Decided on October 01,1974

Kannan Devan Hills Produce Co. Ltd Appellant


V.P.GOPALAN NAMBIYAR,J. - (1.) THE Kannan Devan Hills Produce Company Limited,Munnar,the appellant in this appeal,filed O.S.135 of 1968,Sub Court,Kottayam,against the respon­dent the Kerala State Electricity Board,under section 20 of the Arbitration Act,praying that the agreement dated 28th May 1948 between the Company and the then Govern­ment of Travancore,may be filed in Court and the disputes between the parties referred for arbitration to the Arbitrators to be appointed in accordance with the agree­ment.The court below dismissed the suit holding that the plaintiff was not entitled to the reliefs prayed for.
(2.) EXT .P -10 dated 28th May 1948 is an agreement between the plaintiff and Maharaja of Travancore.Clause 10 of the agreement provides: "10.The Kannan Devan Company shall pay the Government for electrical energy supplies under this Agreement at the sliding scale of rates set forth in the Fifth Schedule hereunder written.Provided always that if the Government shall at any time make any general reduction in the rates charges to other parties,whether licensed distri­butors or private consumers which said other parties are consumers of a similar load of electrical energy as that for the time,being supplied to and taken by the Kannan Devan Company the rates in the Fifth Schedule hereto shall at the same time be reduced in proportion to such reduction." Clause 22 provides: "22.If any dispute or difference shall arise between the parties hereto as to the construction,effect or application of these presents or any term or provision thereof or as to the amount or extent of any liability hereunder,the same shall,where not hereby otherwise provided for,be referred to a single arbitrator in case the parties can agree upon one,otherwise to two arbitrators one to be appointed by each party in accordance with and subject to the provisions of the law relating to arbitration under the Travancore Arbitration Act or any statutory amendment or re -enactment thereof." There is no dispute or controversy that the rights of the Government of Travancore under the Agreement devolved successively on the Government of Travancore -Cochin and then on the Government of Kerala,and thereafter on the Kerala State Electricity Board. The Board,in pursuance of the power vested in it,under the Indian Electricity,1910,the Electricity Supply Act,1948 and the Regulations framed under the appropriate provisions of these statutes has recently provided for the imposition of Grid Tariffs.The case of the Company was that this imposition would affect the rates for the supply of electricity to the Company as provided in Clause 10 of Ext.P -10 agreement.On this basis,the Company sought arbitration,under Clause 22 of the agreement.The case of the Board was that it was not taking action under the contract at all,but under the provisions of the statute and the Regulations framed there­under,and therefore no question of invoking of the arbitra­tion clause and no dispute in regard to any of the clauses in Ext.P -10 agreement,would possibly arise.It was this cont­roversy that was sought to be resolved in the suit from which the present appeal arises.The plaintiff has set forth its case in paragraphs 10 and 16 of the plaint.In paragraph 10 it referred to the scale of rates set forth in the Fifth Schedule to the Agreement.In paragraph 16 it sets out the grounds on which the imposition of new Grid Tariff rates is claimed to be illegal,ultra vires and void;and one of the grounds is that these rates specified in the Fifth Schedule in the 1948 Agreement,cannot be unilaterally increased [See paragraph 16(b)of the plaint].It was also stated that the defendant is not competent to ignore or violate the terms of the Agree­ment [See paragraph 16(c)];and that under the Agreement,the Government have no power or right to enhance the rates [paragraph 16(d)].These aspects stated in paragraph 16 of the plaint were denied by the Board in paragraph 12 of the written statement,where it took up the position that none of the reasons in paragraph 16(a)to(j)of the plaint for questioning the levy of the Grid Tariff are valid or correct.Issues 4 and 5 which are the crucial issues framed by the court below are as follows: "4.Whether any difference or differences such as detailed in paragraph 16 of the plaint have arisen between the parties and whether the agreement of 28th May 1948 applies to them? 5.Whether the plaintiff is entitled to have clause 22 of the 1948(agreement filed as an arbitration agreement and further proceedings taken thereof? " On these issues,the court below recorded its finding as follows: "The existence of contracts made by Government does not curtail authority of the legislature to legislate on subject which are within its sphere.The Grid Tariff rates now fixed by the Board in exercise of powers vested under the statute and in conformity with the provisions thereunder therefore binds the plaintiff and the dispute regarding the liability is not one arising under the contract,but under the enactment controlling the contract.Thus the present dispute which is not a matter directed or required to be referred to arbitration either under section 52 of the Indian Electricity Act,1910 or section 76(2)of the Electricity(Supply)Act,1948 or one arising under the arbitration agreement in Ext.P -10 is not therefore referrable to arbitration.These issues are accordingly found against the plaintiff." (The discussion was in regard to issues 3 to 5.It is unnecessary to specify issue 3.). .Before us,the controversy that was hotly debated was whether the dispute as regards the imposition of the grid tariff rates is a dispute that is covered by the arbitra­tion clause viz.clause 22 of Ext.P -10 Agreement .Giving the matter our careful attention,we feel that it is.Counsel for the Board stated that it was invoking only its statutory powers under the provisions of the two Acts mentioned