4)  R          1969 SC 488  (5)  RF         1984 SC1072  (41)  F          1985 SC1156  (45)

ACT:     Indian  Arbitration Act (X of 1940), s.  33--Arbitration clause--Whether    dispute   "arises   out   of    agreement "--Tests--Plea that agreement is not applicable and does not subsist--No  dispute  about  the existence  or  validity  or meaning--Jurisdiction  of  arbitrator Application  under  s. 33--Maintainability.

HEADNOTE:     The  appellant  company insured a car belonging  to  re- spondent  No. 1 and issued a policy which  contained,  inter alia, the following terms :--"All differences arising out of this policy shall be referred to the decision of an arbitra- tor to be appointed by the parties..........  If the company shall disclaim liability to the insured for any claim  here- under 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 the 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  arbitra- tor until more than twelve months after the last  disclaimer by  the company.  The case of the company was that  the  in- sured  must be deemed to have abandoned his claim by  virtue of  the contract of insurance policy while  ’the  respondent averred  that  there was never any valid disclaimer  by  the company  of its liability as the Branch Manager had  no  au- thority  to  disclaim the liability and it could  have  been disclaimed  only  by  the resolution of  the  company.   The company  presented the present application under see. 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 65

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502 operative and the question as to the existence and  validity of the Arbitration agreement was triable by the court  under sec. 33 of the Arbitration Act and not by the arbitrator.      Held,  (i) that the point on which the parties were  in dispute  was  a  difference "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  in  the present case by either of the  parties  that there  was  no contract entered into at all or that  it  was void  ab initio, and therefore the arbitrator had  jurisdic- tion  to  decide the matter referred to him.   A  contention that  the arbitration agreement has ceased to be  applicable or that it no longer subsists will not oust the jurisdiction of the arbitrator.  (ii)  No question of determining the effect of the arbitra- tion  within the meaning of sec. 33 arose because there  was no dispute between the parties as to what it meant.    A.M. Mair and Co. v. Gordhandas Sagarmull [1950]  (S.C.R. 792), Heyman v. Darwins Ltd. ([1941] 1 A.E.R. 337),  Mecaura v.  Northern  Assurance Co. ([1925] A.C. 619),  Stebbing  v. Liverpool, London and  Globe  Insurance  Co.  Ltd.  ([1917], 2 K.B. 433) referred to.

JUDGMENT:     CIVIL  APPELLATE  JURISDICTION: Civil Appeal No. 163  of 1951.  Appeal by special  leave from the Judgment dated  the 10th  April. 1951, of the High Court of Judicature  for  the State  of Punjab at Simla (Kapur J.) in Civil  Revision  No. 286 of 1950 arising out of Order dated the 24th March, 1950, of  the Court of Subordinate Judge, 1st Class, Delhi, in  an Application under Section 33 of Indian Arbitration Act, X of 1940.      Rattan  Lal  Chawla (K. N. Agarwal, with him)  for  the appellant. Som Nath Chopra for the respondent.     1952. February 25.  The Judgment of the court was deliv- ered by     FAZL ALI J.--This is an appeal by special leave  against the judgment of the Punjab High Court upholding the decision of a Subordinate Judge of Delhi relating to a petition filed by  the  appellant-company under section 33  of  the  Indian Arbitration Act against the respondents, 503     The  material facts are these. On the 22nd April,  1947, the  appellant company insured a car belonging to the  first respondent  and  issued a policy which fully  sets  out  the terms and conditions of the agreement relating to the insur- ance.  The  first  respondent left his car in  a  garage  at Lahore  and  came  away to India on  the  31st  July,  1947. Subsequently, he learned about the loss of his car, and sent a  legal  notice  dated the 18th March,  1948,  through  his advocate Mr. A.R. Kapur to the Head Office of the company at Calcutta,  claiming a sum of Rs. 7,000 for the loss  of  the car.  On the 10th April, 1948, Mr. Kapur received  a  letter from the Branch  Manager of the  Company’s office at  Amrit- sar asking for information regarding certain matters  stated in  the letter. This information appears to have  been  sup- plied  on the 30th April, 1948. On the 26th May,  1948,  the company’s  Branch  Manager at Amritsar wrote  to  the  first respondent repudiating the liability of the company for  the loss  of  the car on the ground that the loss  was  "due  to

