D.H Nasir, J.:— This appeal arises from an order passed by the Principal Subordinate Judge, Anantapur on 6-7-1993 in I.A No. 18 of 1992 in O.S No. 79 of 1991, by which it was held that there is no dispute with regard to the payment of amount mentioned under Exs. B-2 and B-3 by the defendant to the plaintiff, and therefore, there was no necessity of referring the matter to arbitration.

2. It appears that the parties entered into an agreement in the year 1980 for business transactions, which continued upto 1987. In April, 1987 certain disputes arose regarding discount, brand, goodwill, development etc., which could not be settled amicably between the parties. The agreement contained an arbitration clause. Efforts were made to refer the disputes for arbitration, but the same did not materialise. The respondent-plaintiff, eventually caused a notice dated 15-2-1991 to be served upon the appellant-defendant, by which the plaintiff took a stand that there was no need for any arbitration and withdraw its consent for arbitration. A suit was therefore filed for recovery of Rs. 44,14,358/- from the appellant defendant I.A No. 18 of 1992 was filed by the defendant alleging that the suit could not be decided on merits in view of the arbitration clause in the original Agreement and that the proceedings in O.S No. 79 of 1991 were liable to be stayed and the disputes were liable to be referred to arbitration. The plaintiff resisted the said application by saying that by the acknowledgment of liability dated 29-3-1988, agreement dated 29-3-1988 and letter dated 26-4-1988, the defendant agreed to pay the outstanding amount to the plaintiff in instalments, and that there was do dispute which could be referred to arbitration. The appellant-defendant also filed O.P No. 147 of 1991 on the file of the I Additional Judge, City Civil Court, Hyderabad for appointment of an Arbitrator for adjudicating the disputes. The learned counsel for both the parties were heard at length and the following questions emerge from the submissions made on behalf of both the parties, for consideration in this appeal:

1. Whether the original contract stood substituted by the subsequent agreement which did not envisage any dispute to be referred to arbitration,

2. Whether the parties settled their disputes by mutual agreement which dispensed with the necessity of referring the disputes to arbitration and

3. Whether the defendant forefeited the right of referring any dispute to arbitration by stepping into the suit proceedings.

3. In the plaint of O.P No. 147 of 1991 which appears on the record of the case as Ex. A-1, it is averred in paragraph 6, by the present appellant that the plaintiff entered into an agreement with the defendant in the year 1980 and the transactions between the parties continued upto 1987. Another agreement was entered into between the parties in the month of April, 1987, and that the defendant was selling electrical goods in the name of Lepakshi much prior to the entering into business transactions with the respondent and that the appellant had been instrumental in popularising the trade name of Lepakshi since 1974. In its written statement against the plaint in O.P No. 147 of 1991, the present respondent contended, as stated in Paragraph 4 of the said plaint, that there were practically no disputes, and that the appellant was illegitimately witholding the dues of the respondent. It is further contended in the said para that it was not completely true that there was an arbitration clause for referring the disputes between the parties regarding discount, brand, goodwill, advertisement etc. According to the respondent, it was the unilateral and unreasonable claim of the appellant for enhancement of discount abnormally. The disputes raised by the appellant, however were ultimately withdrawn according to the present respondent, and that the agreement to discharge the debt due to the respondent by the appellant was executed by Mr. K. Ashok Kumar, Managing Director of the appellant company on 29-3-1988. Likewise, an acknowledgment of liability was also signed by Mr. K. Ashok Kumar on the same date admitting that a sum of Rs. 31,55,201/- was due and payable to the respondent by the appellant as on 29-3-1988, and that the said two documents were executed after a thorough discussion, full verification of accounts, records and after complete settlement of all issues between the parties. From that date, therefore, according to the respondents, no disputes were remaining to be settled Further, according to the respondent, another document in March, 1988 styled as third party collateral security was executed by Mr. K. Ashok Kumar as the constituted attorney of Smt. Kamala Bai Biyani, in which the fact that a sum of Rs. 31,55,201/- was due to the respondent was also admitted and that there was a complete substitution of the original agreement between the parties entering into a fresh and new contract on 21-3-1988, and that the whole contract was put to an end and that there was no arbitration clause in the new contract, the old contract having been abrogated by mutual consent.

