Holding

Section 32 of the Arbitration Act, 1940 does not preclude a civil suit challenging the validity of a contract containing an arbitration clause; such a suit is maintainable.

Summary

Orient Transport Co. and another sued Jaya Bharat Credit & Investment Co. Ltd., seeking a declaration that eight agreements were loan contracts, not hire‑purchase agreements, and an injunction against enforcement. The trial, appellate and High Courts dismissed the suit, holding that Section 32 of the Arbitration Act, 1940 barred any suit concerning an agreement containing an arbitration clause. The Supreme Court held that Section 32 has a narrow scope, applying only to disputes about the existence, effect or validity of the arbitration agreement itself, not to challenges to the underlying contract. Consequently, a civil suit for declaration that the contracts are void or not hire‑purchase agreements is maintainable. The Court allowed the appeal, set aside the lower courts' orders and directed that the suit proceed.

Issues considered

Whether Section 32 of the Arbitration Act, 1940 bars a suit that challenges the validity of a contract merely because it contains an arbitration clause.
Whether a suit for declaration that the agreements are not hire‑purchase agreements but loan agreements is maintainable under civil law.

Legislation cited

Arbitration Act, 1940s. 32, s. 33
Code of Civil Procedure, 1908s. 9

Subjects

ArbitrationSection 32Contract validityHire‑purchase agreementLoan agreementCivil suitDeclarationJurisdiction

Judgment

ORIENT TRANSPORT CO. GULABRA AND ANOTHER. A
,..-,;- v.
JAYA BHARAT CREDIT AND INVESTMENT CO., LTD.,
AND ANR .
•
SEPTEMBER 7, 1987.
B
[SABYASACHI MUKHARJI AND G.L. OZA, JJ.]

+ Arbitration Act, 1940-Maintainability of suit for declaration
under section 32 thereof-In respect of agreements/contracts relating to
transaction of loan.
c
~- The appellant/plaintiffs filed a suit for a declaration that the eight
agreements/contracts executed between the appellants and the defen-
~ dant/respondent No. 1, were not 'hire-purchase agreements' but were
agreements relating to the transaction of loan. The suit was dismissed.
The appellate Court confirmed the decision of the Trial Court. There
was a second appeal to the High Court, whereafter the appellants D
moved this Court by special leave against the judgment and order of the
High Court.

Allowing the Appeal, the Court, '
HELD: The suit had been dismissed on the ground that it was not E
maintainable in view of the provisions of section 32 of the Arbitr11tion
Act, 1940. Section 32 of the Act stipulates that notwithstanding 11ny law
for the time being in force, no suit shall lie on any ground whatsoever
for a decision upon the existence, effect or v11lidlty of an arbitr11tion
agreement or award, nor shall any arbitration agreement or award be
enforced, set aside, amended, modified or in any way affected otherwise F
,
than 11s provided in the Act. [49B-C]
-\
Specific case of the appellants was that it wa• a transaction of loan
and there was in fact no agreement of arbitration. It appeared from the
plaint as well as the issues framed that the very existence of the agree-
ment described as hire-purchase agreement was put in issue. The execu· G
lion of the documents was not denied but it was alleged that these were
manipulated documents and that there were in fact n0 agreements
which contained the arbitration agreement. [SOA-C]
~
Section 32 of the Act does not contemplate the case of suits chal·
lenging the validity of a contract because it contains an arbitration H
47
48 SUPREME COURT REPORTS [ 19881 1 S.C.R.

A clause. The section bas a very limited application, namely, where the
existence of the validity of an arbitration agreement and not the con-
tract containing the arbitration agreement is challenged. [SOD-El

Every person has a right to bring a suit which is of a Civil nature
and the Court has jurisdiction to try all suits of Civil nature under
B section 9 of the Code of Civil Procedure. That right bas not been taken
away by section 32 of the Act. One of the issues, framed namely. issue
No. 4 was "whether the defendant No. 1 obtained disputed hire-
purchase agreements from the plaintiffs in pursuance of its money lend-
ing business?" The existence of the disputed hire-purchase agreements
was put in issue. It is true that the execution of an alleged document was
C not in issue, but the existence of that document as an arbitration agree-
ment was in issue. Section 32 of the Act does not purport to deal with
suits for declaration that there was never any contract or that the
contract is void. This principle is well-settled. In State of Bombay v.
Adamjee Hajee Dawood and Co., A.I.R. 19Sl Calcutta 147, the
Calcutta High Court held that section 32 of the Act does not contemp-
D late the. case of a suit challenging the validity of a contract merely
because it contains an arbitration clause. This is the correct position in
law, and in the facts and circumstances of the case, the trial Court, the
appellate Court and the High Court in this case were in error. Their
judgments and orders were set aside. [SOE-H; SIA-Cl
\.
E State of Bombay v. Adamjee Hajee Dawood & Co., A.I.R 19Sl
Cal. 147, referred to.

CIVIL APPELLAlE JURISDICTION: Civil Appeal No. 2286
of 1987.

F From the Judgment and Order dated 17. 12.1986 of the Madhya
Pradesh High Court in S.A. No. 536 of 1985. '>
V.M. Tarkunde, K.M.K. Nair for the Appellants.