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communal  riots which were going on in the whole of  Punjab" and was not covered by the agreement of insurance.  A  simi- lar  letter was written again by the Branch Manager  on  the 3rd July, 1948, to the first respondent, and another  letter was  written by one Mr. Rattan Lal Chawla representing  him- self  to be counsel for the company, to Mr. A.R.  Kapur,  on the 1st August, 1948.  On the 21st November, 1949, the first respondent  wrote  a letter to the Branch Secretary  of  the Company’s  office  at Calcutta, stating that his  claim  was valid  and nominating Mr. T.C. Chopra,  Assistant   Manager, Lakshmi Insurance Company Ltd., Delhi, as arbitrator on  his behalf and requesting the company to appoint another  person as  arbitrator on its behalf. Thereafter, the  company  pre- sented  an  application on the 29th December, 1949,  in  the court  of the Senior Sub-judge, Delhi, under section  33  of the Indian Arbitration Act, against the first respondent and Mr. T.C. Chopra, the arbitrator, who is the second  respond- ent in this appeal, praying for-- 504     (1)  a declaration to the effect that the  reference  to arbitration and the appointment of respondent No. 2 as  sole arbitrator was illegal; (2)  a declaration to the effect that if the  respondent No.  2  made  any  award it would  not  be  binding  on  the company;and     (3) an injunction restraining the respondents Nos. 1 and 2 from taking any proceeding in the matter and the  respond- ent No. 2 from making any award.      Upon  this petition, notice was issued to the  respond- ents,  and  an injunction was issued directing them  not  to file any award till the date of the next hearing, which  was fixed  for 31st January, 1950.  On the 4th  February,  1930, the  first  respondent wrote to the second  respondent  (the arbitrator) that  since  no arbitrator had been appointed by the company and since the company had refused to appoint any arbitrator, he (Mr. Chopra) was to act as the sole  arbitra- tor.  On the 6th February, 1950, Mr. Chopra wrote to  inform the insurance company that he had been appointed sole  arbi- trator  and asked the company to send the statement  of  its case  and to produce all the evidence on the 14th  February, 1950.   On  the 10th February, 1950, the  insurance  company filed a petition before the Subordinate Judge, Delhi,  pray- ing that the respondents be stopped from proceeding  further in  the matter so that its application under section 33  may not become infructuous.  On the 11th February, the  Subordi- nate Judge issued notice to the respondents fixing the  17th February  as  the date of hearing and passed  the  following order:     "Moreover  (till) the decision of this  application  the arbitrator should not give or pronounce his award but should continue the proceedings."     On  the  14th  February, 1950,  the  second   respondent pronounced  his award after making a note to  the  following effect:-     " Mr. G.R. Chopra, the counsel of the defendants, sent a telephonic  message at 12 A.M. requesting extension  till  1 P.M.  I agreed and accordingly I waited for 505 him  and the plaintiff with his counsel also waited up to  1 P.M.   Nobody  turned  up on behalf of  the  defendants.   I commenced  the  proceedings and took the  statement  of  the plaintiff and the documents that he had produced."      He made a further note at the end of the award to  this effect :--     "As  after the giving of the award a notice  was  served

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upon  me not to give the award, I have not sent  any  formal letter  to the parties informing them of the award  and  its costs."     On the 24th March, 1950, the Subordinate Judge passed an order  on the company’s application under section  33,  dis- missing  it  and holding that the terms of clause 7  of  the agreement  "were comprehensive enough to include the  points of disputes between the parties now and as such are  triable by  the arbitrator and not by the court."   The  Subordinate Judge concluded his order by observing:     "I,  therefore, hold that the reference to the  arbitra- tion  of the differences is perfectly valid and  the  points raised by the parties to this application with regard to the abandonment  of claim and its becoming irrecoverable are  to be decided by the arbitrator."     The  judgment  of the Subordinate Judge  was  upheld  in revision  by the Punjab High Court and the company  has  now preferred an appeal to this court by special leave. The  points  that were urged on behalf of the  appellant  in this appeal are these: --      (1) that the arbitration clause had ceased to be opera- tive  and the question as to the existence and  validity  of the  arbitration  agreement was triable by the  court  under section 33 of the Arbitration Act and not by the arbitrator; and     (2)  that the award was invalid and not binding  on  the appellant,  because it was pronounced in spite of the  order of  the court dated the 11th February, 1950,  directing  the arbitrator not to pronounce his award. 506       Clause 7 of the policy of insurance  rims  as follows :---        "All differences arising out of this policy shall  be referred to the decision of an arbitrator to be appointed in writing  by  the parties in  difference or  if  they  cannot agree upon a single arbitrator to the decision of two  arbi- trators  one  to  be appointed in writing  by  each  of  the parties within one calendar month after having been required in writing so to do by either of the parties or in case  the arbitrators  do not agree of an umpire appointed in  writing by the arbitrators before entering upon the reference.  The umpire  shall sit with the arbitrators and preside at  their meeting  and  the making of an award shall  be  a  condition precedent  to any right of action against the  company.   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 under the provisions  herein  con- tained  then the claim shall for all purposes be  deemed  to have been abandoned and shall not thereafter be  recoverable hereunder."     It will be noticed that this clause provides among other things  that  if  the company disclaimed  liability  to  the insured  for any claim under the policy and such  claim  was not  within  twelve calender months from the  date  of  such disclaimer referred to arbitration, then the claim should be deemed  to have been abandoned and was not recoverable.  The case of the company is that it disclaimed liability for  the loss  of the car on three successive occasions,  namely,  on the 26th May, 1948, the 3rd July, 1948, and the 1st  August, 1948.  The first respondent however did not take any  action in regard to the appointment of an arbitrator until the 21st November,  1949, i.e, until more than 12 months  after  even the  last  disclaimer by the company. For this  reason,  the claim put forward by the first respondent must be deemed  to