4. Further according to the respondent, as stated in Paragraph 7 of the counter, Ex. A-2 that the respondent agreed to a suggestion made by the appellant to have the matter amicably settled through mediation of Sri. P. Ramachandra Reddy, former Chairman of APIDC However, the appellant never turned up for discussing the matter with Sri. P. Ramachandra Reddy. Further according to the respondent, the appellant informed Sri. P. Ramachandra Reddy that they would seek arbitration through the Federation of Andhra Pradesh Chamber of Commerce and Industry in the matter. Thereafter, the respondent suggested the name of Sri P. Nagesam, a retired IRS Officer as arbitrator. However, the appellant refused to give his consent for the same. Once again, arbitration through the Federation of Andhra Pradesh Chamber of Commerce and Industry was suggested by the appellant. The respondent, with a view to avoiding unpleasantness and unhappiness yielded. The points for arbitration were also to be set up, but the appellant again with held his consent on the ground that appropriate points for consideration by arbitrator had yet to be framed.

5. The Agreement containing arbitration clause and terms of business, is Ex. A-1 dated 12-4-1987. That was for a period of three years from 1-4-1987. Within a short time after the Agreement (Ex. A-3), a letter dated 19-5-1987 was sent by appellant acknowledging that he owed a sum of Rs. 42,00,000/- (as on date) and that he would clear the liability by the end of July. Thereafter, on 29-3-1987, Exs. B-2 and B-3 were executed by the appellant.

6. The acknowledgment of liability dated 29-3-1988, Ex. B-2, unequivocally and in clear terms discloses that the defendant owed a sum of Rs. 31,55,201/- towards interest plus interest upto and end of February, 1988 to the respondent-plaintiff towards the value of the supplies of GLS lamps received by the appellant-defendant from the respondent-plaintiff from time to time as per the requirements of the appellant-defendant. On the same day, i.e, on 29-3-1988, the agreement Ex. B-3 for discharging the debt was also executed in which, in the 1st paragraph, the acknowledgment of liability by the appellant-defendant is referred to, and in the 2nd paragraph, it is further recited that the appellant-defendant having been unable to clear off the dues of the respondent-plaintiff and having regard to the fact that the respondent-plaintiff had granted time of six months for payment, the appellant-defendant had agreed to pay interest on 1-3-1988 and also agreed to furnish collateral security for due performance of their agreement to discharge the debt with interest thereon at the rate of 18 per cent per annum within a maximum period of six months from the date on which the said agreement was executed.

7. By letter dated 4-8-1988, Ex. B-4 addressed to the respondent-plaintiff by the appellant-defendant, the appellant-defendant stated that due to unexpected return of bills and cheques by the agents, the realisation of its market dues had become most disappointing with the result that their resources could not be mobilised as envisaged to arrange funds for honouring the said cheques and the appellant-defendant requested the respondent-plaintiff not to present cheques which had been issued by the defendant to the plaintiff for payment till the plaintiff heard from the defendant again in the matter. It is further stated by the defendant in the said letter Ex. B-4 that the defendant was striving hard to pool its resources and hoped to honour its commitment as early as possible. It is further stated in the said letter that the inconvenience caused due to unavoidable circumstances was very mud regretted.

8. With this situation in view, we have to examine whether the trial Court justified in rejecting the interim application of the defendant for staying the proceedings of O.S No. 79 of 1991.

9. As far as the first questions concerned, whether the parties settled to disputes by mutual agreement, with dispensed with the necessity of referring the disputes to arbitration. The perusal of the contents of Para 7 in the counter Ix. A-2, presented by the plaintiff in O.P No. 147 of 1991, gives us a prima facie impression that even on 24-2-1992 when the counter was filed there was an acknowledgment of the fact that the plaintiff agreed to a suggestion made by the defendant to have the matter amicably sated through the mediation of Sri P. Ramachandra Reddy. However, it would no be proper to read this statement in isolation, and that it is required to be read with the earlier and subsequent statements made in the said Paragraph 7. In the opening portion of the said para, the plaintiff stated that though the appellant went on raising non-existent disputes, it was with a view to avoid breaking up of business relationship, and to avoid litigation, as far as possible, that the respondent-plaintiff was obliged to agree to the suggestion of the appellant-defendant to have the matter amicably settled. In the subsequent portion of the said Para 7, it is stated that the appellant-defendant never turned up to have the matter discussed with Sri. P. Ramachandra Reddy, though the respondent-plaintiff promptly attended the scheduled meeting at the stipulated time and that Sri. P. Ramachandra Reddy, obviously found that the appellant-defendant was not interested. If the statement “This respondent was obliged to agree to the suggestion of the appellant to have the matter amicably settled through mediation of Sri. P. Ramachandra Reddy”, is read in context with the earlier statement made in the said para, and the subsequent statement made in the same para, it would not be in order to say that the plaintiff had acknowledged he existence of disputes, on the other and, it gives us a reason to believe that ut of frustration, the plaintiff expressed its aceptance to refer the matter to arbitration. Having regard to the feet that huge amount was involved, the plaintiff would have been anxious to see that with the intervention of Sri P. Ramachandra Reddy to other mediator, if the amount could be received expeditiously, that the plaintiff volunteered to refer the matter to him inspite of the fact that there were no disputes, and there was a categorical acknowledgement of the dues by the defendant as emanating from the documents Exs. B-2, B-3 and B-4.