Mukul Mudgal for the Respondents.
G
The Judgment of the Court was delivered by

SABYASACHI MUKHARJI, J. Special leave granted.

This is an appeal from the judgment and order of the High Court
H of Madhya Pradesh dated 17th of December, 1986. The appeal was
ORIENT TPT. CO. v. J.B. CREDIT CO. [MUKHARJI, J.] 49

filed by the plaintiff whose suit for a declaration that the eight A
agreements/contracts executed between it and the defendant No. 1
M/s. Jayabharat Credit and Investment Company Ltd. were not 'hire
purchase agreements' but were agreements relating to transaction of
loan and for injunction restraining the defendant no. 1. from enforcing
them until the decision of the suit, had been dismissed on the ground
that the suit was not maintainable in view of the provisions of section B
32 of the Arbitration Act, 1940 (hereinafter called 'the Act'). Section

+ 32 of the Act stipulates 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 otherwise than as provided C
in the said Act. The execution of documents containing the alleged
arbitration clause was not disputed in this case. The clause was as
follows:

"All disputes, differences or claims arising out of this ag-
reement shall be settled by arbitration in accordance with D
the provisions of the Arbitration Act, 1940 or any statutory
amendments thereof and shall be referred to the sole arbit-
ration of a person to be nominated by the owners. In the
event of death, refusal, neglect, inability or incapability of
the person so appointed to act as arbitrator, the owners
may appoint a new arbitrator. The award of the arbitrator E
shall be final and binding on all the parties concerned."

Various issues were framed by the trial court. The appellate
court confirmed the said decision. There was a second appeal to the
High Court. The High Court framed the question of law in the
impugned judgment as follows: F

"Whether the courts below were right in holding that sec-
tion 32 of the Arbitration Act barred the suit and in dismis-
sing the same on that ground?

It was contended before the High Court by the appellant that the G
so-called 'hire purchase agreements' were nothing else than agree-
ments entered into by the plaintiff and the defendant No. I with
respect to transaction of loan. It was the case of the appellant that the
alleged arbitration agreement was not entered into as such in the sense
though certain documents were executed, these were not properly
understood as hire purchase agreements. Therefore, the main ques- H
50 SUPREME COURT REPORTS [1988] 1 S.C.R.

A tion was whether the existence of the agreement as hire purchase ~
agreement was denied by the appellant and put in issue before the
court. Specific case of the appellant was that this was a transaction of
loan and there was in fact no agreement of arbitration. It appears from
the perusal of the plaint as well as the issues framed that the very
existence of the agreement described as hire purchase agreements was
B put in issue. The execution of the documents was not denied but it was
alleged that these were manipulated documents, in other words
fraudulent, documents and it was further the case of the appellant that
there were in fact no agreements which contained the arbitration '+·
agreement. The case of the appellant was that there was no document
containing any valid arbitration agreement in existence. This fact was
c raised
1
in the plaint and issue to that effect was raised, in other words
that the appellant, plaintiff in this case was contended that the agree-
ment described as hire purchase agreements were untrne and void
procured fraudulently. The issues framed by the learned trial judge
also included this specific point. Section 32 of the Act does not con-
template the case suits challenging the validity of a contract because it
D contains an arbitration clause. If the intention of the legislature were
that all documents containing an arbitration clause should come within
the purview of sections 32 and 33, the legislature would have said so in
appropriate words. These sections have a very limited application,
namely, where the existence of validity of an arbitration agreement
and not the contract containing the arbitration agreement is challen-
°).-.
E ged. Every person, it has to be borne in mind has a right to bring a suit
which was of a civil nature and the court had jurisdiction to try all suits
of civil nature under section 9 of the Code of Civil Procedure. That
right has not been taken away by section 32 of the Act. Such a right can
only be taken away by express terms or by necessary implication.
Section 32 of the Act does not have that effect. We have perused the
F plaint in this case; one of the issues, namely, issue No. 4 was "Whether
the defendant No. 1 obtained disputed hire purchase agreements from )._
the plaintiffs in pursuance of its money lending business?" The exist-
ence of tbe disputed hire purchase agreements were put in issue. It was
suggested that these were obtained by dubious method or that these
were fraudulently procured. It is true that the execution of an alleged
G document was not in issue but the existence of that document as an
arbitration agreement was in issue. Sections 32 and 33 of the Act on
the true construction do not purport to deal with suits for declaration
that there was never any contract or that contract is void. This princi-
pie is well-settled. The Division Bench of the Calcutta High Court
·1--
consisting of Harries, C.J. and Banerjee, J. in State of Bombay v.
H Adamjee Hajee Dawood and Co., A.LR. 1951 Calcutta 147 held that
ORIENT TPT. CO. v. J.B. CREDIT CO. (MUKHARJl, J.) 51

section 32 of the Act does not contemplate the case of a suit challeng- A
ing the validity of a contract merely because it contains an arbitration
clause. This is the correct position in law. If that is the law then in the
facts and circumstances of the case the learned trial court, the learned
appellate court and the High Court were in error in this case in dismis-
sing the suit and the appeals respectively.
B
The appeal is, therefore, allowed and the judgment and order of
the High Court and the courts below are set aside. In the facts and
circumstances of the case costs of the parties will be costs in the suit.
The suit will now proceed as expeditiously as possible.

S.L. Appeal allowed. c

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