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have been abandoned and he cannot recover anything from  the company.  On the other hand. the case of the first  respond- ent, which 507 is set out in. his affidavit dated the 17th February,  1950, is that there was never any valid disclaimer by the  company of its liability. The position that he took up was that  the Branch  Manager of the company had no authority to  disclaim the  liability, and it could have been disclaimed only by  a resolution  of the company. Now these being  the  respective contentions  of  the parties, the question  is  whether  the point in dispute fell to be decided by the arbitrator or  by the court under section 33 of the Arbitration Act.   Section 33 is to the following effect:--     "Any  party  to an arbitration agreement or  any  person claiming  under him desiring to challenge the  existence  or validity of an arbitration agreement or an award or to  have the effect of either determined shall apply to the Court and the Court shall decide the question on affidavits:     Provided that where the Court deems it just and  expedi- ent,  it may set down the application for hearing  on  other evidence also. and it may pass such orders for discovery and particulars as it may do in a suit."     The question to be decided is whether the point on which the  parties are in dispute is a difference "arising out  of the policy" in terms of clause 7 of the policy. The test for determining  such a question has been laid down in a  series of cases and is a simple one.  The test is whether  recourse to the contract by which the parties are bound is  necessary for the purpose of determining the matter in dispute between them.   If such recourse to the contract is necessary.  then the  matter must come within the scope of  the  arbitrator’s jurisdiction.  In the present case, both the  parties  admit the  contract and state that they are bound by  it.  Indeed, the appellant-company, in order to make good its contention, is obliged to rely and does rely on that part of clause 7 of the policy which states that if the company should  disclaim liability  and  the claim be not  referred  to   arbitration within  12  months of such disclaimer, the  claim  shall  be deemed to have been abandoned.    Evidently,    the  company cannot succeed without  calling  in aid  this clause and 508 relying on it. Again, the first respondent does not say that he is not bound by the clause but states that the matter was referred  to  arbitration before any  valid  disclaimer  was made.  The position therefore is that one party relying upon the arbitration clause says that there has been a breach  of its terms and the other party, also relying on that  clause, says that there has been no breach but on the other hand the requirements of that clause have been fulfilled.  Thus,  the point in dispute between the parties is one for the decision of which the appellant is compelled to invoke to his aid one of  the terms of the insurance agreement. It is  thus  clear that  the  difference between the parties  is  a  difference arising  out of the policy and the arbitrator had  jurisdic- tion  to  decide it, the parties having made  him  the  sole judge of all differences arising out of the policy.     A  large number of cases were cited before us on  behalf of  the  parties, but it is unnecessary to  refer  to  them, since  the question which arises in this appeal is a  simple one  and is covered by the statement of law which is  to  be found  in the decision of this Court in A.M. Mair &  Co.  v. Gordhandass Sagarmull C), and in a series of English author- ities, some of which only may be referred to.  In Heyman  v. Darwins,  Ltd.  (2)  the law on the subject  has  been  very

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clearly stated in the following passage :-     "An arbitration clause is a written submission,   agreed to  by the parties to the contract, and, like other  written submissions  to arbitration, must be construed according  to its language and in the light of the circumstances in  which it  is  made. If the dispute is as to 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  exam- ple,  the making of such a contract is illegal)the  arbitra- tion (1)[1950] S.C.R. 792.        (2) [1941] 1 A.E.R.337,343 509 clause  cannot operate, for on this view the clause’  itself is also void.     If.  however, the parties are at one in  asserting  that they  entered into a binding contract, but a difference  has arisen between them as to whether there has been a breach by one  side or the other, or as to whether circumstances  have arisen  which have discharged one or both parties from  fur- ther  performance,  such differences should be  regarded  as differences  which  have arisen ’in respect  of,’  or  ’with regard  to,’  or ’under’ the contract,  and  an  arbitration clause which uses these, or similar expressions,  should  be construed accordingly."     In  Macaura   v.  Northern     Assurance  Co.  (1),  the appellant  had  insured a large quantity of  timber  against fire  and  the greater part of the timber  having  been  de- stroyed  by fire, he sued the insurance company  to  recover the  loss but the action was stayed and the matter  was  re- ferred  to arbitration in pursuance of the  conditions  con- tained in the policy.  The arbitrator held that the claimant had  no insurable interest in the goods insured  and  disal- lowed  the claim.  One of the points raised in the case  was that  the arbitrator had no jurisdiction to decide the  mat- ter,  but  that contention was rejected by  Lord  Sumner  in these words:-     "The  defendants do not repudiate the policy or  dispute its validity as a contract; on the contrary, they rely on it and  say that according to its terms, express  and  implied, they  are, relieved from liability: see Stebbing’s  case(2), Woodall v. Pearl Assurance Co.(3)......  It is a Fallacy  to say that they assert the policy to be null and void."     In Stebbing v. Liverpool and London and Globe  Insurance Company  Limited(2),  to which reference was  made  by  Lord Summer, the policy of insurance contained a clause referring to  the decision of an arbitrator "all  differences  arising out of this policy ".  It also    (1) [1925] A.C. 619.          (3) [1919] 1 K.B. 593,    (2)  [1917] 2 K.B. 433, 66 510 contained a recital that the assured had made a proposal and declaration  as the basis of the contract, and a  clause  to the effect that compliance with the conditions indorsed upon the policy should be a condition precedent to any  liability on the part of the insurers. One of the conditions  provided that  if  any false declaration should be made  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

