TMI Blog1989 (2) TMI 410X X X X Extracts X X X X X X X X Extracts X X X X ..... 0th January, 1974 and No. 1568 dated 30th January, 1974 with the Registrar 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 Objection 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 defendant owner will deliver the said trawlers to the plaintiff charterer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n subject to two conditions, namely, that the charter rental would be ₹ 50,000 per month and that the charter would be for a period of three years but the agreement 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 charter rent as agreed up to and for the month of Jul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... age 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 defendant; 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 and entering appearance moved on 25th April, 1979 and application under section 34 of the Arbitration Act, 1940, hereinafter 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 contained 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 servants 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, contentions alleged to have arisen between the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, interalia, 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 improperly; 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 question ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, therefore, 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 proceedings; and if satisfied that there is no sufficient reason why the matter should not be referred in acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct 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 contract. If the parties substitute a new contract for the contract which they have abrogated the arbitration clause in the abrogated contract cannot be invoked for the determination 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 entered 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 specifications. The plaintiff having brought an action against ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ms 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, D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ators 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, misrepresentation 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 noncompliance of the statutory requirement, the court should decline to exercise discretion in favour of the stay of the suit. Similarly in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly. 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 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 agreement or an award to have the effect of either ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vernment 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 Company, [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 agreement. 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 Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment 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 opportunity 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. Mor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eir 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 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 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 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontract 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 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 standard 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 Thankerton 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 subject-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 intention, though neither realises that the respective promises have been misunderstood, there is mutual mistake. The illustration 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 Zephyr. In su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acted 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 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 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tial charges on repairs the owner shall bear only ₹ 1.5 lakhs per trawler for repairs carried out up to the commencement of the charter hire. The charter hire was revised to ₹ 6,25,000 per trawler per year and an amount of ₹ 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 ₹ 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 ₹ 90,000 towards repair charges and transferring ₹ 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 agreement. 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 discoverable by ordinary dil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 proceedings are in respect of a dispute so agreed to be referred. In Taylor v. Barnett, (supra) Singleton J; expressed the opinion that an arbitrator is guilty of misconduct if he knows or recognises ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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. Again it is a settled principle that one who knowingly enters into a contract with improper object cannot enforce his rights thereunder. The learned counsel for the appellant submitted that the import of trawlers was subject to the conditions of the import licence, 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 permitted 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 appell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 arbitration 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 henc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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