I.T.C.
Limited Vs. George Joseph Fernandes & Anr [1989] INSC 43 (6 February 1989)
Saikia,
K.N. (J) Saikia, K.N. (J) Oza, G.L. (J)
CITATION:
1989 AIR 839 1989 SCR (1) 469 1989 SCC (2) 1 JT 1989 (1) 552 1989 SCALE (1)283
ACT:
Arbitration
Act, 1940: Sections 32, 33, 34.
Stay
of Legal proceedings--Whether court has jurisdiction to decide validity of
contract containing Arbitration clause--Existence of a valid agreement--Whether
condition precedent.
Jurisdiction
of court to decide on--Validity and legality of contract--Whether to be decided
on affidavits and documents or on evidence.
Constitution
of India 1950, Article 136.
Interference
by Supreme Court--With discretion of courts under Section 34 of Arbitration
Act, 1940--When called for.
Contract
Act, 1872: Section 20.
Mistake
of fact--Nature of--An erroneous opinion as to the value of the contracted
thing--Not a mistake of fact--Common mistake of both parties must be about the
same vital fact--Common mistake and Mutual Mistake--Distinction between.
Fishing
trawlers--Refrigeration system--Deficiency--Required temperature Minus 20
Degree F--Attained temperature Minus 10 Degree F--Whether mutual mistake.
Words
& Phrases: Natural iratione in unitilis.
Ex turpi
causa non oritur actio---Meaning of.
HEAD NOTE:
Under
an import licence dated 3rd
March, 1971 issued by
the Chief Controller of Imports and Exports the respondent imported two fishing
trawlers with the financial assistance of the second respondent Canara Bank.
The respondent con- ducted negotiations with the appellant for a charter-party
agreement in respect of the said trawlers. On 21st March, 1977, an agreement
between the parties was executed 470 under which the appellant agreed to take
on charter hire the said two trawlers for the purpose of deep sea fishing for a
period of two years with an option to continue the hire for a further period of
three years. Under the terms of the agreement the respondent was to deliver the
said trawlers to the appellant at Vishakhapatnam within seven days of the receipt of approval from the Chief
Controller of Imports and Exports or no objection certificate from the Canara
Bank, for making the said trawlers fully operational and to ascertain the cost
of such repairs. The appellant charter was then to conduct fishing trials to
ascertain actual conditions and thereafter the charter hiring was to commence
from the date the fishing trials were ended.
On 18th August, 1977, the Chief Controller of Imports
and Exports granted permission to the respondent to charter the said trawlers
to the appellant on the conditions that the charter rent would be Rs.50,000 per
month per trawler and that the charter would be for a period of three years.
On 30th September, 1977, the respondent delivered the said
two trawlers for repairs to the appellant.
On 2nd February, 1978, the parties modified the agreement
revising the rate of charter hire and the date of commencement of hire, to the
extent that the charter hire would commence from 15th January, 1978 and the revised rate of hire would be Rs.6,25,000 per
trawler per year.
The
appellant charter raised objections alleging that the trawlers suffered from
inherent and latent defects in the refrigeration system which was an essential
part of such trawlers and as such the trawlers were not fully operational
because even after carrying out extensive repairs the refrigeration system
could not be brought to the required standard of minus 20 degree F but attained
only minus 10 degree F.
On
29.9.1978, the appellant instituted a suit in the original side of the Calcutta
High Court claiming (i) a decree for a sum of Rs.39,64,341 towards cost,
charges, damages and compensation incurred on the said trawlers and, (ii) a
declaration that the agreement was contrary to the terms of the permission
granted by the Chief Controller of Imports and Exports and consequently illegal
and against public policy and void; (iii) that the Parties had entered into the
agreement on the basic fundamental assumption that by effecting necessary
repairs the trawlers would be made fully operational but the assumption was
subsequently dis- covered to be mistaken because of the deficiency in the
refrigeration system and it rendered the agreement void.
471
The respondent filed an application under Section 34 of the Arbitration Act,
1940 praying that the suit instituted by the appellant, and all proceedings
therein be stayed because the disputes were wholly covered by the arbitration
clause as contained in the modified agreement dated 2nd February, 1978 which was binding between the parties.
The
Single Judge held that there was no invalidity for non-compliance of the
conditions of the licence granted because necessary permission was obtained in
respect of the agreement from the Chief Controller of Imports and Exports and
the modifications of the agreement did not impair its validity; though in a
particular case if there was any doubt about facts, the matter had to be
decided by trial on evidence but in the instant 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; there was no illegal- ity or mutual mistake; that
the alleged fundamental breach was wholly covered by the arbitration clause;
that the arbitration clause was valid and binding between the par- ties; and
that all the conditions of Section 34 were satisfied. Accordingly, the Single
Judge granted stay of the suit and directed the parties to take immediate steps
for initiation of reference under the arbitration agreement.
The
judgment and order of the Single Judge was confirmed by the Division Bench by
dismissing the appeal.
In
this appeal by special leave it was contended on behalf of the appellants that
(i) the
subject-matter of the suit, namely, the question whether the agreement was void
ab initio for mutual mistake was not arbitrable; and the courts below erred in
holding so;
(ii) assuming
that the subject- matter was arbitrable, the court should not have exercised
its jurisdiction on the application under Section 34 because it involved complicated
questions of fact and in exercising such jurisdiction the courts acted without
jurisdiction;
(iii) the
court should have decided only after taking oral and documentary evidence and
not merely on affidavits;
(iv) the
agreement was void being violative of the conditions of the permission granted
by the Chief Controller of Imports and Exports;
(v) the
agreement itself having been void ab initio due to mutual mistake, the
arbitration clause per- ished with it and the courts below erred in holding
that the disputes were arbitrable.
Dismissing
the appeal, the Court,
HELD:
1. Section 34 deals with the staying of a suit where there 472 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 agreement to submit to
arbitration. Where the objection is that the arbitration is a nullity, it
amounts to an objection of want of jurisdic- tion. The term "arbitration
agreement" includes "agreement to refer", and
"submission" to Arbitrator. A submission forming part of a void
contract is itself void and cannot be enforced. [484B-C]
1.1
Whether a particular dispute arising out of a par- ticular contract is
referable to arbitration or not, must necessarily depend on the intention of
the parties as em- bodied in the arbitration clause. If the dispute is squarely
covered by the arbitration clause, the relevant provisions of the Act will be
attracted. The question whether the dispute in the suit fails within the
arbitration clause really pre-supposes that there is such agreement and in- volves
consideration of two matters, that is (i) what is the dispute in the suit, and
(ii) what dispute the arbitration clause covers. It is incumbent upon the court
to decide whether there is a binding contract for arbitration between the
parties. If it is found that the dispute in the suit is not covered by the
arbitration clause the application for stay may be dismissed. [488H; 489A]
2.
Where in an application under Section 34 of the Act an issue is raised as to
the validity or existence of the contract containing the arbitration clause,
the court has to decide first of all whether there is a binding arbitration
agreement, even though it may involve incidentally a deci- sion as to the
validity or existence of the parent contract.
