Holding

A stay under Section 34 may be granted only if a valid arbitration agreement exists, and while the court may decide the existence or validity of that agreement (even incidentally addressing the parent contract’s validity), the arbitration clause does not cover disputes about the contract’s own validity or illegality; consequently, the lower courts correctly stayed the suit as the dispute was arbitrable and there was no mutual mistake or illegality.

Summary

The appellant, I.T.C. Ltd., chartered two imported fishing trawlers from the respondents but later claimed the vessels were defective and that the charter party was void due to a mutual mistake about the refrigeration system and alleged violation of import licence conditions. The respondents filed an application under Section 34 of the Arbitration Act, 1940 seeking a stay of the suit, arguing that the dispute was covered by the arbitration clause in the charter party. The Supreme Court examined whether a court can decide the validity of the contract containing the arbitration clause, whether such a decision can be made on affidavits alone, and whether the alleged mutual mistake and alleged illegality were arbitrable. It held that a stay can be granted only if a valid arbitration agreement exists, that the court may determine the existence or validity of that agreement even if it incidentally decides the parent contract’s validity, but that the arbitration clause does not extend to disputes about the contract’s own validity or illegality. Applying these principles, the Court found no mutual mistake or illegality, held the dispute arbitrable, and concluded that the lower courts had correctly exercised their discretion to stay the suit. The appeal was dismissed.

Issues considered

Whether a court has jurisdiction under Section 34 of the Arbitration Act, 1940 to decide the validity of a contract containing an arbitration clause.
Whether the validity of the arbitration agreement and the underlying contract can be decided on affidavits and documents without oral evidence.
Whether the dispute concerning alleged mutual mistake about the refrigeration system is covered by the arbitration clause.
Whether the charter party is void ab initio under Section 20 of the Contract Act, 1872 on the ground of mutual mistake.
Whether the charter party is illegal or void for contravening the conditions of the import licence and public policy.
Whether an arbitration clause perishes when the underlying contract is held void or illegal.

Legislation cited

Arbitration Act, 1940s. 32, s. 33, s. 34
Constitution of Indias. 136
Import and Export (Control) Act, 1947
Indian Contract Act, 1872s. 20

Subjects

ArbitrationSection 34Stay of suitMutual mistakeContract validityIllegalityArbitration clauseImport licenceCharter partyPublic policy

Judgment

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

FEBRUARY 6, 1989

+ [G.L. OZA AND K.N. SAIKIA, JJ.] B

Arbitration Act, 1940: Sections 32, 33, 34.

Stay of Legal Proceedings-Whether court has jurisdiction to
r decide validity of contract containing Arbitration clause--Existence of a
valid agreement-Whether condition precedent.
c
'"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. D

Interference by Supreme Court-With discretion of courts under
Section 34 of Arbitration Act, 1940-When called for.

Contract Act, 1872: Section 20.
E
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 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.
G
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 respondent-
Canara Bank. The respondent conducted negotiations with the appel-
lant for a charter-party agreement in respect of the said trawlers. On
21st March, 1977, an agreement between the parties was executed H
469
470 SUPREME COURT REPORTS [1989) 1 S.C.R.

under which the appellant agreed to take on charter hire the said two
A
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
B 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
c 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.
D
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.
E
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 funda-
mental 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 Arbi-
A
~ !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 agree-
ment dated 2nd February, 1978 which was binding between the parties.

The Single Judge held that there was no invalidity for non-com- B
+ 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
of the parties it was not necessary to set down the matter for trial on
c
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
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
F

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]
t
1.1 Whether a particular dispute arising oµt of a particular con-
tract 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 pro-
C
visions 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 arbitra-
tion 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]
I.T.C. v. G.J. FERNANDES 473

2.1 In the instant case, considering the issues raised, the arbitra-
A
tion clause and the surrounding circumstances and the part played by
the parties pursuant to the charter party since execution to the modi-
fication 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. I492F-G I
B
+ 3. Where the validity, existence or legality of the contract is chal-
lenged 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 appro-
pirate 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 c
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 agree- D
ment. [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, 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 Com-
pany, [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
and were considered by it. Therefore no illegality was committed by the t
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
c 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 Arbi-
D 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.