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assured  objected  that  this was not a  difference  in  the arbitration  and that the arbitrator had no power to  deter- mine  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  as  fol- lows:-    "  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  of  some material fact inducing the contract, of which the 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 main contention put forward on behalf of the  appel- lant  is that the points in dispute fall outside the  juris- diction of the arbitrator, firstly because the existence  of the  arbitration  agreement  is  challenged,  and  secondly, because the sole object of the application under section  33 of the Arbitration Act is tO have the 511 effect  of  the  arbitration agreement  determined.  In  our opinion, neither of these objections is sound. How can it be held  that  the existence of the  arbitration  agreement  is challenged,  when both parties admit that the clause in  the policy  which  contains  that agreement binds  them.  It  is neither party’s case that there is no arbitration  agreement in the policy.  On the ,:other hand, both parties admit that such  agreement  exists, and each of them relies  on  it  to support  its  case. It is true that the  appellant  contends that the arbitration agreement has ceased to be  applicable, but  that  contention  cannot be  sustained  without  having recourse to the arbitration agreement.  It is said that  the agreement no longer subsists,but that is very different from saying  that  the  agreement never existed or  was  void  ab initio and therefore is to be treated as non-existent.     Again,  no  question of determining the  effect  of  the arbitration  agreement arises, because there is  no  dispute between  the parties as to what it means.  The  language  of the  arbitration  clause is quite  clear,  and  both,parties construe it in the same way.  The real question between them is whether the first respondent has or has not complied with the conditions of the agreement.  But this question does not turn on the effect of the agreement.  This is the view which has  substantially been taken by the High Court, and in  our opinion it is correct.      The  second point urged before us is that the award  is invalid,  since it was made in spite of the court’s  injunc- tion  directing the arbitrator not to pronounce  any  award. This point however does not, in our opinion, fall within the scope  of this appeal.  The application under section 33  of the  Arbitration Act, which is the subject of  this  appeal, was filed before the award was pronounced.  In that applica- tion,  there is no reference to the award; nor is there  any reference  to  the  circumstances which are  now  stated  to invalidate  the award and which happened after the  applica-

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tion  was filed. The learned counsel for the appellant  made an  application before us praying for the amendment  of  the petition under section 38 by introducing certain 512 additional facts and adding a prayer for declaring the award to  be  invalid, but it was rejected/by us.   It  should  be stated  that as early as the 24th March, 1950, the  Subordi- nate  Judge  in dismissing the  appellant’s  petition  under section 33, made the following observations :--     "During the pendency of the arbitration proceedings  the arbitrator pronounced the award.....  The award has now been filed  in  the court of S. Mohinder Singh,  Sub  Judge,  1st class, Delhi.  Any objection against the award can be  filed there.  In this application in which there is no prayer  for setting  aside  the award, which exists, I do not  think  it proper to decide the question of the validity of the award."       In our opinion, the Subordinate Judge correctly  indi- cated  the course which it was open to the appellant in  law to adopt for the purpose of questioning the validity of  the award, but not having taken that course and not having  made any   application   in  the courts below  for  amending  the petition under section 33, the company cannot ask this court to  go into the validity of the award by widening the  scope of the original petition.  This court is always in favour of shortening  litigation, but it would be a very unusual  step to allow the petition under section 33 to be amended now and to decide a question involving investigation of facts  with- out having the benefit of the judgments of the courts below.     In  the result, the appeal fails and is  dismissed  with costs.                                           Appeal dismissed. Agent for the appellant: Ganpat Rai. Agent for respondent No. 1.: S.D. Sekhri. 513