If the
arbitration clause is so wide as to have included the very validity or
otherwise of the contract on the grounds of fraud, mis-representations, mutual
mistake or any valid reason the arbitrator will surely have jurisdiction to
decide even that dispute. The proper approach would be to examine the issue
raised in the suit and to ascertain wheth- er it squarely falls within the
compass of the arbitration clause and take a decision before granting the stay
of the suit. If an issue is raised as to the formation, existence or validity
of the contract containing the arbitration clause, the court has to exercise
discretion to decide or not to decide the issue of validity or otherwise of the
arbitration agreement even though it may involve incidental- ly a decision as
to validity or existence of the challenged contract. Should the Court find the
parent contract to be void ab initio or illegal or non-existent, it will be
with- out jurisdiction to grant stay. If the challenged contract is found to be
valid and binding and the dispute raised in the suit covered by the arbitration
clause, stay of the suit may be justified. [491F-G; 492A-B, D-F] 473
2.1 In
the instant case, considering the issues raised, the arbitration clause and the
surrounding circumstances and the part played by the parties pursuant to the
charter party since execution to the modification and thereafter till objection
raised by the appellant-plaintiff. it must be held that the trial court did not
err in proceeding to decide the issue of validity or legality of the parent
contract. [492F-G]
3.
Where the validity, existence or legality of the contract is challenged in suit
on grounds de hors, independ- ent of, or external to the terms or stipulations
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 a large majority of
cases it would be applica- ble, 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
failing 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 chal- lenged contract containing the arbitration
agreement.
[488A-C]
3.1 In
the instant case, the arbitration clause formed part of the agreement. The
arbitration agreement is not the same as the contract in the charter party. It
cannot, there- fore, be said that the validity or otherwise of the charter
party was covered by the arbitration clause. [489D-E] Jee Lae v. Lord Dalmeny,
[1927] 1 Ch. 300; Heyman v. Darwins, [1942] A.C.
356; Monro v. Bognor Urban District Council, [1915] 3 K.B. 167; Jawaharlal Burman
v. Union of India, [1962] 3 S.C.R. 769: Waverly Jute Mills Co. Ltd. v. Raymon
& Co. (India) Pvt. Ltd.,3 S.C.R. 209; A.I.R. 1963 S.C. 90; Khardah Co. Ltd.
v. Raymon & Co. India Ltd., [1963] 3 S.C.R. 183; Renusagar Co. v. General
Electric Co., [1985] 1 S.C.R. 432; Anderson Wright Ltd. v. Moran and Company,
[1955] 1 S.C.R. 862; Damodar Valley Corporation v.K.K. Kar, [1974] 2 S.C.R.
240; Hirji Mulji v. Cheong Yue Steamship Co., [1926] A.C. 497; applied.
Banwari
Lal v. Hindu College, A.I.R. 1949 East Punjab 165; Johurmull Parasram v. Louis
Dreyfus Co. Ltd. 52 C.W.N. (1947-48) 137 A.I.R. 1949 Cal 179; Pramada Prasad v. Sagar Mal Aggarwal, A.I.R.
1952 Patna 352; Narsingh Prasad v. Dhanraj
Mills. I.L.R. 21 Patna 544; A.I.R. 1943 Patna 53; Birla Jute Manufacturing Co.
Ltd. v. Dulichand. A.I.R. 1953 Calcutta 450;
W.F. Ducat & Co. Pvt. Ltd. v. 474 Hiralal Pannalal, A.I.R. 1976 Calcutta
126; General Enter- prises v. Jardine Handerson Ltd., A.I.R. 1978 Calcutta 407;
Khusiram v. Hanutmal, [1948] 53 C.W.N. 505, approved.
4. In
the instant case, facts were admitted. [493B-C] All the relevant documents and
affidavits were before the Court and were considered by it. Therefore no
illegality was committed by the trial court in not setting down the matter for
trial on evidence and deciding the validity and legality of the matter without
taking oral evidence. [49211; 493B]
4.1
Even if it appears that the discretion could have also been exercised to decide
the issue of invalidity in a trial on evidence adduced, this court would not
substitute its view for that of the trial court, unless the ends of justice
required it to be done. This Court would not lightly interfere under Article
136 of the Constitution with the concurrent exercise of discretion of the
courts below under Section 34 of the Arbitration Act. Before it can justly do
so, the appellant must satisfy the Court, on the relevant facts referred to by
the Courts below, that they exercised their discretion in a manifestly
unreasonable or perverse way which was likely to defeat the ends of justice.
The appellant has failed to do so in the instant case. [493C, E-F] Ormarod v. Todmordon,
[1882] 8 Q.B.D. 664; Charles Osenton and Co. v. Johnston, [1942] A.C. 130; Gardner v. Jay, [1885] 29 Ch. D. 50; Printers (Mysore) Pvt. Ltd. v. Pothan Joseph, [1960] 3 S.C.R. 713, applied.
5.
Where the parties make mutual mistake misunderstanding each other and are at
cross purposes, there is no real correspondence of offer and acceptance and the
parties are not really consensus ad idem. There is thus no agreement at all;
and the contract is void. Section 20 is concerned with common mistake of fact
and not mutual mistake. A common mistake is there where both parties are
mistaken about the same vital fact although both parties are ad idem, e.g., the
subject matter of the contract has already perished. A con- tract in such a
case is void. Where each party is mistaken as to the other's intention, though
neither realises that the respective promises have been misunderstood, there is
mutual mistake. 1493H; 494A-B]
6. A
mistake will not affect assent unless it is the mistake of both parties, and is
as to the existence of some quality which makes the thing 475 without the
quality essentially different from the thing as it was believed to be. Neither
party can rely upon his own mistake to say that it was a nullity from the
beginning, no matter that it was a mistake which to his mind was fundamen- tal,
and no matter that the other party knew that he was under a mistake. A
fortiori, if the other party did not know of the mistake but shared it. The
question is not what the parties had in their minds, but what reasonable third
par- ties would infer from their words or conduct. The court has to ascertain
the "sense of the promises". [496E; 495G-H]
7. The
application of the doctrine of mutual mistake depends upon the true
construction of the contract made between the parties. A mutual
misunderstanding will not nullify a contract but only if the terms of contract
con- strued in the light of the nature of the contract and of the circumstances
believed to exist at the time it was done show that it was never intended to
apply to the situation which in reality existed at that time, will the contract
be held void. Thus a mistake as to an essential and integral element in the
subject matter of the contract will avoid the con- tract. A mistake as to the
quality of the article contracted for may not always avoid the contract. A
distinction, there- fore, should be drawn between a mistake as to the substance
of the thing contracted for, which will avoid the contract and mistake as to
its quality which will be without effect.
According
to circumstances even a mistake as to the sub- stance of the thing contracted
for may not necessarily render a contract void. Thus there must be a difference
so complete that, if the contract were enforced in the actual circumstances
which have unexpectedly emerged, this would involve an obligation fundamentally
different from that which the parties believed they were undertaking. [496A-H]
8.
From the series of steps taken for repairs and the stipulations in the charter
party including the modifica- tions thereof, it is not possible to hold that it
was a case of mutual mistake as to a quality which made the trawlers
transferred essentially different from the trawlers that the parties in their
minds agreed to transfer. Therefore, there was no mutual mistake and the
contract would not be avoided on this ground. [498C-D] Cooper v. Phibbs, [1867]
L.R. 2 H.L. 149; Ear/Beauchamp v. Winn., [1873] 6 H.L. 223; Hudders field
Banking Co. v. Henry Lister & Sons, [1895] 2 Ch. 273; Bell v. Laver Brs. Ltd., [1932] A.C.
161; Kannedy v. Panama Royal Mail Co., [1867] L.R. 2 Q.B. 580; Smith v. Hughes,
[1871] L.R. 6 Q.B. 597; Solle v. Butcher, [1950] 1 K.B. 671: 476 Fraderick E.
Rose (London) Ltd. v. William H. Pim Junior & Co. Ltd. [1953] 2 Q.B. 450;
Sheikh Brothers LId. v. Arnold, [1957] A.C. 136; referred to.
U.P.
Government v. Nanhoo Mal, A.I.R. 1960 All. 420, approved.
9. It
is settled law that where the subject matter of a reference is illegal, no
award can be of any binding effect.
If the
contract itself was illegal, the controversy as to whether it was illegal or
not would not be a dispute arising out of the contract as also would be the
question whether the contract was void ab initio. When, however, it is found that
a binding contract was made which was not illegal what follows from such a
contract would be covered by the expres- sion "dispute arising out of
contract". To stay a suit under Section 34 the Court has to see whether
there was a valid agreement to have the dispute settled by arbitration and that
the proceedings are in respect of a dispute so agreed to be referred. [498E,
(;-H; 499A]
10.
Public policy imposes certain limitations on the freedom of contract by
forbidding the making of certain contracts. In such cases though all other
requisites for formation of the contract are complied with, parties to such
forbidden contracts are not allowed to enforce any rights under them. In clear
cases the law strikes at the agreement itself by making the contract illegal.
However, the effect and nature of illegality are by no means uniform and will
depend upon the facts and circumstances of each case. Where a statute makes a
contract illegal or where a certain type of contract is expressly prohibited
there can be no doubt that such a contract will not be enforcible. [499B-D]
11. A
contract which was not illegal from the beginning may be rendered illegal later
by the method of performance which did not comply with the statutory
requirements. The appellant's burden was to show that the charter party was
illegal to take it out of the arbitration clause for if the contract is illegal
and not binding on the parties the arbitration clause would also be not
binding. Once it is shown to have been illegal it would be unenforcible as ex turpi
causa non oritur actio. [499G-H]
12.
One who knowingly enters into a contract with im- proper object cannot enforce
his rights thereunder. The appellant in the instant case was also a party to the
agree- ment of charter party in respect of the two imported trawl- ers. Though
it purported to be actual user's licence 477 there was no violation of this
condition in view of the express permission granted by the Controller of
Imports and Exports allowing the chartering of the two imported trawl- ers. The
modifications to the contract did not make any alteration so as to make the
agreement contrary to the terms and conditions of the permission inasmuch as
the permission was for a period of three years. The option to continue hire of
the trawlers for a further period of three years did not ipso facto violate the
permission. There was also no viola- tion as to the duration of the charter
party. [499H; 500C-E] Taylor v. Barnett, [1953] 1 W.L.R. 562;
Anderson Wright Ltd. v. Moran and Company, [1955] 1 S.C.R. 862; In Re arbi- tration
between Mahmoud and Isphani, [1921] 2 K.B. 176;
applied.
13.
The Courts below were right in holding that the matters were arbitrable apart
from the question of illegali- ty, invalidity of the contract. The question of
invalidity of the contract due to the alleged mutual mistake would be de hors
and independent of the contract and as such would not be referable under the
arbitration clause. In so far as the question of illegality of the charter
party is concerned as the appellant has not established that the charter party
was illegal or void as initio, the question whether the modification as alleged
had rendered the contract illegal would be covered by the arbitration clause.
[500F-G]
14. In
the instant case, the reliefs claimed in the suit other than the question of ab
initio invalidity or illegali- ty of the contract would be referable. However,
it will be within the jurisdiction of the arbitrator to decide the scope of his
jurisdiction. The Court cannot make a contract between the parties and its
power ends with the interpreta- tion of the contract between them. The same
principle also applies to the arbitration agreement unless the parties to the
arbitration agreement authorises the court to make and modify the agreement. The
arbitrator shall proceed in ac- cordance with law to decide the questions
including that of jurisdiction, if raised. [501C-1). E]
CIVIL
APPELLATE JURISDICTION: Civil Appeal No. 1795 of 1982.
From
the Judgment and Order dated 3.2. 1982 of the High Court of Calcutta in Appeal No. 75 of 1981.
Shanti
Bhushan, Ms. Lira Goswami, S. Ganesh, R. Narain and D.N. Mishra for the
Appellant.
478
C.S. Vaidyanathan, S.R. Setia, K.V- Mohan and K.V. Viswanathan for the
Respondents.
The
Judgment of the Court was delivered by K.N. SAIKIA, J. This appeal by special
leave is from the appellate judgment of the Calcutta High Court in Appeal No.
75 of
1981 dismissing the appeal and upholding the judgment of the learned Single
Judge granting stay of the appellant's suit on the respondent's application
under section 34 of the Arbitration Act, 1940.
The
appellant as plaintiff has instituted suit No. 736 of 1978 on 29.9.1978 in the
original side of the Calcutta High Court against the respondent as first de- fendant
and Canara Bank as second defendant stating in the plaint, inter alia, that the
first defendant, was the sole and absolute owner of two fishing trawlers, Ave
Maria-I and Ave maria-II, registered under No. 1567 dated 30th January, 1974
and No. 1568 dated 30th January, 1974 with the Regis- trar of Indian Ships,
Cochin that the said trawlers were imported by the first defendant with
financial assistance of the second defendant, Canara Bank, under Import Licence
No. P/CC/2062299 dated 3rd March, 1971 issued by or on behalf of the Chief
Controller of Imports & Exports, Ministry of Commerce, Government of India,
New Delhi, that in or about March, 1977 the first defendant as owner agreed to
charter and the plaintiff as charterer agreed to take on charter for the
purpose of deep sea fishing, the said two trawlers on the terms and conditions
contained in a "Bare Boat Charter Party" dated the 21st March, 1977,
hereinafter called, the agreement, executed at Calcutta, subject to the owner
first defendant obtaining the requisite permission in writing from the Chief
Controller of Imports & Exports and the No Objec- tion Certificate of the
second defendant for chartering the said trawlers; that within seven days of
receipt of the approval of the Chief Controller of Imports & Exports or no
objection certificate from the Canara Bank the first defend- ant owner will
deliver the said trawlers to the plaintiff charterer at the Port of Vishakapatnam
for carrying out the inspection of the said trawlers by its authorised agents
to ascertain repairs to be carried out to the trawlers for making them fully
operational without any defect whatsoever and also to ascertain the cost of
such repairs and thereaf- ter the Chatterer will undertake the repairs at the
cost of the owner and bring them to fully operational condition without any
defect including all aspects of refrigeration equipment; that the charterer
will then conduct fishing trials to ascertain actual condition of the trawlers
and in case the condition is fully satisfied according to the Charterer, and
the 479 owner furnishes to the Charterer all documents certifying
sea-worthiness and also supplies proof of compliance of pre-condtions, the
Charter hiring shall commence on or from the date fishing trials are ended;
that the charterer shall pay to the owner Rs.50,000 per trawler per month
payable in advance every month and shall continue to pay up to and including
the date of redelivery of each trawler to the owner at Vishakapatnam (unless
lost-sunk); that he shall keep a deposit of Rupees one lakh per trawler with
the owner during the period of the agreement to be adjusted without interest
towards the charter hire against the last two months of charter period; that by
a Letter No.
CG/N-2-143-70-71
dated 18th August, 1977 the Chief Control- ler of Imports & Exports granted
permission to the first defendant to charter the said trawlers to the plaintiff
on a charter rental of Rs.50,000 per month per trawler for a period of three
years; that the owner delivered the said two trawlers for repairs to the
plaintiff at Vishakapatnam on or about 30th September, 1977 and thereafter on
or about 2nd February, 1978 the parties agreed to modify the agreement in the
manner stated in a subsequent written agreement dated 2nd February, 1978
executed at Calcutta; and that according to the agreement after modification,
the charter hire com- menced from 15.1.1978 and the charter hire revised to
Rs.6,25,000 per trawler per year.