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 suhject-
G 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
A
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 B
+ words or conduct. The court has to ascertain the "sense of the
promises". [496E; 49SG-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 construed in the light of the nature of the contract and C
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 fundamen-
tally different from that which the parties believed they were under-
taking. [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
476 SUPREME COURT REPORTS [19891 1 S.C.R.

Fraderick £.Rose (London) Ltd. v. William H. Pim Junior & Co. Ltd.
A
[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.
B
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
c 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
D
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 illega-
lity 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
G 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
l.T.C. v. G.J. FERNANDES 477

there was no violation of this condition in view of the express permission A
granted by the Controller of Imports and Exports allowing the charter-
ing 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 per- B
mission. There was also no violation as to the dtiration of the charter
party. [499H; SOOC-E]
)
'
f 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.
c
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 D
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 con-
tract 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 E
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 F
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. G

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. H
478 SUPREME COURT REPORTS [19891 1 S.C.R.

C.S. Vaidyanathan, S.R. Selia, K.V. Mohan and K.V. Viswa-
A
nathan for the Respondents.

The Judgment of the Court was delivered by

K.N. SAIKIA, J. This appeal by special leave is from the appel-
8 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
G trawlers for making them fully operational without any defect what-
soever 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 con-
duct 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

·owner furnishes to the Charterer all documents certifying sea-worthi-
t ness and also supplies proof of compliance of pre-condtions, the Char-
A
ter 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
+ 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
month per trawler for a period of three years; that the owner delivered
c
the said two trawlers for repairs to the plaintiff at Vishakapatnam on
-t' or about 30th September, 1977 and thereafter on or about 2nd
February, 1978 the parties agreed to modify the agreement in the man-
ner 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 per-
mission dated 18th August, 1977 granted by the Chief Controller of
Imports & Exports to the first defendant for chartering the said E
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 F
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 opera- G
tional and free from all defects by effecting repairs as contemplated
_... thereby but the assumption was mistaken and not true and was sub-
sequently 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 H
480 SUPREME COURT REPORTS [1989] 1 S.C.R.

charter rent as agreed up to and for the month of July 1978, but in or
A
about early September 1978 the plaintiff having discovered the agree- -+
ment to have been void and illegal called upon the first defendant to
take back or obtain permission of the said trawlers lying at Visha-
kapatnam 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
B 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 modifica-
tions which went to the root and affected the very substance of the
c 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
D 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 com-
pensate and such loss and damage is assessed reasonably at
Rs.39,64.341 particulars whereof have been given in Schedule 'D'
E 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 con-
sideration which has totally failed and/or to the use of the first
defendant.

F 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
G 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
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 respon-
dent 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 B
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 bind-
c
ing 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.
D
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
the Chief Controller of Imports and Exports vide his letter dated 18th
August, 1977 and the modification of the agreement on 2nd February, E
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 F
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, G
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 H
482 SUPREME COURT REPORTS [1989) 1 S.C.R.

fundamental breach is wholly covered by the arbitration clause as it is
A
wide enough to include the same; that the arbitration clause is valid
and binding between the parties; that the allegation of breach of con-
tract 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
B 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,
c 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
D 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
E that there was no breach of conditions of the permission or the pro-
visions 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.

F Mr. Shanti Bhushan, the learned counsel for the. appellant sub-
mits, inter-alia, that the subject matter of the suit, namely, the ques-
tion 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
G ought not to have exercised jurisdiction on the application under sec-
tion 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
H 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 allega- A
tions 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 B
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
c
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 D
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 E
decided on affidavits or on evidence.

