Indian Kanoon - Search engine for Indian Law

The learned Single Judge in his judgment dated 11.2. 1981 held, inter alia, that there was no question of inva- lidity for non-compliance of the conditions of the licence granted to the first defendant-applicant as necessary per- mission was obtained in respect of the agreement from the Chief Controller of Imports and Exports vide his letter dated 18th August, 1977 and the modification of the agree- ment on 2nd February, 1978 could not and did not materially alter its terms to impair its validity and there was sub- stantial compliance with the obtained permission; that though in a particular case if there was any doubt about facts, the matter had to be decided by trial on evidence, in this case, having regard to the admitted facts and conduct of the parties, it was not necessary to set down the matter for trial on evidence to determine the facts as the same could not be disputed; that having regard to the conduct of the parties in admitted documents, being the licence of the petitioner granted by the Chief Controller of Import & Export in respect of the said two trawlers and the provi- sions of the Import and Export Control Act, 1947, and Appen- dix 31 of the Import & Export Trade Control Hand Book for Rules and Procedures, 1979, the correspondence between the parties before the alleged discovery of purported mistake and illegality by the respondent (plaintiff) and particular- ly the letter dated 18th July, 1978 from the respondent No. 1 (plaintiff) to the applicant 1(first defendant) and the Balance Sheet of the plaintiff (Respondent No. 1) I.T.C. Ltd, for the year 1978, there is no question of any illegal- ity or any mutual mistake; that the alleged fundamental breach is wholly covered by the arbitration clause as it wide enough to include the same; that the arbitration clause is valid and binding between the parties; that the allega- tion of breach of contract and the claims made are within the jurisdiction of the arbitrator; and that all the condi- tions under section 34 of the Act have been satisfied in this case. Accordingly the learned Judge granted stay of the suit and directed the parties to take immediate steps for initiation of reference under the arbitration agreement. On appeal, the learned Division Bench by an elaborate and erudite judgment dismissed the appeal holding, inter- alia, that in the facts and circumstances of the case it could not be held that the trial court erred in exercising its discretion to decide the controversy, namely, whether the contract being void the arbitration clause also was void, in the application without evidence and on the basis of pleadings only, nor was the discretion exercised improp- erly; that the learned Judge was not wrong in coming to the conclusion that the mistake as pleaded as to quality of the goods was not a mistake of such nature as to make the thing contracted for something different, and in holding that there was no case of mutual mistake of such a type as to quality of the thing contracted for which could have avoided the parent contract which contained the arbitration clause; and that the learned Single Judge was right in so far as he held that the matters were arbitrable apart from the ques- tion of illegality of the contract. It was further held that there was no breach of conditions of the permission or the provisions of the Import & Export Control Act to render the contract illegal or void; and that the Court having held that all the contentions and allegations were arbitrable, the granting stay in the suit was reasonable and proper. Mr. Shanti Bhushan, the learned counsel for the appel- lant submits, inter-alia, that the subject matter of the suit, namely, the question whether the agreement was void ab-initio for mutual mistake was not arbitrable at all and the learned Courts below erred in holding so; that even assuming but not admitting that the subject matter was arbitrable, it having involved complicated questions of facts the court ought not to have exercised jurisdiction on the application under section 34 and in doing so it acted without jurisdiction and, assuming that the court had juris- diction, it should have decided only after taking oral and documentary evidence and not merely on affidavits; that the agreement itself having been void ab initio due to mutual mistake the arbitration clause, namely, clause 18 of the charter party, also perished with it and there was no scope for arbitration at all and the learned courts below erred in holding that all the contentions raised and allegations made in the suit were arbitrable under the arbitration clause; and that the agreement was void being violative of the conditions of the permission and for that matter the import licence and the provisions of the Import and Export Control Act.

This section deals with the staying of a suit where there is an arbitration agreement concerning the subject- matter of the suit and between the same parties, for the Court to have power to exercise the discretion conferred upon it by this section, there must have been a valid agree- ment to submit to arbitration. Where the objection is that the arbitration is a nullity, it amounts to an objection of want of jurisdiction. The term "arbitration agreement"

includes "agreement to refer", and "submission" to arbitra- tor. A submission forming part of a void contract is itself void and cannot be enforced. Where a firm of bookmakers had engaged in betting transactions with the defendants on the terms that any dispute which might arise should be referred to arbitration, it was held that the whole contract was void and unenforceable and that the defendants could not be compelled to submit to arbitration: Joe Lee v. Lord Dalneny, [1927] 1 Ch. 300. Where there is no valid arbitration agree- ment on the subject matter of the suit, there is no justifi- cation for staying a suit for that will deprive the plain- tiff of his fight to sue on that subject matter. In Heyman v. Darwins, [1942] A.C. 356, Lord Macmillan pointed out at Pages 370-371:

In Jawaharlal Burman v. Union of India, [1962] 3 S.C.R. 769 it was held that section 32 of the Act creates a bar against the institution of suits with regard to an arbitra- tion agreement or award on any ground whatsoever. Thus if a party affirms the existence of an arbitration agreement or its validity it is not open to the party to file a suit for the purpose of obtaining a declaration about the existence of the said agreement or its validity. The bar to the suit thus created by section 32 of the Act inevitably raises the question as to what remedy is open to a party to adopt in order to obtain an appropriate declaration about the exist- ence or validity of an arbitration agreement. 1t was held that having regard to the scheme of sections 31, 32 and 33 of the Act in matters which fail within the bar created by section 32, if a suit cannot be filed it is not necessarily intended that an application can be made under the Court's powers provided for by section 31 and impliedly recognised by section 32 of the Act. In the later part of section 33 an application can be made to have the effect or purport of the agreement determined but not its existence. That means that an appli- cation to have the effect of the agreement can be made provided the existence of the agreement is not in dispute, and that a party affirming the existence of an arbitration agreement cannot apply under section 3 for obtaining a decision that the agreement in question exists. In Waverly Jute Mills Co. Ltd. v. Raymon & Co. (India) Pvt. Ltd., [1963] 3 S.C.R. 209; A.I.R. 1963 S.C. 90 the Constitution Bench reiterated the decision in Khardah Co. Ltd. v. Raymon & Co. India Ltd., [1963] 3 S.C.R. 183 where it was held that if a contract is illegal and void, the arbitration clause which is one of the terms of the contract thereof must also perish along with it and that a dispute relating to the validity of the contract is in such a case for the court and not for the arbitration to decide. Where the arbitration clause is a term of the particular contract whose validity is in question it has no existence apart from the impugned contract and must perish with it. In Renusagar Co. v. General Electric Co., [1985] 1 S.C.R. 432 at page 507 it has been reiterated that though section 34 of the Arbitration Act, 1940 confers a discretion upon the Court in the matter of granting stay of legal proceedings where there is an arbitration agreement, it cannot be disputed that before granting the stay the Court has to satisfy itself that arbitration agreement exists factually and legally and that the disputes between the parties are in regard to the matters agreed to be referred to arbitration and that decided cases have taken the view that the Court must satisfy itself about these matters before the stay order is issued. In other words, Court under section 34 must finally decide those issues before granting stay.

Among High Court decisions reference may be made to Banwari Lal v. Hindu College, Delhi, A.I.R. 1949 East Punjab 165 wherein it has been held at paragraph 33 that the Arbi- tration Act has been enacted merely with the object of consolidating the law relating to arbitrations, and the question of the existence or validity of the contract con- taining an arbitration agreement being not a matter falling within the purview of the Act, it cannot be said, with any show of reason, that section 32 takes away the jurisdiction of the courts to give appropriate relief in suit brought either to contest or to establish, the existence or validity of the contract. In Johurmull Parasram v. Louis Dreyfus Cx. Ltd., 52 C.W.N. (1947-48) 137; A.I.R. 1949 Cal. 179 it was held at para 14 that the court must consider a suit as it is pleaded and framed. If it comes to a conclusion that a suit as pleaded in a suit on the contract or arising out of the contract containing the arbitration clause then the suit should be stayed. But on the other hand if the suit is pleaded as a suit independent of the contract then the Court has no power to stay the suit although it is satisfied that the frame of the suit is merely a means of avoiding the consequences of alleging the true nature of the claim. In considering the question of stay of the suit the Court is not entitled to go into the question as to what is substantially the nature of the claim. So also in Pramada Prasad v. Sagar Mal Aggarwal, A.I.R. 1952 Patna 352 it was observed that from the language of the Section 34 it is clear that party can apply to stay a legal proceeding only when the repudiation is of the right or obligation in re- spect of any matter agreed to be referred, and not when the very existence of the agreement is repudiated. The court relied on the decision in Monro v. Bognor Urban District Coun, [1915] 3 K.B. 167. In Narsingh Prasad v. Dhanraj Mills, I.L.R. 21 Patna 544; A.I.R. 1943 Pat 53 Harries, C.J. held that where an agreement is impeached on the ground of fraud and the dispute is as to the factum or validity of contract, such a dispute does not fail under the arbitration clause and should be decided by the Court. Similarly in Birla Jute Manufacturing Co. Ltd. v. Dulichand, AIR 1953 Calcutta 450 it was held at paragraph 15 that a dispute as to the validity of the contract cannot be held to be within an arbitration agreement contained in the contract itself and such a dispute cannot be referred to arbitrators or dealt with by them under such an agreement, unless the parties agreed to include it in the arbitration clause. Otherwise where the contract itself is repudiated in the sense that its original existence or its binding force is challenged, for example, where it is said that the parties were never 'ad idem' or where it is said that the contract is voidable ad initio on the ground of fraud, misrepresenta- tion or mistake and it has been avoided, the parties are not bound by any contract and escape the obligation to perform any of its terms, including the arbitration clause, unless the provisions of that clause are wide enough to include the question of jurisdiction as well. In W.F. Ducat & Co. Pvt. Ltd. v. Hiralal Pannalal, A.I.R. 1976 Calcutta 126, Salil K. Roy Choudhary, J. held at paragraph 8 that where in a suit the plaintiff alleges that the contract containing the arbitration clause is void and illegal and prima facie it appears that there are sufficient grounds on which the legality of the said contract has been challenged for non- compliance of the statutory requirement, the court should decline to exercise discretion in favour of the stay of the suit. Similarly in General Enterprises v. Jardine Handerson Ltd., A.I.R. 1978 Calcutta 407, Sabyasachi Mukharji, J., as his Lordship then was, held that if the contract containing the arbitration clause was obtained by fraud the stay of the suit could not be granted under Section 34 of the Act. Thus, while there is not doubt about the law as enunciated in the above English and Indian decisions, namely, where the validity, existence or legality of the contract is challenged in the suit on grounds de hors, independent of, or external to the terms or stipula- tions of the contract, the court in an application under Section 34 of the Act shall have no jurisdiction to go into the question, and that in large majority of cases it would be applicable, in appropriate cases, having regard to the nature of the dispute raised in the pleadings of the suit, the compass and scope of the arbitration clause in the contract, the surrounding facts and circumstances of the case having a bearing on the question of genuine grievance falling outside or inside the arbitration agreement and the objects and spirit of the Arbitration Act, the court may be justified in deciding the validity, existence or legality of the challenged contract containing the arbitration agree- ment. In Heyman v. Darwins, (supra) Viscount Simon, L.C. stated thus: