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PETITIONER: I.T.C. LIMITED

       Vs.

RESPONDENT: GEORGE JOSEPH FERNANDES & ANR.

DATE OF JUDGMENT06/02/1989

BENCH: SAIKIA, K.N. (J) BENCH: SAIKIA, K.N. (J) OZA, G.L. (J)

CITATION:  1989 AIR  839            1989 SCR  (1) 469  1989 SCC  (2)   1        JT 1989 (1)   552  1989 SCALE  (1)283

ACT: Arbitration Act, 1940: Sections 32, 33, 34.     Stay  of Legal proceedings--Whether court has  jurisdic- tion  to decide validity of contract containing  Arbitration clause--Existence  of a valid  agreement--Whether  condition precedent.     Jurisdiction of court to decide on--Validity and legali- ty  of  contract--Whether to be decided  on  affidavits  and documents or on evidence. Constitution of India 1950, Article 136.     Interference by Supreme Court--With discretion of courts under Section 34 of Arbitration Act, 1940--When called for. Contract Act, 1872: Section 20.     Mistake  of fact--Nature of--An erroneous opinion as  to the  value  of  the  contracted  thing--Not  a  mistake   of fact--Common mistake of both parties must be about the  same vital  fact--Common mistake and Mutual  Mistake--Distinction between.     Fishing                          trawlers--Refrigeration system--Deficiency--Required  temperature  Minus  20  Degree F--Attained  temperature Minus 10 Degree  F--Whether  mutual mistake. Words & Phrases: Naturali ratione inunitilis. Ex turpi causa non oritur actio---Meaning of.

HEADNOTE:     Under an import licence dated 3rd March, 1971 issued  by the  Chief Controller of Imports and Exports the  respondent imported two fishing trawlers with the financial  assistance of  the second respondent Canara Bank. The  respondent  con- ducted  negotiations with the appellant for a  charter-party agreement  in respect of the said trawlers. On  21st  March, 1977, an agreement between the parties was executed 470 under which the appellant agreed to take on charter hire the said two trawlers for the purpose of deep sea fishing for  a period of two years with an option to continue the hire  for a  further  period of three years. Under the  terms  of  the agreement the respondent was to deliver the said trawlers to the  appellant  at Vishakhapatnam within seven days  of  the receipt of approval from the Chief Controller of Imports and

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Exports  or no objection certificate from the  Canara  Bank, for making the said trawlers fully operational and to ascer- tain  the cost of such repairs. The appellant charterer  was then  to conduct fishing trials to ascertain  actual  condi- tions and thereafter the charter hiring was to commence from the date the fishing trials were ended.     On  18th August, 1977, the Chief Controller  of  Imports and Exports granted permission to the respondent to  charter the  said trawlers to the appellant on the  conditions  that the  charter rent would be Rs.50,000 per month  per  trawler and  that the charter would be for a period of three  years. On  30th September, 1977, the respondent delivered the  said two trawlers for repairs to the appellant.     On  2nd February, 1978, the parties modified the  agree- ment  revising  the  rate of charter hire and  the  date  of commencement  of hire, to the extent that the  charter  hire would commence from 15th January, 1978 and the revised  rate of hire would be Rs.6,25,000 per trawler per year.     The appellant charterer raised objections alleging  that the  trawlers suffered from inherent and latent  defects  in the refrigeration system which was an essential part of such trawlers and as such the trawlers were not fully operational because  even after carrying out extensive repairs  the  re- frigeration  system  could not be brought  to  the  required standard  of  minus 20 degree F but attained only  minus  10 degree F.     On  29.9.1978,  the appellant instituted a suit  in  the original  side  of the Calcutta High Court  claiming  (i)  a decree  for  a sum of Rs.39,64,341  towards  cost,  charges, damages and compensation incurred on the said trawlers  and, (ii)  a declaration that the agreement was contrary  to  the terms  of the permission granted by the Chief Controller  of Imports  and  Exports and consequently illegal  and  against public  policy and void; (iii) that the Parties had  entered into the agreement on the basic fundamental assumption  that by  effecting necessary repairs the trawlers would  be  made fully  operational but the assumption was subsequently  dis- covered  to  be mistaken because of the  deficiency  in  the refrigeration system and it rendered the agreement void. 471     The respondent filed an application under Section 34  of the  Arbitration Act, 1940 praying that the suit  instituted by  the  appellant, and all proceedings  therein  be  stayed because the disputes were wholly covered by the  arbitration clause  as  contained in the modified  agreement  dated  2nd February, 1978 which was binding between the parties.     The  Single Judge held that there was no invalidity  for non-compliance  of  the conditions of  the  licence  granted because necessary permission was obtained in respect of  the agreement  from the Chief Controller of Imports and  Exports and  the modifications of the agreement did not  impair  its validity; though in a particular case if there was any doubt about  facts, the matter had to be decided by trial on  evi- dence but in the instant case, having regard to the admitted facts and conduct of the parties it was not necessary to set down the matter for trial on evidence; there was no illegal- ity  or mutual mistake; that the alleged fundamental  breach was  wholly  covered  by the arbitration  clause;  that  the arbitration  clause was valid and binding between  the  par- ties; and that all the conditions of Section 34 were  satis- fied. Accordingly, the Single Judge granted stay of the suit and directed the parties to take immediate steps for initia- tion of reference under the arbitration agreement.     The judgment and order of the Single Judge was confirmed by the Division Bench by dismissing the appeal.