To decide the question we may conveniently refer to the pro-
visions of section 34 of the Arbitration Act;

Section 34: Power to stay legal proceedings where there is an.arbitra- F
tion agreement. Where any party to an arbitration agree-
ment 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 H
484 SUPREME COURT REPORTS [1989] 1 S.C.R.

still remains, ready and willing to do all things necessary to
A
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
B 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. A submission forming part
of a void contract is itself void and cannot be enforced. Where a firm of
c 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 unen-
forceable and that the defendants could not be compelled to submit to
arbitration: Joe Lee v. Lord Dalmeny, [1927] 1 Ch. 300. Where there is
D no valid arbitration agreement on the subject matter of the suit, there
is no justification for staying a suit for that will deprive the plaintiff of
his right to sue on that subject matter.

In Heyman v. Darwins, [1942] A.C. 356, Lord Macmillan
pointed out at Pages 370-371:
E
"If it appears that the dispute is whether there has ever been
a binding contract between the parties, such a dispute can-
not 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
F 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 arbit-
ration cluase in the contract sought to be set aside. Again,
an admittedly binding contract containing a general arbit-
ration clause may stipulate that in certain events the con-
G tract shall come to an end. If a question arises where the
contract has for any such reason come to an end I can see
no reason why the arbitrator should not decide that ques-
tion. 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
H arbitration clause in the contract, it perishes with the con-
I.T.C. v. G.J. FERNANDES !SAIKIA, J.I 485

tract. If the parties substitute a new contract for the con-
A
tract which they have abrogated the arbitration clause in
the abrogated contract cannot be invoked for the deter-
mination of questions under the new agreement. All this is
more or less elementary."

Earlier in Monro v. Bognor Urban District Council, 11915) 3 B
K.B. 167; where a building contract had been entered into between the
plaintiff and the defendants for a construction of sewerage works con-
tained 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 dis-
putes arose between the parties mainly as to the nature of the site upon c
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 where-
by he was induced to enter into the contract, the defendants took out a D
summons asking that all proceedings in the action be stayed and the
matter be referrd 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 E
the arbitration clause.

In Jawaharlal Burman v. Union of India, 11962) 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 arbitration agreement or award on any
ground whatsoever. Thus if a party affirms the existence of an arbitra- F
tion 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
existence or validity of an arbitration agreement. It was held that G
having regard to the scheme of sections 31, 32 and 33 of the Act in
matters which fall 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 H
486 SUPREME COURT REPORTS [19891 1 S.C.R.

determined but not its existence. That means that an application to
A
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 exitence
of an arbitration agreement cannot apply under section 3 for obtaining
a decision that the agreement in question exists.

B In Waverly Jute Mills Co. Ltd. v. Raymon & Co. (India) Pvt.
Ltd., [196313 S.C.R. 209; A.LR. 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 con-
tract 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
c 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., [198511 S.C.R. 432 at
D page 507 it has been reiterated that though section 34 of the Arbitra-
tion Act, 1940 confers a discretion upon the Court in the matter of
granting stay of legal proceedings where there is an arbitration agree-
ment, it cannot be disputed that before granting the stay the Court bas
to satisfy itself that arbitration agreement exists factually and legally j,
and that the disputes between the parties are in regard to the matters
E 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 )
F Lal v. Hindu College, Delhi, i' T.R. 1949 East Punjab 165 wherein it 1
has been held at paragraph 33 that the ,ubitration Act has been enac-
ted merely with the object of consolidating the law relating to arbitra-
tions, and the question of the existence or validity of the contract
containing an arbitration agreement being not a matter falling within
the purview of the Act, it cannot be said, with any show of reason, that
i;:; 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 Co.
Ltd., 52 C.W.N. (1947-48) 137; A.LR. 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
H contract or arising out of the contract containing the arbitration clause
1.T.C. v. G.J. FERNANDES [SAIKIA, J.I 487