therein,and the Regulations framed thereunder and not taking any action in pursuance of the terms of contract so that in order to resolve the disputes if any,bet­ween the parties,reference to the contract would be wholly unnecessary.On the other hand,Counsel for the company maintained that even if the Board be acting under the pro­visions of the statute,the Company's case was that the pro­visions in the contract inhibited or curtailed even action under the provisions of the statute and statutory regulations and therefore the Board was incompetent to impose Grid tariff rates. The contention of the company may or may not be a sound one.In fact,Counsel for the Board drew our attention to the fact that similar contentions raised under almost identical facts and background had been found against by this court,and the Board's power to take statu­tory action under the provisions of the Acts and Regulations have been sustained.In particular,he invited our atten­tion to the decision in the Indian Aluminium Company's case 1971 K.L.T.722.But we feel that whatever be the effect and the result of the Arbitration,where the parties have deliberately cast their bargain in the form of Ext.P -10 Agreement,they are bound to refer the dispute to an arbitrator.Once these disputes have arisen,we cannot,except for adequate rea­sons,deny the parties the benefit of adjudication of the dis­putes in the chosen forum.We might in this context,usefully refer to the decision cited by Counsel for the appellant,in Heymanl and another v. Darwins Ltd. 1942(1)A.E.R.337=1942 Appeal Cases 356 Viscount Simon,L.C.observed at pages 343 and 344: "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 example,the making of such a contract is illegal ),the arbitration 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 further 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.By the law of England(though not,as I understand,by the law of Scotland ),such an arbitration clause would also confer authority to assess damages for breach,even though it does not confer upon the arbitral body express power to do so. I do not agree that an arbitration clause expressed in such terms as above ceases to have any possible application merely because the contract has "come to an end " ;,as,for example,by frustration.In such cases it is the performance of the contract that has come to an end.The doctrine of discharge from liability by frustration has often been explained as flowing from the inference of an implied term,and,in giving my opinion on the occasion of the recent decision of this House in Joseph Constantine S.S.Line,Ltd.v.Imperial Smelting Corpn.Ltd ., at p.171,I expressed the view that the most satisfactory basis upon which the doctrine can be put is that it depends on an implied term in the contract of the parties.If therefore,when parties have entered into a contract,circumstances arise before the performance of the contract is completed which,in the view of one party,bring the contract to an end by frustration and therefore discharge both parties from further performance,but the other party does not agree,this is a difference about the applicability of the implied term,and is just as much within the arbitration clause as if it were a difference about an express term of the contract.There is a previous decision of this House which establishes this precise proposition.I refer to Scott &Sons v.Del Sel where sellers of jute contended that a contract to export from Calcutta 2,800 bales to Buenos Ayres was brought to an end,after a portion has been despatched,by a government prohibition of further export,notwithstanding that the contract contained an express term exempting the sellers from liability for late delivery due to unforeseen circumstances,The arbitration clause ran: "Any dispute that may arise under this contract to be settled by arbitration.The sellers argued that the dispute as to frustration was not a dispute under the contract,but a dispute as to the existence of the contract.This contention was unanimously rejected.Lord Dunnedin reasoned thus,at p.41: They(the sellers)can only succeed.... if they bring themselves within one of two categories.Either they must show that there was an express term of the contract which had that effect(i.e.of bring­ing the contract to an end)or they must show that there was an implied term in the contract which had the same effect.That an implied term in a contract may have that effect is quite clearly shown by what was decided in this House in the case of the Tamplin S.S.Co.and in the case of the Metropolitan Water Board v. Dick Kerr &Co. It seems to me,therefore,that they are in this dilemma,that in either view they have got to have recourse to the contract,and,if they have got to have recourse to the contract,it seems to me that the dispute is a dispute under the contract. I can see no reason why an arbitration clause framed on the above lines should not equally apply,if the supervening event which is alleged by one side to have effected discharge by frustration occurs after the contract has been entered into,but before the time has come for anything to be done under the contract.The reasoning of Lord Dunnedin applies equally to both cases.It is,in my opinion fallacious to say that,because the contract has 'come to an end 'before per­formance begins,the situation,so far as the arbitration clause is con­cerned,is the same as though the contract had never been made.In such case a binding contract was entered into,with a valid submission to arbitration contained in its arbitration clause,and,unless the language of the arbitration clause is such as to exclude its application until performance has begun,there seems no reason why the arbitrator's jurisdiction should not cover the one case as much as the other." Lord Macmillan observed at page 347: "It is inaccurate to speak in such cases of repudiation of the contract.The contract stands,but one of the parties has declined to fulfil his