10. In the case of C. Javed v. Jagdish Peshad Associates (1) 1991 (2) ALT 606, the Division Bench comprising of Justice Jagannadha Rao and Justice Ranga Reddy, held in Paragraph 10 as under:

“On the question whether there was new contract or not, according to the respondent-plaintiff, the allegations in the plaint are certainly relevant. We find from the plaint that the suit is not based upon any agreement which has substituted the original contract dated 22-10-1984. In fact, the plaintiff relied upon the earlier agreement dated 22-10-1984 in the cause of action Paragraph. He no where stated that the said contract stood discharged by a fresh contract entered into between the parties at any time later. We find from Paragraph 8 of the plaint, referring to the cause of action, that reliance is clearly placed on the original agreement dated 22-10-1984 as part of the cause of action and on all subsequent dates referred to in the plaint and finally on 14-2-1991 when the plaintiff got issued a legal notice to the defendants. In fact the learned counsel for the respondent-plaintiff seeks to rely upon an oral settlement sometime before the issuance of cheques rather than any written contract dated 22-10-1084. Even in the notice, which the respondent-plaintiff gave prior to the date of the suit, dated 14-2-1991, there is no allegation that the original contract stood discharged by a new contract. In that view of the matter and particularly, in the light of Paragraph 8 of the plaint relating to the cause of action, we are of the opinion that the suit is based on the original agreement dated 22-10-1984. In view of the above decisions of the Supreme Court, it is clear that the arbitration clause in the original contract continues to apply. Therefore, it is not necessary for us to go into the correctness or otherwise of the decision of the Madras High Court in Vasanji Nayji's case (1 Supra), which proceeded on the assumption that the issuance of the cheques in that case amounted to the formation of a new contract”

11. The learned counsel for the appellant heavily relied upon the above decision of this High Court and submitted that the subsequent acknowledgement could not be treated as substituting the original agreement and that it was no where stated that the original contract stood discharged by the fresh contract entered into between the parties.

12. As in that case, in the plaint no reliance has been placed on the original Agreement in the present case. On the other hand, if we take into consideration the agreement Ex. A-3 in which Clause 8 was in regard to reference of disputes to arbitration, the substratum of the agreement envisaged the CMIGLS lamps to be sold by the defendant and to allow a trade discount of 34 per cent on such sales inclusive of 1 per cent towards manufacturing defects, and in case of manufacturing defects exceeding 1 per cent of the lamps sold to CML the plaintiff was required to replace the excess free of cost after inspecting of the defects. It was further agreed between the parties that the supplies would be on ex-works basis, and that the plaintiff was required to allow 60 days credit on the supplies, and in the case of the defendant making immediate payment on delivery of goods, the plaintiff was required to offer 37 per cent as trade discount. Further the plaintiff reserved its right to increase the list prices from time to time. In Clause 7 it is provided that the terms and conditions of agreement may be varied by mutual consultations between the two parties. This was the manner in which the transactions between the plaintiff and the defendant were to be carried out. In our opinion, if there was any variation in the terms touching the substratum of the contract as narrated above, or any breach was committed by any party in respect of the aforesaid portion of the Agreement it could be held that the suit was based on the original agreement and that the arbitration Clauses as contained in the original contract continued to apply. However, as seen above, the subsequent agreement evidenced by Exs. B-2 and B-3, did not in any manner deal with the substantive part of the performance of the contract except that the outstanding payments in respect of the goods supplied under the original contract were acknowledged and agreed to be paid in instalments by the defendant. The subsequent agreement did not even make any reference to any dispute which necessitated the payment to be kept in abeyance. There is no reference whatsoever in Exs. B-2 and B-3 with regard to any dispute between the parties except that six months time was sought of paying the outstanding amount which was evidently arrived at by mutual settlement. Further, it is evident from the contents of Ex. B-4 that payment was withheld by the defendant not because any default was committed by the plaintiff, but it was mainly became of the defendant's financial difficulties which came in its way for honouring the commitments to the plaintiff. It cannot therefore be held that the suit was based on original contract containing arbitration Clause.

13. In the above view of the matter, by no stretch of imagination, it could be said that the arbitration Clause as contained in the original agreement could still be invoked, inspite of the fact that then was no dispute between the parties with regard to the terms and conditions of the contract relating to the breach or performance of the contract Assuming that in the present case Exs. B-2 and B-3 could not be treated as substituting the original contract however, since the subject matter of the suit filed by the plaintiff is not in respect of the breach of any terms of the original contract but a simple suit for recovery of money due and payable by the defendant on the basis of acknowledgment of the same, the necessity for falling back upon the original contract does not really arise. In that view of the matter therefore, the ratio laid down in Javeed's case (1 Supra), does not go to the rescue of the appellant.

14. In Paragraph 12 of the above decision, the High Court observed that even assuming that the amount is settled, the non-payment is a dispute arising out of the contract and had to be referred to arbitration because the Clause is a ‘comprehensive Clause’ covering all disputes. It would however, appear from a close perusal of Paragraph 10 of the above decision that the plaintiff sought to rely upon on oral settlement sometime before the issuance of cheques rather than any written contract substituting the original contract. In our case, however, there is a written acknowledgment of liability of Rs. 31,55,201/- in Ex. B-2 as well as in Ex. B-3 being the agreements to discharge the debt. The defendant does not deny the execution of Ex. B-1, B-2 and B-3 in I.A No. 18 of 1991 filed before the Subordinate Judge, Anartapur, for stay of proceedings. Under these circumstances, therefore, since the sediment is made in writing and the same has not been denied by the defendant in his application - I.A No. 18 of 1991, it would be fetching it too far to say that inspite of such written acknowledgment of liability, the defendant is not bound by the same on the ground that the disputes still existed between the parties. In its application for say of proceedings also, the defendant has jot spelt out its dispute in any intelligible terms. Merely in Paragraph 4, the defendant stated that pursuant to the agreement entered into in the month of April, ′87, certain disputes arose between the parties regarding discount brand goodwill, advertisement and several other aspects which could not be settled by mutual consent. Beyond this, not a word has been mentioned in the plaint regarding the nature of disputes. There is also no clarification as to how inspite of such dispute, the acknowledgment of liability and other documents relating to the same were executed by the defendant in March 1988.

15. Our attention was also drawn to the arbitration clause in Ex. A-3, dated 12-4-1987. It was pointed out that under Clause 8, if any dispute or difference arises out of the Agreement or any matter incidental thereto, the same shall be settled first by mutual consultations. However, if the disputes or differences still persisted, the same should be referred to the person/authority mutually agreed upon whose decision shall be final and binding on both the parties. It is evident from the above, that this clause is split in two parts. The first part calls for settlement by mutual consultations. In our case, the settlement has been arrived at in terms of Exs. B-2 and B-3 mutual consultation and therefore no resort was required to be made to the second part of Clause 8 of the original agreement. It would thus appear that there was no ambiguity in the minds of the parties with regard to the fact that the settlement was made, and therefore in the instant case it could not be said that the dispute still persists. It is an undisputed fact that after the settlement/agreement there were no further business dealings which might give rise to fresh disputes. It is in this distinction between the facts of this case and the facts before the Division Bench of the Court in Javeed's case (1 Supra) which compels us to deviate from the ratio laid down in that case.