then the suit should be stayed. But on the other hand if the suit is A
pleaded as a suit independent of the contract then the Court has· no
power to stay the suit although it is satisified 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 B
Aggarwal, A.LR. 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
respect 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. Bognar Urban District Coun, [19151 3 K.B. 167.
In Narsingh Prasad v. Dhanraj Mills, LL.R. 21Patna544; A.LR. 1943
c
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 fall 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 D
15 that a dispute as to the validity of the contract cannot be held to be
within an arbitration agreement contained in the contrac.t itself and
such a dispute cannot be referred to arbitrators or dealt with by them
under such an agreement, unlesss 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, E
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 F
jurisdiction as well. In W.F. Ducat & Co. Pvt. Ltd. v. Hira/al Pan-
nalal, A.LR. 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 G
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.LR. 1978 Calcutta 407, Sabyasachl Mukharji, J.,
as his Lordship then was, held that if the contract containing the arbi-
tration clause was obtained by fraud the stay of the suit could not be
granted under Seetion 34 of the Act. Thus, while there is not doubt H
488 SUPREME COURT REPORTS [19891 I S.C.R.

about the law as enunciated in the above English and Indian decisions,
A
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 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 large majority of cases it would be applicable, in
B 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
c arbitration agreement. 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
D to arbitration undei the clause, for the party who denies
that he has ever entered into the contract is thereby deny-
ing that he had ever joind in the submission. Similarly, if
one party to the alleged contract is contending that it is
yoid ab initio (Because for example, the making of such a
contract is illegal), the arbitration clause cannot operate
E for on this view the clause itself also is void. But, in a
situation where the parties a:e at one in asserting that they
entered into a binding contract, but a difference has arisen
a
between them whether there has been breach by one side
or the other, or whether circumstances have arisen which
have discharged one or both parties from further per-
F formance, such differences should be regarded as dif-
ference 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."

G 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
l.T.C. v. G.J. FERNANDES [SAIKIA, J.] 489

relevant provisions of the Act will be attracted. Section 32 puts a bar to
A
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 B
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
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 evi-
dence also, and it may pass such orders for discovery and particulars as
c
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, D
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 construction, meaning or effect or as to the rights and E
liabilities of the parties thereunder 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 thereunder? In our opinion, the . F
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 Sep-
tember 7, 1955 for the purchase of certain goods and clause 14 thereto G
provided that all disputes arising out of or concerning the contract
should be referred to the arbitration of the Bengal Chamber of Com-
merce. The respondents having failed to deliver the goods as agreed
the appellants applied to the Bengal Chamber of Commerce for arbi-
tration and an award made in favour of the appellant. Thereupon the
respondent filed an application in the High Court of Calcutta under H
490 SUPREME COURT REPORTS [19891 1 S.C.R.

section 33 of the Arbitration Act, 1940 challenging the validity of the
A
award on ·the ground that the contract dated September 7, 1955 itself
was illegal as it was in contravention 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
B 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, [195511 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,
c 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 arbitra-
tion agreement. The question whether the dispute in the suit falls
within the arbitration clause really pre-supposes that there is such
D 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
E 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 eq~ally 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
F 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
G 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 con-
tract. In case of rescission it would put an end to the rights of the
parties to the contract in future but it may permit claiming of damages
either for previous breaches or for the breach which constitute the
H termination. The contract being consensual, the question whether the
J.T.C. v. G.J. FERNANDES [SAIKIA, J.l 491

arbitration clause survives or perishes would depend on the nature of A
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 determined is in the same B
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 agreementto 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
c
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 opportun-
ity for putting these and other considerations before the court that it
may determine whether the action shall be stayed or not." These D
observations were accepted by S.R. Das, Jin 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, E
decide the issue as to the existence or validity of the arbitration agree-
ment even though it may involve incidentally a decision as to the validity
or existence of the present contract (Emphasis supplied). Their Lord-
ships 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 F
section 34 of the Act an isssue 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 decision as to the validity or
existence of the parent contract. The court has to bear in mind that a
contract is an agreement enforcible at law and that it is for the parties G
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 is
outside or independent of the contract it follows that the arbitration
clause will not encompass that dispute. However, as the parties were H
492 SUPREME COURT REPORTS [1989] I S.C.R.

A 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 mis-
take or any valid reason the arbitrator will surely have jurisdiction to
decide even that dispute. Two extreme cases have to be avoided,
B namely, if simply because there is an arbitration clause all suits includ-
ing one questioning the validity or existence or binding nature of the
parent contract is to be referred to arbitrator irresepective of whether
the arbitration clause covered it or not, then in all cases of contracts
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,
c 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
D be to examine the issues raised in the ~uit and to ascertain 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 arbi-
tration clause, the court has to exercise discretion to decide or not to
decide the issue of validity or otherwise of the arbitration agreement
E 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 arbitra-
tion clause, stay of the suit may be justified. In the instant case con-
F sidering the issues raised, the arbitration clause and surrounding
circumstances and the part played by the parties pursuant to the char-
ter party since execution to the modification and thereafter till objec-
tion 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.
G
The quesrion whether the validity and legality of the parent con-
tract 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
H system in the trawlers so as to maintain 20F temperature in their fish-
1.T.C. v. G.J. FERNANDES [SAIKIA, J.] 493

~ holds are highly technical matters and given the opportunity the appel-
A
!ant plaintiff could have produced expert evidence in the matter.
Counsel, however, states, that at no stage of the porceedings 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 commited by the trial court in this regard con- B
sidering 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 disputed. 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 c
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 descretion 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 D
in justice 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, [19601 3 E
S.C.R. 713 that 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 Act. Before it can justly do so,
the appellant must satisfy the court, on the relevant facts referred by
,f~ the courts below, that they exercised their discretion in a manifestly
unreasonable or perverse way, which was likely to defeat the ends of F
justice. The appellant has failed to do so in this case.·

The next question is whether the learned courts below were cor-
reel in holding that there was no mutual mistake so as to render the
agreement void ab initio under section 20 of the Contract Act.
G
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- H
494 SUPREME COURT REPORTS [1989] 1 S.C.R.

take misunderstanding each other and are at cross purposes, there is
A
no real corrspondence of offer arid 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
B contract in such a case is void as the illustrations to the section make
clear. In U. P. Government v. Nanhoo Mal, A.LR. 1960 Allahabad 420
it has been observed that section 20 is concerned with common mistake
of fact and not mutual mistake. 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] LR. 2 H.L. 149, A agreed to take a lease of a fishery from B,
c 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 mis-
apprehension as to their relative and respective rights, the result is that
the agreement is liable to be set aside as having proceeded upon a
D 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 Huddeersfield 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, 27followed in Kennedy v. Panama Royal
E Mail Co., [1867) L.R. 2 Q.B. 580 and Smith v. Hughes, [1871) L.R. 6
Q.B. 597 described the statement of Westbury too wide and said that
the correct view was that there was a contract which the vender was
either incapable of perforrning or had committed breach of a stipula-
tion as to title; the contract was unenforceable but not void. In Bell v.
Lever Bros Ltd., (supra) an agreement of service between the com-
F pany and two of the directors of its subsidiary company was terrninated
on payment of compensation. The parties proceeded on the assump-
tion that the service agreement was not liable to immediate terrnina-
tion 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
G 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 terrns of the contract or its
surrounding circumstances 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 ah initio if the assump-
H tion is of present fact and it ceases to bind if the assumption is of future
l.T.C. v. G.J. FERNANDES [SAIKIA, J.J 495

fact. The assumption must have been fundamental to the continued
A
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 B
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 Fifoot's Law
of Contract is, if B were to offer to sell his Ford Cortina Car to A and
c
A were to accept in the belief that the offer related to a Ford Zephyr.
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 D
sense of the promises". In other words, it decides whether a sensible
third party would take the agreement to mean what A understood it to
mean or what B understood it to mean, or whether indeed any mean-
ing can be attributed to it at all. Blackbum Jin Smith v. Hughes, [1871]
L.R. 6 Q.B. 597, 607 said "if whatever a man's real intention may be
he so conducts himself what a reasonable man would believe that he E
was assenting to tbe 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 F
term can be implied in both offer and acceptance 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 G
it is set aside for failure 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 kµow of the J-1
496 SUPREME COURT REPORTS [1989] 1 S.C.R.