The
plaintiff's main averments in the plaint are that the permission dated 18th
August, 1977 granted by the Chief Controller of Imports & Exports to the
first defendant for chartering the said trawlers to the plaintiff was given
under the said Import Licence to the first defendant and the permission was
given subject to two conditions, namely, that the charter rental would be
Rs.50,000 per month and that the charter would be for a period of three years
but the agree- ment dated 21st March, 1977 was, in fact, for a period of two
years with an option to the plaintiff to continue the hire for a further period
of three years and as such the agreement was in contravention of and contrary
to the terms of the said permission and consequently to the said Import Licence,
and hence, illegal, against public policy and void;
that
the plaintiff and the first defendant entered into the agreement and its
modification dated 2nd February, 1978 on the basic, essential and fundamental
assumption that the trawlers would be made fully operational and free from all
defects by effecting repairs as contemplated thereby but the assumption was
mistaken and not true and was subsequently discovered to be so mistaken that it
rendered the agreement with its modifications void; that pursuant to the
agreement the plaintiff paid to the first defendant through the second defendant
the initial deposit of Rupees two lakhs in respect of the said two trawlers of
the 480 charter rent as agreed up to and for the month of July 1978, but in or
about early September 1978 the plaintiff having discovered the agreement to
have been void and illegal called upon the first defendant to take back or
obtain permission of the said trawlers lying at Vishakapatnam at the risk and
cost of the first defendant but he failed and neglected to do so; and that the
first defendant is bound to pay or make compensation for all the advantages
which he had received under the agreement and its modifications and the costs,
charges and expenses which the plaintiff has incurred on the said trawlers,
being assessed at Rs. 39,64,34 1 as per Schedule 'D' to the plaint. In the
alternative it has been averred that in supplying the said trawlers the first
defendant committed a fundamental breach of the agreement and its modifications
which went to the root and affected the very substance of the same and which
made its perform- ance impossible and such a breach on the part of the first
defendant has produced a situation fundamentally different from anything which
the parties could as reasonable persons have contemplated when the agreement
was entered into, and as the plaintiff has not been able to use or obtain any
benefit out of the said trawlers, the plaintiff never was nor is bound by the
obligation under the agreement and the modification thereof and was entitled to
and had duly re- scinded the same and the plaintiff had in the premises
suffered loss and damages which the first defendant is bound to compensate and
such loss and damage is assessed reasona- bly at Rs.39,64 341 particulars
whereof have been given in Schedule 'D' thereof; and that the plaintiff is
entitled to recover the said sum of Rs.39,64,34 1 as money paid to and or on
account of the first defendant and expenses so in- curred without any
consideration and or for consideration which has totally failed and/or to the
use of the first defendant.
The
plaintiff accordingly claimed, inter-alia, a decla- ration that the agreement
dated 2 Ist March, 1977 and the modifications thereof dated 2nd February, 1978
were, and are illegal, against public policy and void; a decree for
Rs.39,64,341 against the first defendant; alternatively an enquiry into the
amount due to the plaintiff from the first defendant and decree for a sum found
due on such enquiry; in the alternative decree for the same amount as
compensation for loss and damage and or as money paid to or expenses incurred
without any consideration or for consideration which has totally failed or to
the use of the first defend- ant; and further and other reliefs.
In the
matter of the aforesaid Suit No. 736 of 1978, hereinafter referred to as 'the
suit', the first defendant after receiving summons 481 and entering appearance
moved on 25th April, 1979 and appli- cation under section 34 of the Arbitration
Act, 1940, here- inafter referred to as 'the Act', impleading the plaintiff
(instant appellant) as first respondent and Canara Bank second defendant as
second respondent stating, inter-alia, that the agreement as modified on 2nd
February, 1978 con- tained an arbitration clause; that the agreement has been
and is perfectly binding and not violative of the conditions of the permission
granted by the Controller of Imports & Exports; that the defects in the
refrigeration system as alleged are factually wrong; that the plaintiff, his serv-
ants and agents have themselves materially deteriorated the machines and hence
no amount was payable to the plaintiff as claimed in the plaint; and that all
the disputes, conten- tions alleged to have arisen between the plaintiff and
the defendant were wholly covered by the said arbitration clause contained in
the agreement which was binding between the parties. Accordingly, it was prayed
that the suit and all proceedings therein be stayed and interim orders, costs
and other reliefs be granted. The plaintiffs filed affidavit in opposition to
the application and the applicant first de- fendant filed affidavit in reply.
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 482 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 483 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.
Mr.
C.S. Vaidyanathan, the learned counsel for the respondent refuting submits that
there having been no mutual mistake so as to invalidate the agreement, the
arbitration clause remains binding and the subject matter of the suit has
rightly been held to be arbitrable; that the court rightly exercised
jurisdiction on the application under section 34 of the Arbitration Act on the
basis of the affi- davits and at no stage before argument the appellant as
respondent No. 1 applied to the court for permission to adduce oral evidence,
and stay of the suit was granted in accordance with law on the basis of the
evidence on record;
that
the agreement as modified was not void on the ground of violation of the
permission or of the import licence or of the provisions of the Import &
Export Control Act; and that the direction to proceed to arbitration is just
and proper and the respondent has no objection to a Retired Supreme Court Judge
being appointed arbitrator.
The
first question to be decided in this appeal, there- fore, is whether in an
application under section 34 of the Indian Arbitration Act the court has
jurisdiction to decide the validity of the Contract containing the arbitration
clause, and if so, whether it has to be decided on affidavits or on evidence.
To
decide the question we may conveniently refer to the provisions of section 34
of the Arbitration Act;
Section
34: Power to stay legal proceedings where there is an arbitration agreement.
Where any party to an arbitration agreement or any person claiming under him
commences any legal proceedings against any other party to the agreement or any
person claiming under him in respect of any matter agreed to be referred, any
party to such legal proceedings may, at any time before filing a written
statement or taking any other steps in the proceedings, apply to the judicial
authority before which the proceedings are pending to stay proceed- ings; and
if satisfied that there is no suffi- cient reason why the matter should not be
referred in accordance with the arbitration agreement and that the applicant
was, at the time, when the proceedings were commenced, and 484 still remains,
ready and willing to do all things necessary to the proper conduct of the
arbitration, such authority may make an order staying the proceedings.
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:
"If
it appears that the dispute is whether there has ever been a binding contract
between the parties, such a dispute cannot be covered by an arbitration clause
in the challenged contract. If there has never been a contract at all, there
has never been as part of it an agreement to arbitrate. The greater includes
the less. Further, a claim to set aside a contract on such grounds as fraud,
duress or essential error cannot be the subject matter of a reference under an
arbitration clause in the contract sought to be set aside. Again, an admittedly
binding contract containing a general arbitration clause may stipulate that in
certain events the contract shall come to an end. If a question arises where
the con- tract has for any such reason come to an end I can see no reason why
the arbitrator should not decide that question. It is clear, too, that the
parties to a contract may agree to bring it to an end to all intents and
purposes and to treat it as if it had never existed. In such a case, if there
be an arbitration clause in the contract, it perishes with the con- 485 tract.
If the parties substitute a new con- tract for the contract which they have abro-
gated the arbitration clause in the abrogated contract cannot be invoked for
the determina- tion of questions under the new agreement. All this is more or
less elementary." Earlier in Monro v. Bognor Urban District Council,
[1915] 3 K.B. 167; where a building contract had been en- tered into between
the plaintiff and the defendants for a construction of sewerage works contained
an arbitration clause which provided that if at any time any question, dispute
or difference should arise between the parties upon or in relation to or in
connection with the contract, the matter should be referred to arbitration and
during the progress of the works disputes arose between the parties mainly as
to the nature of the site upon which the works had to be carried out, which the
plaintiff alleged was different from that which he had been led to believe by
the specifica- tions. The plaintiff having brought an action against the
defendants claiming, inter alia, damages for fraudulent misrepresentation
whereby he was induced to enter into the contract, the defendants took out a
summons asking that all proceedings in the action be stayed and the matter be
re- ferred to arbitration. It was held that the action, being based on fraud,
referred to matters wholly outside the powers of the arbitrator, with which he
could not possibly deal, and so could not be said to be a question, dispute or
difference upon or in relation to or in connection with the contract and as
such referable to arbitration under the arbitration clause.
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 486 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 487 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 488 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:
"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 had 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 situa-
tion where the parties are at one in asserting that they entered into a binding
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 difference 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." Section 34 of
the Arbitration Act, deals with the staying of a suit where reference
concerning the subject matter of the suit and between the same parties is
pending. This section corresponds to Section 4 of the English Arbitration Act.
Whether
a particular dispute arising out of a particular contract is referable to
arbitration or not must necessarily depend on the intention of the parties as
embodied in the arbitration clause. If the dispute is squarely covered by the
arbitration clause the 489 relevant provisions of the Act will be attracted.
Section 32 puts a bar to suits contesting arbitration agreement or award by
providing that notwithstanding any law for the time being in force, no suit
shall lie on any ground whatsoever for a decision upon the existence, effect or
validity of an arbitration agreement or award, nor shall any arbitration
agreement or award be enforced, set aside, amended modified or in any way
affected or otherwise than as provided in the Act. Section 33 of the Act
provides that any party to an arbitration or any person claiming under him
desiring to challenge the existence or validity of an arbitration agree- ment or
an award 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 expedient 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.
It may
be noted that section 32, 33 and 34 speak of an arbitration agreement as defied
in section 2(a) of the Act which means a written agreement to submit present or
future differences to arbitration, whether an arbitrator is named therein or
not. In the instant case the arbitration clause forms a part of the agreement,
namely, the charter party.
The
question is whether the validity or otherwise of the charter party itself can
be said to have been covered within the arbitration clause. On scrutiny of
clause 18 we find that any dispute or difference in respect of the construc- tion,
meaning or effect or as to the rights and liabilities of the parties there under
or any other matter arising out of this agreement shall be referred to
arbitration. Can the validity of the contract itself as embodied in the charter
party be said to have arisen out of the contract or can the validity or
otherwise of the contract in the charter party itself be said to be
construction, meaning or effect or rights and liabilities of the party there under?
In our opinion, the answer is in the negative. The arbitration agreement is not
the same as the contract in the charter party. It cannot, therefore, be said
that the validity or otherwise of the chartery party was covered by clause 18.
In Khardah Company Ltd. v. Raymon & Co. (India) Pvt. Ltd., [1963] 3 S.C.R.
183 the appellant company entered into a contract on September 7, 1955 for the
purchase of certain goods and clause 14 thereto provided that all disputes
arising out of or concerning the contract should be referred to the arbitration
of the Bengal Chamber of Commerce. The respondents having failed to deliver the
goods as agreed the appellants applied to the Bengal Chamber of Commerce for
arbitration and an award made in favour of the appellant.
Thereupon
the respondent filed an application in the High Court of Calcutta under 490 section
33 of the Arbitration Act, 1940 challenging the validity of the award on the
ground that the contract dated September 7, 1955
itself was illegal as it was in contraven- tion of the notification of the
Central Government dated October
29, 1953. It was held
that the dispute as to the validity of the contract dated September 7, 1955,
was not one which the arbitrators were competent to decide under clause 14 and
that in consequences the respondents were entitled to maintain the application
under section 33 of the Act and that where an agreement is invalid every part
of it including clause as to arbitration contained therein must also be
invalid. In Anderson Wright Ltd. v. Moran and Compa- ny, [1955] 1 S.C.R. 862 it
has been laid down that in order that a stay may be granted under section 34 of
the Act, it is necessary, among others, that the legal proceeding which is
sought to be stayed must be in respect of a matter agreed to be referred and
the Court must be satisfied that there is no sufficient reason why the matter
should not be referred to an arbitrator in accordance with the arbitration
agree- ment. The question whether the dispute in the suit falls within the
arbitration clause really pre-supposes that there is such agreement and
involves consideration of two matters, i.e. (i) what is the dispute in the suit
and (ii) what dispute the arbitration clause covers. It is incumbent upon the
Court to decide whether there is a binding contract for arbitration between the
parties. If it is found that the dispute in the suit is not covered by the
arbitration clause the application for stay may be dismissed. In Damodar Valley
Corporation v. K.K. Kar, [1974] 2 S.C.R. 240 it has been held that as the
contract is an outcome of the agreement between the parties it is equally open
to the parties thereto and to Court to bring to an end or to treat it as if it
never existed. It may also be open to the parties to terminate previous
contract and substitute in the place a new contract or alter the original
contract in such a way that it cannot subsist. In all these cases since the
entire contract is put to an end to, the arbitration clause, which is a part of
it, also perishes along with it. Where, therefore, the dispute between the
parties is that the contract itself does not subsist either as a result of its
being substituted by a new contract or by rescission on alteration, that
dispute cannot be referred to the arbitration as the arbitration clause itself
would perish if the averment was found to be valid.
As the
very jurisdiction of the arbitrator is dependent upon the existence of the arbitration
clause under which he is appointed, the parties have no right to invoke a
clause which perished with the contract. In case of rescission it would put an
end to the rights of the parties to the con- tract in future but it may permit
claiming of damages either for previous breaches or for the breach which
constitute the termination. The contract being consensual, the question whether
the 491 arbitration clause survives or perishes would depend on the nature of
the controversy and its effect upon the existence of survival of the contract
itself. A dispute as to the binding nature of the contract cannot be determined
by resort to arbitration because the arbitration clause itself stands or falls
according to the determination of the ques- tion in dispute.
As was
held in Hirji Mulji v. Cheong Yue Steamship Co., [1926] A.C. 497, "a
contract that has deter- mined is in the same position as one that has never
been concluded at all". In Heyman v. Darwins, (supra) Lord Porter pointed out "that it is not in every instance
in which it is claimed that the arbitrator has no jurisdiction the Court, will
refuse to stay an action. If this were the case such a claim would always
defeat an agreement to submit disputes to arbitration, at any rate, until the
question of jurisdiction had been decided. The Court to which an application
for stay is made is put in possession of the facts and arguments and must in
such a case make up its mind whether the arbitrator has jurisdiction or not as
best it can on the evidence before it. Indeed, the application for stay gives
an oppor- tunity for putting these and other considerations before the court
that it may determine whether the action shall be stayed or not."
These
observations were accepted by S.R. Das, J in the case of Khusiram v. Hanutmal,
[1948] 53 C.W.N. 505,518 wherein it was held that where on an application made
under section 34 of the Arbitration Act for stay of a suit, an issue is raised
as to the formation, existence or validity of the contract containing the
arbitration clause, the Court is not bound to refuse a stay but may in its
discretion, on the application for stay, decide the issue as to the existence
or validity of the arbitration agreement even though it may involve
incidentally a decision as to the validity or existence of the present contract
(Emphasis supplied). Their Lordships in Anderson Wright Ltd. v. Moran and
Company, (supra) reiterating the above passage observed:
"We
are in entire agreement with the view enunciated above." Thus, where in an
application under section 34 of the Act an issue is raised as to the validity
or existence of the contract containing the arbitration clause, the court has
to decide first of all whether there is a binding arbitration agreement, even
though it may involve incidentally a deci- sion as to the validity or existence
of the parent contract.
The
court has to bear in mind that a contract is an agree- ment enforcible at law
and that it is for the parties to make their own contract and not for the court
to make one for them. Court is only to interpret the contract. The stipulations
in the contract have, therefore, to be examined in the light of the dispute raised
in the pleadings of the suit. If it is found that the dispute raised in the
suit outside or independent of the contract it follows that the arbitration
clause will not encompass that dispute. However, as the parties were 492 free
to make their own contract they were also free to have agreed as to what
matters would be referred to arbitration.
If the
arbitration clause is so wide as to have included the very validity or
otherwise of the contract on the grounds of fraud, misrepresentations, mutual
mistake or any valid reason the arbitrator will surely have jurisdiction to
decide even that dispute. Two extreme cases have to be avoided, namely, if
simply because there is an arbitration clause all suits including one
questioning the validity or existence or binding nature of the parent contract
is to be referred to arbitrator irrespective of whether the arbitration clause
covered it or not, then in all cases of con- tracts containing arbitration
clause the parties shall be deprived of the right of a civil suit. On the other
hand if despite the arbitration clause having included or covered ex facie even
a dispute as to the existence, validity or binding nature of the parent
contract, to allow the suit to proceed and to deprive the arbitrator of his
jurisdiction to decide the question will go contrary to the policy and objects
of the Arbitration Act as embodied in Sections 32, 33 and 34 of the Act. Both
the extremes have, therefore, to be avoided. The proper approach would be to
examine the issues raised in the suit and to ascertain whether it squarely
fails within the compass of the arbitration clause and take a decision before
granting the stay of the suit. If an issue is raised as to the formation
existence or validity of the contract containing the arbitration clause, the
court has to exercise discretion to decide or not to decide the issue of
validity or otherwise of the arbitration agreement even though it may involve
incidentally a decision as to validity or existence of the challenged contract.
Should the court find the present contract to be void ab initio or illegal or
non-existent, it will be without jurisdiction to grant stay. If the challenged
contract is found to be valid and binding and the dispute raised in the suit
covered by the arbitration clause, stay of the suit may be justified.
In the
instant case considering the issues raised, the arbitration clause and surrounding
circumstances and the part played by the parties pursuant to the charter party
since execution to the modification and thereafter till objection raised by the
appellant plaintiff, we are of the view that the learned trial court did not
err in proceeding to decide the issue of validity or legality of the parent
contract.
The
question whether the validity and legality of the parent contract could be decided
without taking oral evidence need not detain us long. All the relevant
documents and affidavits were before the court and were considered.
Mr. Shanti
Bhushan submits that in deep sea fishing, use of trawlers, requirement and
standard of refrigeration system in the trawlers so as to maintain 20F
temperature in their fish- 493 holds are highly technical matters and given the
opportunity the appellant plaintiff could have produced expert evidence in the
matter. Counsel, however, states, that at no stage of the proceedings before
argument any written or even oral application was made seeking permission to
adduce oral evidence. Admittedly, it was only during agreement that oral prayer
was made. We are, therefore, of the view that no illegality was committed by
the trial court in this regard considering the facts and circumstances of the
case. The learned judge rightly observed that if there was any doubt about
facts, the matter had to be decided by trial on evidence, in this case the
admitted facts could not be disput- ed. The learned courts have also exercised
discretion to grant stay. Even if it appears that the discretion could have
also been exercised to decide the issue of invalidity in a trial on evidence
adduced, this court would not substitute its view for that of the trial court,
unless the ends of justice required it to be done. Since it was said by the
Court of Appeal in Ormerod v. Todmordon, [1882] 8 Q.B.D. 664 that while it had
jurisdiction to review the descreation of the judge it would not do so except
in a case in which it clearly though that the judge had wrongly exercised his
discretion and that an injustice had thereby been done by his order. This was
approved in Charles Osenton & Co. v. Johnston, [1942] A.C. 130 holding that a legitimate exercise of the jurisdiction
would not be disturbed in appeal but a wrongful exercise of the discretion will
be corrected by the House of Lords. Referring to Gardner v. Jay, [1885] 29 Ch.
D. it
was ruled in the Printers (Mysore) Pvt. Ltd. v. Pothan Joseph, [1960] 3 S.C.R.
713 that this court would not light- ly interfere under Article 136 of the
Constitution with the concurrent exercise of discretion of the Courts below
under Section 34 of the Act. Before it can justly do so, the appellant must
satisfy the court, on the relevant facts referred by the courts below, that
they exercised their discretion in a manifestly unreasonable or perverse way,
which was likely to defeat the ends of justice. The appel- lant has failed to
do so in this case.
The
next question is whether the learned courts below were correct in holding that
there was no mutual mistake so as to render the agreement void ab initio under
section 20 of the Contract Act.
Section
20 of the Indian Contract Act, 1872 provides that where both the parties to an
agreement are under a mistake as to a matter of fact essential to the
agreement, the agreement is void. The explanation to the section says that an
erroneous opinion as to the value of the thing which forms subject-matter of
the agreement is not to be deemed a mistake as to a matter of fact. Where the
parties make mutual mis- 494 take misunderstanding each other and are at cross
purposes, there is no real correspondence of offer and acceptance and the
parties are not really consensus ad idem. There is thus no agreement at all;
and the contract is also void. A common mistake is there where both parties are
mistaken about the same vital fact although both parties are ad idem, e.g. the
subject-matter of the contract has already perished. The contract in such a
case is void as the illustrations to the section make clear. In U.P. Government
v. Nanhoo Mal, A.I.R. 1960 Allahabad 420
it has been observed that section 20 is concerned with common mistake of fact
and not mutual mis- take. A common mistake is made or shared alike by both
while mutual means made or entertained by each of the persons towards or with
regard to each other. In Cooper v. Phibbs, [1867] L.R. 2 H.L. 149, A agreed to
take a lease of a fish- ery from B, though contrary to the belief of both
parties at the time, A was tenant for life of the fishery and B had no title at
all. Lord Westbury applied the principle that if parties contract under a
mutual mistake and misapprehension as to their relative and respective rights,
the result is that the agreement is liable to be set aside as having proceeded
upon a common mistake. The transfer of ownership being impossible, the
stipulation was naturali ratione inunitilis. This principle of Cooper v. Phibbs
has been followed in Earl Beauchamp v. Winn [1873] 6 H.L. 223 and Hudders field
Banking Co. v. Henry Lister & Sons, [1895] 2 Ch. 273. However, Lord Atkin in Bell v. Lever Bros Ltd., [1932] A.C. 161;
(1931) All E.R. Rep. 1, 27 followed in Kennedy v. Panama Royal Mail Co., [1867]
L.R. 2 Q.B. 580 and Smith v. Hughes, [1871] L.R. 6 Q.B. 597 described the
state- ment of Westbury too wide and said that the correct view was that there
was a contract which the vender was either inca- pable of performing or had
committed breach of a stipulation as to title; the contract was unenforceable
but not void. In Bell v. Lever Bros Ltd., (supra) an
agreement of service between the company and two of the directors of its subsidi-
ary company was terminated on payment of compensation. The parties proceeded on
the assumption that the service agree- ment was not liable to immediate
termination by reason of misconduct of the directors which assumption proved to
be mistaken. Fraud was however negatived. In an action by the company for
recession of contract and repayment of moneys paid the agreement was set aside
on the ground of mutual mistake as to the quality of the service contract. The
accepted proposition was that whenever it is to be inferred from the terms of
the contract or its surrounding circum- stances that the consensus has been
reached upon the basis of a particular contractual assumption, and that
assumption is not true, the contract is avoided; i.e. it is void ab initio if
the assumption is of present fact and it ceases to bind if the assumption is of
future 495 fact. The assumption must have been fundamental to the continued
validity of the contract or a foundation essential to its existence. Lord Atkin
observed that the common stand- ard for mutual mistake and implied conditions
as to the existing or as to future fact is: Does the state of new facts destroy
the identity of the subject-matter as it was in the original state of facts? In
the words of Lord Than- kerton the error must be such that it either appeared
on the face of the contract that the matter as to which the mistake existed was
an essential and integral element of the sub- ject-matter of the contract or
was an inevitable inference from the nature of the contract that all parties so
regarded it. Where each party is mistaken as to the other's inten- tion, though
neither realises that the respective promises have been misunderstood, there is
mutual mistake. The illus- tration in Cheshire and Fifoots Law of Contract is, if B were to offer to sell his Ford Comina
Car to A and A were to accept in the belief that the offer related to a Ford Zeph-
yr. In such a case, no doubt, if the minds of the parties could be probed,
genuine consent would be found wanting. But the question is not what the
parties had in their minds, but what reasonable third parties would infer from
their words or conduct. The court has to ascertain "the sense of the
promises". In other words, it decides whether a sensible third party would
take the agreement to mean what A under- stood it to mean or what B understood
it to mean, or whether indeed any meaning can be attributed to it at all.
Blackman J in Smith v. Hughes, [1871] L.R. 6 Q.B. 597,607 said "if
whatever a man's real intention may be he so conducts him- self what a
reasonable man would believe that he was assent- ing to the terms proposed by
the other party, and that other party upon that belief enters into the contract
with him, the man thus conducting himself would be equally bound as if he had
intended to agree the other party's terms".
This
case establishes that a contract is void at law only if some term can be
implied in both offer and accept- ance which prevents the contract from coming
into operation.
In Solle
v. Butcher, [1950] 1 K.B. 671 (691) Lord Denning said that once a contract has
been made, that is to say, once the parties, whatever their in most states of
mind, have to all outward appearances agreed with sufficient certainty in the
same terms on the subject-matter, then the contract is good unless and until it
is set aside for fail- ure of some condition on which the existence of the
contract depends, or for fraud, or on some equitable ground. Neither party can rely
upon his own mistake to say that it was a nullity from the beginning, no matter
that it was a mistake which to his mind was fundamental, and no matter that the
other party knew that he was under a mistake. A fortiori, if the other party
did not know of the 496 mistake but shared it. There is no doubt that the applica-
tion of the doctrine of mutual mistake depends upon the true construction of
the contract made between the parties. A mutual misunderstanding will not
nullify a contract but only if terms of the contract construed in the light of
the nature of the contract and of the circumstances believed to exist at the
time it was done show that it was never intend- ed to apply to the situation
which in reality existed at that time, will the contract be held void. Mistake
as to the quality of the article contracted for may not always avoid the
contract.
As
Lord Atkin said in Bell v. Lever Bros Ltd. (supra) mistake
as to the quality of the thing contracted for raises more difficult questions.
In such a case a mis- take will not affect assent unless it is the mistake of
both parties, and is as to the existence of some quality which makes the thing
without the quality essentially different from the thing as it was believed to
be. A distinction has, therefore, to be made between a mistake as to substance
or essence on the one hand, and a mistake as to quality or attributes on the
other. A mistake of the former type, will avoid the contract whereas a mistake
of the latter type will not. Such a distinction was made in Kennedy v. Panama,
Royal Mail Co. Ltd., (supra). It may be said that if there be misapprehension
as to the substance of the thing there is no contract; but if it be a
difference in some quality or accident, even though the misapprehension may have
been the actuating motive to the purchaser, yet the contract remains binding.
Thus a mistake as to an essential and integral element in the subject-matter of
the contract will avoid the contract. A mistake will not affect assent unless
it is the mistake of both parties, and is as to the existence of some quality
which makes the thing without the quality essential- ly different from the
thing as it was believed to be. A distinction, therefore, should be drawn
between a mistake as to the substance of the thing contracted for, which will
avoid the contract and mistake as to its quality which will be without effect.
According to circumstances even a mistake as to the substance of the thing
contracted for may not necessarily render a contract void as was observed in Solle
v. Butcher (supra). Similarly in Frederick E. Rose (London) Ltd. v. William H. Pim
Junior & Co. Ltd., [1953] 2 Q.B. 450 where both parties entered into a
contract for the sale of horse-beans, which were quite different from the feveroles
which they each believed them to be, yet the contract was held not to be void.
Thus there must be a difference so complete that, if the contract were enforced
in the actual circumstances which have unexpectedly emerged, this would involve
an obligation fundamentally different from that which the parties believed they
were undertaking.
In
Sheikh. Brothers Ltd. v. Arnold, [1957] A.C. 136; Belly. Lever Bros
(supra) was applied.
497
Applying the above principles of law to the facts of the instant case, we find
that the two fishing trawlers Ave Maria-I and Ave Mariall were imported by the
respondent on 30.1.1974 and were operated by him based at Vishakapatnam.
At the
time of negotiations survey report relating to the trawlers dated 20.2. 1977 of
ABS Worldwide & Technical Services India Pvt. Ltd. was handed over by the
respondent to the appellant and thereafter the agreement was executed on
21.3.1977. Delivery of the trawlers was to be made seven days after receipt of
the approval or no objection certifi- cate for carrying out inspection to
ascertain repairs to be carried out for making the trawlers fully operational
and to ascertain the cost of such repairs. On 10.7. 1977 trawlers were
delivered to the charterer for inspection and repairs.
On
12.11.1977 the charterer wrote to the owner asking for payment of hire charges
from 1.10.1977 and pointing out delays in repairs. The owner also requested the
charterer to pay port charges with effect from 1.10.1977. On 2.2.1978 the
charter party was modified to the extent that charter hire would commence from
15.1.1978 and that as the charterer had incurred substantial charges on repairs
the owner shall bear only Rs. 1.5 lakhs per trawler for repairs carried out up
to the commencement of the charter hire. The charter hire was revised to Rs.6,25,000
per trawler per year and an amount of Rs.6,70,000 paid towards deposit and
charter hire from 15.1.1978 to May 1978. In the first week of March, 1978 the charterer
paid Rs. 1,04,000 towards charter hire for June 1978. On 18.7.1978 the charterer
wrote to the owner setting out payments made and claiming adjustment of Rs.90,000
towards repair charges and transferring Rs.14,000 towards charter hire. It was
only on 14.9.1978 that the charterer for the first time raised some complaints
and objections on the trawlers and questioned the very validity of the agree- ment.
On 14.9. 1978 the trawlers were inspected by Kamath & D'Abrie Marine
Surveyors who submitted their report on 26.9. 1978 and the suit was filed on
29.9. 1978.
The
appellant-plaintiff's averment, as we have already mentioned, is that the
trawlers suffered from inherent and latent defects in the refrigeration system
which was an essential part of such trawlers and which were not discover- able
by ordinary diligence at the time of entering into the agreement on 21st March 1977 and as such they were not fully
operational. It is not their grievance that there was no refrigeration system
at all in the trawlers but that only it was not of a particular standard,
namely that even after extensive repairs it could not be brought to the
standard of minus 20 degree F but attained only minus 10 degree F. The learned
counsel for the appellant submits that 498 for deep sea fishing the temperature
in the trawler's fish- hold has to be minus 20 degree F and minus 10 degree F
would not be adequate and as a result the trawlers cannot be used for deep sea
fishing. The grievance has been made that no opportunity to lead expert
evidence on this question was available to the appellant. The question,
therefore, arises under the facts and circumstances of the case, namely,
whether the deficiency in the refrigeration systems to the extent of minus 10
degree F made the trawlers essentially different from trawlers with a
refrigeration system of minus 20 degree F. The other question is whether this
standard of the refrigeration system was in the minds of the parties at the
time of entering into the contract and there was a mutual mistake regarding
this, and the contracting minds were, therefore, not ad idem. From the series
of steps taken for repairs and the stipulations in the charter party in- cluding
the modifications thereof we are unable to hold that it was a case of mutual
mistake as to a quality which made the trawlers transferred essentially
different from the trawlers that the parties in their minds agreed to transfer.
This
being the position we have to agree with the learned courts below that there
was no mutual mistake and the con- tract would not be avoided on this ground.
The
next question is that of illegality or otherwise of the agreement. The learned
trial court exercised its discre- tion to go into the question and arrived at
the finding that there was no illegality on the ground of violation of the
permission or the condition of licence granted by the Chief Controller of
Exports and Imports. The learned lower appel- late court upheld that finding.
It is settled law that where the subject matter of a reference is illegal no
award can be of any binding effect. In Taylor v. Barnett, [1953] W.L.R. 562; the plaintiff had agreed to purchase
goods from the defendants. The defendants had agreed to deliver. The goods were
subject to the price control, sales at price in excess of the control price
being forbidden by regulations at the time of making the contract (though not
at the time of the delivery). The control price was less than the agreed price.
The
umpire awarded the plaintiffs damages and the award was good on the face of it,
but it was held that the award should be set aside for illegality. If the
contract itself was illegal, the controversy as to whether it was illegal or
not would not be a dispute arising out of the contract as also would be the
question whether the contract was void ab initio. When, however, it is found
that a binding contract was made which was not illegal what follows from such a
contract would be covered by the expression "dispute arising out of the
contract". To stay a suit under section 34 of the Act the Court has to
see, inter-alia, whether there was a valid agreement to have the dispute
concerned settled by arbitration and that the 499 proceedings are in respect of
a dispute so agreed to be referred. In Taylor v. Barnett, (supra) Singleton J;
ex- pressed the opinion that an arbitrator is guilty of miscon- duct if he
knows or recognises that a contract is illegal and thereafter proceeds to make
award upon dispute arising under that contract. The illegality of a contract
can be an issue in deciding want of jurisdiction. The first and essen- tial
pre-requisite to making an order of stay under section 34 of the Act, as was
ruled in Anderson Wright Ltd. (supra) is that there is a binding arbitration
agreement between the parties to the suit which is sought to be stayed. Public
policy imposes certain limitations on the freedom of con- tract by forbidding
the making of certain contracts. In such cases though all other requisites for
formation of the contract are complied with, parties to such forbidden con-
tracts are not allowed to enforce any rights under them. In clear cases the law
strikes at the agreement itself by making the contract illegal. However, the
effect and nature of illegality will depend upon on the facts and circum-
stances of each case. Thus, the effects of illegality are by no means uniform.
In other words, the effect of illegality is not the same in all cases. Where a
statute makes a con- tract illegal or where a certain type of contract is ex- pressly
prohibited there can be no doubt that such a con- tract will not be enforcible.
In Rearbitration between Mahmoud and Isphani, [1921] 2 K.B. 716 by a war time statu-
tory order it was forbidden to buy or sell linseed oil without a licence from
the Food Controller. The plaintiff had a licence to sell to other licenced
dealers. He agreed to sell and deliver to the defendant a quantity of linseed
oil, and before the contract was made, asked the defendant whether he possessed
a licence, the defendant falsely as- sured him that he did. Subsequently;
however, the defendant refused to accept the oil on the ground that he had no licence.
The plaintiff having brought an action for damages for non acceptance, the
Court of Appeal refused to entertain the action even if the plaintiff-was
ignorant, at the time the contract was made, of the facts which brought it
within the statutory prohibition observing that it was a clear and unequivocal
declaration by the legislature in the public interest that this particular kind
of contract shall not be entered into. A contract which was not illegal from
the beginning may be rendered illegal later by the method of performance which
did not comply with the statutory require- ments. The appellant's burden was to
show that the charter party was illegal to take it out of the arbitration
clause for if the contract is illegal and not binding on the par- ties the
arbitration clause would also be not binding. Once it is shown to have been
illegal it would be un enforcible as ex turpi causa non oritur actio. Again it
is a settled principle that one who knowingly enters into a contract with
improper object cannot enforce his rights there under. The learned 500 counsel
for the appellant submitted that the import of trawlers was subject to the
conditions of the import li- cence, and one of the conditions was that the
goods imported under it will be utilised in the licence holder's factories and
that no portion thereof will be sold or will be permit- ted to be utilised by
any other party or placed with any financier other than the banks authorised to
deal in the foreign exchange and State Financial Corporation, provided that
particulars of goods to be pledged are reported by the licence to the licencing
authorities. We are of the view that this was a proforma condition in the licence
No.
P/CC/206299
dated3.3.1971 and could not appropriately be applied to the two imported
trawlers. Needless to observe that the appellant plaintiff was also a party to the
agree- ment of charter party in respect of the two imported trawl- ers. We are
also of the view that though it purported to be actual user's licence there was
no violation of this condi- tion in view of the express permission granted by
the Con- troller vide his Memo No. GG.IV/28/143/70/71/374 dated 17.8.1977 with
specific reference to the licence No.P/CC/2062299 dated 3.3.1971 allowing the
chartering of the two imported trawlers to be delivered to plaintiff M/s.
I.T.C. India Ltd. We also agree with the learned courts below that the
modifications dated 2.2.1978 did not make any alteration so as to make the
agreement contrary to the terms and conditions of the permission inasmuch as
the permission was for a period of three years. The option to continue hire of
the trawler for a further period of three years did not ipso facto violate the
permission. There was also no viola- tion as to the duration of the charter
party.
The next
question is whether the dispute under the charter party raised in the suit are arbitrable.
The divi- sion bench held that the learned Single Judge was right in so far as
he held that the matters were arbitrable apart from the question of illegality,
invalidity of the contract.
We
agree with this view inasmuch as it is obvious that the question of invalidity
of the contract due to the alleged mutual mistake would be de hors and
independent of the contract and as such would not be referable under the arbi- tration
clause, In so far as the question of illegality of the charter party is
concerned as the appellant plaintiff has not established that the charter party
was illegal or void ab initio the question whether the modification as alleged
had rendered the contract illegal would be covered by arbitration clause which
reads:
"Any
dispute or difference at any time arising between the parties hereto in respect
of the construction meaning or effect or as to the rights and liabilities of
the parties afore- said hereunder or any other matter arising out of this 501
agreement, shall be referred to arbitration in accordance with the subject to
the provision of the Indian Arbitration Act, 1940 or any statutory modification
or re-enactment thereto or thereof for the time being in force and the venue of
Arbitration shall be Madras or Cal- cutta, and not elsewhere and the Award or
Awards in such arbitration shall be made a rule of court of competent
jurisdiction at the instance of either party".
We
agree that under the above clause the reliefs claimed in the suit other than
the question of ab initio invalidity or illegality of the contract would be
referable. However, it will be within the jurisdiction of the arbitrator to
decide the scope of his jurisdiction as we have said earlier that the court
cannot make a contract between the parties and its power ends with
interpretation of the contract between them. The same principle also applies to
the arbi- tration agreement unless of course, the parties to the arbitration agreement
authorises the court to make and modify the agreement for themselves.
Mr.
C.S. Vaidyanathan for the respondents states that the respondent shall have no
objection to a retired Judge of the Supreme Court being appointed as Arbitrator
and the respondents shall not raise the question of limitation as indicated by
Mr. Shanti Bhushan learned counsel for the appellant. We have no doubt that the
Arbitrator so appointed shall proceed in accordance with law to decide the
questions including that of the jurisdiction, if raised.
In the
result, we find no merit in this appeal and hence it is dismissed leaving the
parties to bear their own costs.
T.N.A.
Appeal dis- missed.
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