16. The Division Bench of this Court comprising of Justice Jeevan Reddy and Justice Anjaneyulu, in Vijaya Lakshmi Mills ltd. v. Shah Naval Mai Gulab Chand & Sons (2) AIR 1987 AP 294, was confronted with such a situation where the plaintiff had entered into four separate contracts with the defendant for supply of cotton bales for the defendant-mill. The defendant executed different hundies to be discounted from bank. Some hundies were dis-honoured and the defendant did not pay on demand and consequently the suit was filed. The defendant sought stay of the suit on the ground of existence of arbitration Clause and on the ground that he had to recover some amount from the plaintiff which would discharge his liability. With these facts in view, it was held that the claims raised by the defendant could not be treated as arising from, or in relation to the suit contracts, and that the claims could not be said to have brought into existence a dispute between the parties which needed to be referred to arbitration in terms of the original contract. In Paragraph 11 of this decision, the Court observed that what all the defendant was saying was that there were certain other transactions relatable and incidental to the suit transactions under which it was entitled to certain amounts which should go in discharge of the plaintiff's claim, and that the plaintiff's claim was admitted by the defendant. It was also admitted that the defendant had issued cheques and that most of them were dis-honoured. It was also admitted by the defendant that it could not honour the hunches as per the agreement between the parties, and therefore the Court below was justified in holding that in such a case there was no dispute for being referred to arbitration. It is further observed in Paragraph 11 that in Union of India v. B.C.S & W. Mills reported in AIR 1967 SC 688, it was held by the Supreme Court that before a suit could be stayed under Section 34 of the Arbitration Act, there should not only be a subsisting and binding arbitration agreement capable of being enforced between the parties, but that there should also exist a dispute which should go for arbitration, and it was held that in the absence of a dispute between the parties mere could be no reference.

17. In the instant case also, we have seen how the settlement was arrived at between the parties by mutual consultations which did not keep any dispute unresolved, regard being had to the fact that the defendant did not spell out the dispute if only in its application for staying the proceedings before the trial Court. It is also evident in our case that in accordance with the terms of settlement the defendant had given four post-dated cheques of Rs. 10 lakhs each, which eventually could not be realised by the plaintiff. This situation in our case read with the ratio laid down by the division bench of this Court is Vijayalakshmi Mill's case (2 Supra), clearly go to show that the defendant failed to make out a case for referring the matter to arbitration not only by virtue of the fact that the settlement was arrived at between the parties by mutual consent but also by virtue of the fact that the defendant failed to spell out the existence of any dispute which could warrant the reference to be made through arbitration and to stay the proceedings of the suit. In that view of the matter, therefore, the first two questions stand answered in favour of the respondent-plaintiff inasmuch as it clearly transpires that the parties settled the disputes by mutual agreement which dispensed with the necessity of making reference to arbitration for resolving any dispute.

18. The third question whether the defendant forefeited the right of referring the dispute to arbitration by stepping into the suit proceeding, need not be gone into by reason of our findings on the two aspects discussed above. In the case of Rachappa v. Gurusiddappa - (3) (1989) 3 SCC 245 : AIR 1989 SC 635, the division bench of the Supreme Court comprising Justice Sabyasachi Mukharji and Justice S. Ranganthan, observed in Paragraph 4 that an analysis of Section 34 of the Arbitration Act made it clear that in order to have the proceedings in the suit stayed, there must be an arbitration agreement between the parties covering the disputes in question and that the section stipulated that in order that stay could be granted under the section, it was necessary that the following necessary conditions were fulfilled:

“(i) the proceedings must have commenced by a party to an arbitration agreement against any other party to the agreement;

(ii) the legal proceedings, in this case the suit, which is sought to be stayed must be in respect of a matter agreed to be referred;

(iii) the applicant for stay must be a party to the legal proceeding, the suit in this case.

(iv) the applicant must have taken no steps in the proceeding after appearance;

(v) the applicant must satisfy that only the applicant was at the time when the proceedings were commenced, ready and willing to do everything necessary for the proper conduct of the arbitration; and

(vi) the Court must also be satisfied that there was no sufficient reason why the matter should not be referred to arbitration.”

19. In our case, the proceeding has commenced by one party to the agreement against the opposite party, but it could not be said that the legal proceeding which was sought to be stayed was in respect of the matter agreed to be referred to. As already observed there is no dispute at all which could be referred to arbitration, even assuming that the provision for arbitration as per Ex. A-3 subsists. Though we have our own doubts whether Condition No. (v) above is satisfied in view of what is stated in counter, we need not go into that question. The existence of dispute which is an essential condition to be satisfied as pointed out by the Supreme Court in Inder Singh v. Delhi Development Authority (A) (1988) 2 SCC 338 : AIR 1988 SC 1007, is lacking in our case.

20. In the result, therefore, the appeal is dismissed with costs.