# l.T.C. LIMITED v. GEORGE JOSEPH FERNANDES & ANR

- **Citation:** [1989] 1 S.C.R. 469
- **Court:** Supreme Court of India
- **Decided:** 1989-02-06
- **Bench:** G.L. Oza, K.N. Saikia
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/l-t-c-limited-v-george-joseph-fernandes-anr-10243
- **Pages:** 33

## Headnote

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.
'"I:
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.
A
B
c
D
E
)
Fishing trawlers-Refrigeration system-Deficiency-Required
F
temperature Minus 20 Degree F-Attained temperature Minus JO
Degree F-Whether mutual mistake.
Words & Phrases: Naturali ratione inunitilis.
Ex turpi causa non oritur actio--Meaning of.
Under an import licence dated 3rd March, 1971 issued by the
Chief Controller of Imports and Exports the respondent imp<trted two
fishing trawlers with the financial assistance of the second respondentCanara Bank. The respondent conducted 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
469
G
H
A
B
c
D
E
470
SUPREME COURT REPORTS
[1989) 1 S.C.R.
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 1o 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 charterer 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 charterer 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
.lo
F
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
G 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
discovered to be mistaken becau

## Text

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l.T.C. LIMITED
v.
GEORGE JOSEPH FERNANDES & ANR.
FEBRUARY 6, 1989
[G.L. OZA AND K.N. SAIKIA, JJ.]
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.
'"I:
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.
A
B
c
D
E
)
Fishing trawlers-Refrigeration system-Deficiency-Required
F
temperature Minus 20 Degree F-Attained temperature Minus JO
Degree F-Whether mutual mistake.
Words & Phrases: Naturali ratione inunitilis.
Ex turpi causa non oritur actio--Meaning of.
Under an import licence dated 3rd March, 1971 issued by the
Chief Controller of Imports and Exports the respondent imp<trted two
fishing trawlers with the financial assistance of the second respondentCanara Bank. The respondent conducted 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
469
G
H
A
B
c
D
E
470
SUPREME COURT REPORTS
[1989) 1 S.C.R.
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 1o 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 charterer 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 charterer 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
.lo
F
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
G 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
discovered to be mistaken because of the deficiency in the refrigeration
H system and it rendered the agreement void.
l.T.C. v. G.J. FERNANDES
471
-
~
The respondent tiled an application under Section 34 of the ArbiA
!ration 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-comB
+
pliance 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 agree-
, ,,
ment 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 c
of the parties it was not necessary to set down the matter for trial on
evidence; there was no illegality 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 parties; 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 D
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.
E
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) assmi,iing that
"'
the subject-matter was arbitrable, the court should not have exercised
its jurisdiction on the application under Section 34 because it involved
F
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
G
mutual mistake, the arbitration clause perished with it and the courts
. .,J
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
H
472
SUPREME COURT REPORTS
[1989] 1 S.C.R,
A 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
jurisdiction. The term "arbitration agreement" inclu<les "agreement
B to refer", and "submission" to Arbitrator. A submission forming part
of a void contract is itself void and canppt be enforced. [484B-C]
C
1.1 Whether a particular dispute arising oμt 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. 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, 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
D 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 containin~ the
E arbitration clause, the court has to decide first of all whether there is a
binding arbitration agreement, even thQ!'gh it may inrolve incide11tally
a decision 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 sl!rely have
F jurisdiction to decide even that dispute. The proper approach would be
to examine the issue raised in the suit and to 3scert11in whether 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 pr not to cle~ide
G 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 parent contract to
be void ab initio or illegal or non-existent, it will be without jμrisdlctioq
to gnlnt stay. If the challenged contract is foupd to be valid and blqding
and the dispute raised in the suit covered by the arbitration clause, stay
H of the suit may be justified. [49IF-G; 492A-B, D-F]
t
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I.T.C. v. G.J. FERNANDES
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. I 492F-G I
3. Where the validity, existence or legality of the contract is challenged in suit on grounds de hors, independent 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 applicable, in appropirate cases, having regard to the nature of the dispute raised iri the
ple2dings of the suit, the compass and scope of the arbitration clause in
the cotract, 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 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
A
B
c
D
the charter party. It cannot, therefore, be said that the validity or
otherwise of the charter party was covered by the arbitration clause. [4890-EI
E
Jee Lae v. Lord Dalmeny. [1927) I Ch. 300; Heyman v. Darwins.
[1942] A.C. 356; Monro v. Bognar Urban District Council, [1915] 3
K.B. 167; Jawaharlal Burman v. Union of India, [1962) 3 S.C.R. 769:
Waverly lute Mills Co. Ltd. v. Raymon & Co. (India) Pvt. Ltd., [19631
3 S.C.R. 209; A.LR. 1963 S.C. 90; Khardah Co. Ltd. v. Raymon & Co.
F
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., [19261
A.C. 497; applied.
G
Banwari Lal v. Hindu College, A.LR. 1949 East Punjab 165;
Johurmul/ 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.LR. 1952 Patna 352; Narsingh Prasad v. Dhanraj Mills. I.L.R. 21
Patna 544; A.LR. 1943 Patna 53; Birla Jute Manufacturing Co. Ltd. v.
Dulichand, A.LR. 1953 Calcutta 450; W. F. Ducat & Co. Pvt. Ltd. v.
H
474
SUPREME COURT REPORTS
[19891 1 S.C.R.
A
Hiralal Panna!al, A.I.R. 1976 Calcutta 126; General Enterprises 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. [4938-CI
B
All the relevant documents and affidavits were before the Court
c
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. [492H; 4938)
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 fo 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 ArbiD
tration 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)
E
Ormarod v. Todmordon, [1882] 8 Q.B.D. 664; Charles Osen/on
and Co. v. Johnston, [1942] A.C. 130; Gardner v. Jay, [1885] 29 Ch. D.
50; Printers (Mysore) Pvt. Ltd. v. Parhan Joseph, [1960] 3 S.C.R. 713,
applied.
t
5. Where the parties make mutual mistake misunderstanding
\·
F
each other and are at cross purposes, there is no real correspondence of
".jj
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 suhjectG
matter of the contract has already perished. A contract 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. [493H; 494A-BI
6. A mistake will not affect assent unless it is the mistake of both
H
parties, and is as to the existence of some quality which makes the thing
+
~- .
l.T.C. v. G.J. FERNANDES
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 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 mistake but shared it. 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". [496E; 49SG-H]
A
B
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 construed in the light of the nature of the contract and
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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 contract. A mistake as to the quality of the article contracted
D
for may not always avoid the contract. 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. Thus there must be a difference so complete that, if, E
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
F
in the charter party including the modifications thereof, it is not possi- .
hie 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. l498C-D I
G
'
Cooper v. Phibbs, 11867] L.R. 2 H.L. 149; Earl Beauchamp v.
Winn., 11873] 6 H.L. 223; Huddersfield Banking Co. v. Henry Lister &
Sons, 11895] 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, 11950) l K.B. 671;
H
A
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c
D
476
SUPREME COURT REPORTS
[19891 1 S.C.R.
Fraderick £.Rose (London) Ltd. v. William H. Pim Junior & Co. Ltd.
[19531 2 Q.B. 450; Sheikh Brothers Ltd. v. Arnold, [19571A.C.136;
referred to.
U.P. Government v. Nanhoo Mal, A.LR. 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 he covered by the expression ."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, G-H; 499AI
IO. 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
E
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 I
F
I I. 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 he not binding. Once it is shown to
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have been illegal it would be unenforcible as ex turpi causa non oritur
11ctio. [499G-HI
12. One who knowingly enters into a contract with improper
object cannot enforce his rights thereunder. The appellant in the instant
case was also a party to the agreement of charter party in respect of the
H
two imported trawlers. Though it purported to be actual user's licence
(
~
)
' f
l.T.C. v. G.J. FERNANDES
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 trawlers. 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 violation as to the dtiration of the charter
party. [499H; SOOC-E]
Taylur v. Burnell, [195311 W.L.R. 562; Anderson Wri!(ht Ltd. v.
Moran and Company, [1955] I S.C.R. 862; Jn Re arbitration between
Mahmoud and Jsphani, [1921] 2 K.B. 176; applied.
13. The Courts below were right in holding that the matters were
arbitrable apart from the question of illegality, 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. [SOOF-G I
14. In the instant case, 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. The Court cannot make a contract
between the parties and its power ends with the interpretation of the
contract between them. The same principle also applies to the arbitra-
. lion agreement unless the parties to the arbitration agreement
authorises the court to make and modify the agreement. The arbitrator
shall proceed in accordance with law to decide the questions including
that of jurisdiction, if raised. [SO I C-D, El
CIVIL APPEALLATE 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
A
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D
E
F
G
D .N. Mishra for the Appellant.
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478
SUPREME COURT REPORTS
[19891 1 S.C.R.
C.S. Vaidyanathan, S.R. Selia, 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 appel8
late 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
C
29. 9. 1978 in the original side of the Calcutta High Court
against the respondent as first defendant 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 Registrar of Indian Ships,
D 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
E 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 2 lst 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
F
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 at the Port.
of Vishakapatnam for carrying out the inspection of the said trawlers
by its authorised ageGts to ascertain repairs to be carried out to the
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trawlers for making them fully operational without any defect whatsoever and also to ascertain the cost of such repairs and thereafter the
Charterer 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
H
case the condition is fully satisfied according to the Charterer, and the
1.T.C. v. G.J. FERNANDES [SAIKIA, J.]
479
t
·owner furnishes to the Charterer all documents certifying sea-worthiA
ness 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 B
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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 Controller 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 c
month per trawler for a period of three years; that the owner delivered
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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 atCalcutta; and that according to the agreement after D
modification, the charter hire commenced 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
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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 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
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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 operaG
_...
tional 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
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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 ,341 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 ~greement and its modifications which went to the root and affected the very substance of the
same and which made its performance 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 rescinded 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 reasonably 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.39,64,341 as money paio to and or on account of the first defendant
and expenses so incurred without any consideration and or for consideration which has totally failed and/or to the use of the first
defendant.
The palintiff accordingly claimed, inter-alia, a declaration that
the agreement dated 2 lst 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 defendant; and further and other reliefs.
In the matter of the aforesaid S~it No. 736 of 1978, hereinafter
H referred to as 'the suit', the first defendant after receiving summons
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I.T.C. v. G.J. FERNANDES ISAIKIA, J.I
481
and entering appearance moved on 25th April, 1979 and application
A
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 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 defendant filed affidavit in reply.
The learned Single Judge in his judgment dated 11.2.1981 held,
inter alia, that there was no question of invalidity for non-compliance
of the conditions of the licence granted to the first defemlant-applicant
as necessary permission was obtained in respect of the agreement from
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the Chief Controller of Imports and Exports vide his letter dated 18th
August, 1977 and the modification of the agreement on 2nd February,
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1978 could not and did not materially alter its terms to impair its
validity and there was substantial 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
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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 provisions of the
Import and Export Control Act, 1947, and Appendix 31 of the Import
& Export Trade Control Hand Book for Rules and Procedures, 1979,
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the correspondence between the parties before the alleged discovery
of purported mistake and illegality by the respondent (plaintiff) and
particularly the letter dated 18th July, 1978 from the respondent No. 1
(plaintiff) to the applicant !(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 illegality or any mutual mistake; that the alleged
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fundamental breach is wholly covered by the arbitration clause as it is
wide enough to include the same; that the arbitration clause is valid
and binding between the parties; that the allegation of breach of contract and the claims made are within the jurisdiction of the arbitrator;
and that all the conditions 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 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 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. appellant 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 jurisdiction, it shoud 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
I.T.C. v. G.J. FERNANDES [SAIKIA, J.]
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 affidavits 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
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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
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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
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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.arbitraF
tion 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 G
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 accordance
with the arbitration agreement and that the applicant was,
at the time, when the proceedings were commenced, and
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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 agreement 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 arbitrator.