part of it.There has been what is called a total breach,or a breach going to the root of the contract,and this relieves the other party of any further obligation to perform what he for his part has undertaken.Now,in this state of matters,why should it be said that the arbitration clause,if the contract contains one,is no longer opera­tive or effective? A partial breach leaves the arbitration clause effective:why should a total breach abrogate it? The repudiations,not being of the contract,but of obligations undertaken by one of the parties,why should it imply a repudiation of the arbitration clause go that it can no longer be invoked for the settlement of disputes arising in consequence of the repudiation? I do not think that this is the result of what is termed repudiation.Suppose the injured party prefers to have his claim of damages for the other party's total breach assessed by arbitration,can he not invoke and enforce the arbitration clause for that purpose? Can he be effectually met by a plea on the part of the wrongdoer that he,the wrongdoer,has repudiated the contract -and with it the arbitration clause,which is consequently no longer operative? I do not think that this result follows even if the injured party acquiesces in the total breach "accepts the repudiation,as it is put "and contents himself with his claim of damages.I think he is entitled to insist on having his damages assessed by arbitration notwithstanding the other party's repudiation." Warrington,L.J.observed at page 349: "A submission may,however,take many different forms.It may be a special agreement to arbitrate upon a particular dispute which has already arisen on some matter,such as contract,tort,trust or family agreement.Thus,to take a single instance,in Joseph Constantine S.S.Line v. Imperial Smelting Corpn.Ltd ., recently decided by this House,there was a specific submission of the difference whether the charter -party in question had been frustrated,the charterers claiming damages because the vessel had not been tendered to load her cargo,the ship -owners defending the claim on the ground of frustration.That illus­trates clearly one aspect of an arbitration agreement,namely,that it is collateral to the substantial stipulations of the contract;it is merely procedural and ancillary;it is a mode of settling disputes,though the agreement to do so is itself subject to the discretion of the court.All this may be said of every agreement to arbitrate,even though not a separate bargain,but one incorporated in the general contract.It may also be noted that the agreement to arbitrate depends on there being a dispute or difference in respect of the substantive stipulations.It appertains to the stage of pleadings or allegations.It is in regard to these that it has to be decided whether the submission applies or should receive effect.It is interlocutory.Again,the illustration I have given shows that there may be an agreement to arbitrate upon a question on a contract which has on one view ceased to exist,at least as to future performance,though whether it has ceased to exist or not is disputed,or,if that is not disputed,the question of damages remains in dispute.It must depend on the construction of the collateral agree­ment contained in the arbitration clause,whether that agreement survives and can be insisted upon for the settlement of these disputes." Lord Porter,J.observed: "So far as concerns the other cases quoted which seem to conflict with this view,I agree with Viscount Simon,L.C .,in thinking that the true grounds of the decision in the Jureidini case was the narrowness of the field of submission and the fact that no dispute had arisen on the only point submitted to arbitration. Johannesburg Municipal Council v. Stewart ,is rightly,I think,to be looked upon as having been referred back to the Court of Session to exercise that discretion which they would not have had if the contract had been governed by Scottish law,but which they in fact had because it was an English Contract.Moreover,its provisions were complex,containing no less than three arbitration clauses.The decision is explained on both these grounds in the later case of Sanderson v. Armour . Apart from the argument based upon discretion which I have negatived,the only contention raised in the present case is that the contract had come to an end and with it the arbitration clause,or,at any rate,that the respondents have in some way repudiated the Contract and,therefore,should not be permitted to rely upon the arbitration clause contained in it.There is,I think,more than one answer to this argument.( 1)I can see no ground for asserting that the respondents ever repudiated the contract.Rightly,or wrongly,they thought themselves entitled to protection against claims by third parties and accordingly stated in their letter of August 22,1939,that they could only accept further orders on the strict understanding that from the amounts due a percentage must be retained to build up a reserve."
(3.) THE above decisions were referred to with approval by the Supreme Court in Damodar Valley Corporation v. K.K.Kar 1974(11)S.C.R.107.In Willesford v. Watson 1873(8)Chance -A.C.473 Lord Selborne,L.C.observed at page 478: "Here,they seem to have taken more than ordinary pains to throw in words that cover all things collateral as well as all things expressed.That which they agree to refer is every question,first of all,"touching any dues or money payable or retainable under these presents ""that no doubt,is something provided for expressly by the agreement;secondly,'or the price to be paid for any engine,machine,or apparatu taken by the lessors,their heirs or assigns,in pursuance of the provisions in that behalf hereinbefore contained '"that again is a thing which is within the provisions of the lease;thirdly,'or touching these presents,or any clause or matter or thing herein contained,or the construction hereof.";

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