mistake but shared it. There is no doubt that the application of the
A
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 intended to apply to
B 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 mistake will not affect assent
unless it is the mistake of both parties, and "is as to the existence of
C 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.
D 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 pur-
chaser, yet the contract remains binding. Thus a mistake as to an
essential and integral element in the subject-matter of the contract will
E avoid the contract. A mistake will not affect assent unles 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, 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
F 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
G 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 un-
expectedly 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; Bell v. Lever Bros
H (supra) was applied.
l.T.C. v. G.J. FERNANDES [SAIKIA, J.] 497

Applying the above principles of law to the facts of the instant A
case, we find that the two fishing trawlers Ave Maria-I and Ave Maria-
n 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 B
21.3.1977. Delivery of the trawlers was to be oiade seven days after
receipt of the approval or no objection certificate 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
c
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 D
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 E
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 agreement. On
14.9.1978 the trawlers were inspected by Karnath & D'Abrie Marine
Surveyors who submitted their report on 26.9.1978 and the suit was F
filed on 29.9.1978.

The appellant-plaintiff's averment, as we have already men-
tioned, 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 diligence at tlie time of G
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 refri-
geration 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 apellant submits that H
498 SUPREME COURT REPORTS [19891 1 S.C.R.

A for deep sea fishing the temperature in the trawler's fishhold 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 grie-
vance 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
B 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 mis-
take regarding this, and the contracting minds were, therefore, not ad
C idem. From the series of steps taken for repairs and the stipulations in
the charter party including 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
D mistake and the contract would not be avoided on this ground.

The next question is that of illegality or otherwise of the agree-
ment. The learned trial court exercised ·its discretion 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
E granted by the Chief Controller of Exports and Imports. The learned
lower appellate 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, [19531 IW.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,
F sales at price in excess of the control price being forbidden by regula-
tions 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
G 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 "dis-
pute 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 agree-
H men! to have the dispute concerned settled by arbitration and that the
l.T.C. v. G.J. FERNANDES ISAIKIA, J.] 499

t proceedings are in respect of a dispute so agreed to be referred. In
A
Taylor v. Barnett, (supra) Singleton J; expressed the opinion that an
arbitrator is guilty of misconduct 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 essential pre-requisite to
making an order of stay under section 34 of the Act, as was ruled in B
lo

,
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 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 c
,;- by making the contract illegal. However, the effect and nature of
illegality will depend upon on the facts and circumstances 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 contract illegal or where a certain type of contract is expressly D
prohibited there can be no doubt that such a contract will not be
enforcible. In Rearbitration between Mahmoud and Jsphani, [1921) 2

. K.B. 716 by a war time statutory 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 con- E
tract was made, asked the defendant whether he possessed a licence,
_the defendant falsely assured 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 F
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 m·ethod of performance which did not comply with
the statutory requirements. The appellant's burden was to show that G
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 enfo•ce his rights thereunder. The learned H
500 SUPREME COURT REPORTS [1989) 1 S.C.R.

counsel for the appellant submitted that the import of trawlers was
A
subject to the conditions of the import licence, and one of the condi-
tions 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
B 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 dated 3.3.1971 and could not appropriately be applied to
the two imported trawlers. Needless to observe that the appellant
plaintiff was also a party to the agreement of charter party in respect of
the two imported trawlers. We are also of the view that though it
c purported to be actual user's licence there was no violation of this
condition in view of the express permission granted by the Controller
vide his Memo No. GG.N/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
D plaintiff M/s. l.T.C. India Ltd. We also agree with the learned courts
below that the modifications dated 2.2.1978 did not make any altera-
tion 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
E violation 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 division 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
F 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 arbitration 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
G 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
H aforesaid hereunder or any other matter arising out of this
l.T.C. v. G.J. FERNANDES [SAJKIA, J.I 501

agreement, shall be referred to arbitration in accordance A
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 Calcutta, and not else-
where and the Award or Awards in such arbitration shall
B
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 c
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.
D
Mr. C.S. Yaidyanathan 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 E
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 dismissed. F

I ::