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   In  this  appeal by special leave it  was  contended  on behalf of the appellants that (i) the subject-matter of  the suit, namely, the question whether the agreement was void ab initio for mutual mistake was not arbitrable; and the courts below  erred in holding so; (ii) assuming that the  subject- matter  was arbitrable, the court should not have  exercised its jurisdiction on the application under Section 34 because it involved complicated questions of fact and in  exercising such  jurisdiction  the courts acted  without  jurisdiction; (iii)  the court should have decided only after taking  oral and documentary evidence and not merely on affidavits;  (iv) the agreement was void being violative of the conditions  of the  permission granted by the Chief Controller  of  Imports and  Exports; (v) the agreement itself having been  void  ab initio  due to mutual mistake, the arbitration  clause  per- ished with it and the courts below erred in holding that the disputes were arbitrable. Dismissing the appeal, the Court, HELD:  1. Section 34 deals with the staying of a suit  where there 472 is an arbitration agreement concerning the subject-matter of the suit and between the same parties. For the Court to have power  to exercise the discretion conferred upon it by  this section, there must have been a valid agreement to submit to arbitration. Where the objection is that the arbitration  is a  nullity, it amounts to an objection of want of  jurisdic- tion.  The term "arbitration agreement" includes  "agreement to  refer",  and "submission" to  Arbitrator.  A  submission forming part of a void contract is itself void and cannot be enforced. [484B-C]     1.1  Whether a particular dispute arising out of a  par- ticular  contract is referable to arbitration or  not,  must necessarily  depend on the intention of the parties  as  em- bodied in the arbitration clause. If the dispute is squarely covered  by the arbitration clause, the relevant  provisions of  the  Act  will be attracted. The  question  whether  the dispute  in  the suit fails within  the  arbitration  clause really  pre-supposes  that there is such agreement  and  in- volves consideration of two matters, that is (i) what is the dispute  in the suit, and (ii) what dispute the  arbitration clause  covers.  It is incumbent upon the  court  to  decide whether there is a binding contract for arbitration  between the parties. If it is found that the dispute in the suit  is not  covered by the arbitration clause the  application  for stay may be dismissed. [488H; 489A]     2.  Where in an application under Section 34 of the  Act an  issue is raised as to the validity or existence  of  the contract containing the arbitration clause, the court has to decide  first of all whether there is a binding  arbitration agreement,  even though it may involve incidentally a  deci- sion as to the validity or existence of the parent contract. If the arbitration clause is so wide as to have included the very validity or otherwise of the contract on the grounds of fraud,  mis-representations,  mutual mistake  or  any  valid reason  the  arbitrator  will surely  have  jurisdiction  to decide  even that dispute. The proper approach would  be  to examine the issue raised in the suit and to ascertain wheth- er  it squarely falls within the compass of the  arbitration clause  and take a decision before granting the stay of  the suit.  If an issue is raised as to the formation,  existence or  validity  of  the contract  containing  the  arbitration clause,  the court has to exercise discretion to  decide  or not  to  decide the issue of validity or  otherwise  of  the arbitration agreement even though it may involve incidental-

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ly a decision as to validity or existence of the  challenged contract.  Should the Court find the parent contract  to  be void ab initio or illegal or non-existent, it will be  with- out  jurisdiction to grant stay. If the challenged  contract is  found to be valid and binding and the dispute raised  in the suit covered by the arbitration clause, stay of the suit may be justified. [491F-G; 492A-B, D-F] 473     2.1 In the instant case, considering the issues  raised, the arbitration clause and the surrounding circumstances and the part played by the parties pursuant to the charter party since  execution  to the modification  and  thereafter  till objection raised by the appellant-plaintiff. it must be held that the trial court did not err in proceeding to decide the issue  of  validity  or legality  of  the  parent  contract. [492F-G]     3.  Where  the validity, existence or  legality  of  the contract is challenged in suit on grounds de hors, independ- ent  of,  or external to the terms or  stipulations  of  the contract,  the court in an application under Section  34  of the Act shall have no jurisdiction to go into the  question, and  that in a large majority of cases it would be  applica- ble,  in appropriate cases, having regard to the  nature  of the dispute raised in the pleadings of the suit, the compass and  scope  of the arbitration clause in the  contract,  the surrounding  facts  and circumstances of the case  having  a bearing on the question of genuine grievance failing outside or  inside  the arbitration agreement and  the  objects  and spirit of the Arbitration Act, the Court may be justified in deciding  the validity, existence or legality of  the  chal- lenged   contract  containing  the  arbitration   agreement. [488A-C]     3.1  In the instant case, the arbitration clause  formed part of the agreement. The arbitration agreement is not  the same as the contract in the charter party. It cannot, there- fore, be said that the validity or otherwise of the  charter party was covered by the arbitration clause. [489D-E]      Jee  Lae v. Lord Dalmeny, [1927] 1 Ch. 300;  Heyman  v. Darwins,  [1942]  A.C. 356; Monro v. Bognor  Urban  District Council,  [1915] 3 K.B. 167; Jawaharlal Burman v.  Union  of India,  [1962] 3 S.C.R. 769: Waverly Jute Mills Co. Ltd.  v. Raymon  &  Co. (India) Pvt. Ltd.,3 S.C.R. 209;  A.I.R.  1963 S.C. 90; Khardah Co. Ltd. v. Raymon & Co. India Ltd., [1963] 3 S.C.R. 183; Renusagar Co. v. General Electric Co.,  [1985] 1  S.C.R.  432; Anderson Wright Ltd. v. Moran  and  Company, [1955] 1 S.C.R. 862; Damodar Valley Corporation v.K.K.  Kar, [1974]  2  S.C.R. 240; Hirji Mulji v. Cheong  Yue  Steamship Co., [1926] A.C. 497; applied. Banwari  Lal v. Hindu College, A.I.R. 1949 East Punjab  165; Johurmull  Parasram  v.  Louis Dreyfus Co.  Ltd.  52  C.W.N. (1947-48)  137 A.I.R. 1949 Cal 179; Pramada Prasad v.  Sagar Mal  Aggarwal,  A.I.R. 1952 Patna 352;  Narsingh  Prasad  v. Dhanraj  Mills. I.L.R. 21 Patna 544; A.I.R. 1943  Patna  53; Birla Jute Manufacturing Co. Ltd. v. Dulichand. A.I.R.  1953 Calcutta 450; W.F. Ducat & Co. Pvt. Ltd. v. 474 Hiralal  Pannalal, A.I.R. 1976 Calcutta 126; General  Enter- prises v. Jardine Handerson Ltd., A.I.R. 1978 Calcutta  407; Khusiram v. Hanutmal, [1948] 53 C.W.N. 505, approved. 4. In the instant case, facts were admitted. [493B-C]     All  the relevant documents and affidavits  were  before the Court and were considered by it. Therefore no illegality was  committed  by the trial court in not setting  down  the matter  for trial on evidence and deciding the validity  and legality of the matter without taking oral evidence. [49211;

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493B]     4.1  Even if it appears that the discretion  could  have also  been exercised to decide the issue of invalidity in  a trial  on evidence adduced, this court would not  substitute its  view  for that of the trial court, unless the  ends  of justice required it to be done. This Court would not lightly interfere  under  Article 136 of the Constitution  with  the concurrent exercise of discretion of the courts below  under Section  34 of the Arbitration Act. Before it can justly  do so,  the appellant must satisfy the Court, on  the  relevant facts  referred to by the Courts below, that they  exercised their  discretion in a manifestly unreasonable  or  perverse way  which  was likely to defeat the ends  of  justice.  The appellant  has failed to do so in the instant  case.  [493C, E-F]     Ormarod  v.  Todmordon,  [1882] 8  Q.B.D.  664;  Charles Osenton  and  Co. v. Johnston, [1942] A.C. 130;  Gardner  v. Jay,  [1885]  29 Ch. D. 50; Printers (Mysore) Pvt.  Ltd.  v. Pothan Joseph, [1960] 3 S.C.R. 713, applied.     5. Where the parties make mutual mistake  misunderstand- ing  each other and are at cross purposes, there is no  real correspondence  of offer and acceptance and the parties  are not really consensus ad idem. There is thus no agreement  at all; and the contract is void. Section 20 is concerned  with common  mistake  of fact and not mutual  mistake.  A  common mistake  is there where both parties are mistaken about  the same vital fact although both parties are ad idem, e.g., the subject matter of the contract has already perished. A  con- tract  in such a case is void. Where each party is  mistaken as  to the other’s intention, though neither  realises  that the  respective promises have been misunderstood,  there  is mutual mistake. 1493H; 494A-B]     6.  A  mistake will not affect assent unless it  is  the mistake of both parties, and is as to the existence of  some quality which makes the thing 475 without the quality essentially different from the thing  as it  was believed to be. Neither party can rely upon his  own mistake to say that it was a nullity from the beginning,  no matter that it was a mistake which to his mind was fundamen- tal,  and  no matter that the other party knew that  he  was under a mistake. A fortiori, if the other party did not know of  the mistake but shared it. The question is not what  the parties  had in their minds, but what reasonable third  par- ties would infer from their words or conduct. The court  has to ascertain the "sense of the promises". [496E; 495G-H]     7.  The  application of the doctrine of  mutual  mistake depends  upon  the true construction of  the  contract  made between  the  parties. A mutual  misunderstanding  will  not nullify  a contract but only if the terms of  contract  con- strued in the light of the nature of the contract and of the circumstances believed to exist at the time it was done show that  it was never intended to apply to the situation  which in  reality existed at that time, will the contract be  held void. Thus a mistake as to an essential and integral element in  the subject matter of the contract will avoid  the  con- tract. A mistake as to the quality of the article contracted for may not always avoid the contract. A distinction, there- fore, should be drawn between a mistake as to the  substance of  the thing contracted for, which will avoid the  contract and mistake as to its quality which will be without  effect. According  to  circumstances even a mistake as to  the  sub- stance  of  the  thing contracted for  may  not  necessarily render  a contract void. Thus there must be a difference  so complete  that, if the contract were enforced in the  actual

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circumstances  which have unexpectedly emerged,  this  would involve  an  obligation fundamentally  different  from  that which the parties believed they were undertaking. [496A-H]     8.  From the series of steps taken for repairs  and  the stipulations  in the charter party including  the  modifica- tions thereof, it is not possible to hold that it was a case of  mutual mistake as to a quality which made  the  trawlers transferred essentially different from the trawlers that the parties in their minds agreed to transfer. Therefore,  there was no mutual mistake and the contract would not be  avoided on this ground. [498C-D]     Cooper v. Phibbs, [1867] L.R. 2 H.L. 149;  Ear/Beauchamp v.  Winn., [1873] 6 H.L. 223; Hudders field Banking  Co.  v. Henry  Lister & Sons, [1895] 2 Ch. 273; Bell v.  Laver  Brs. Ltd.,  [1932]  A.C. 161; Kannedy v. Panama Royal  Mail  Co., [1867] L.R. 2 Q.B. 580; Smith v. Hughes, [1871]  L.R. 6 Q.B. 597; Solle v. Butcher, [1950] 1 K.B. 671: 476 Fraderick  E. Rose (London) Ltd. v. William H. Pim Junior  & Co. Ltd. [1953] 2 Q.B. 450; Sheikh Brothers LId. v.  Arnold, [1957] A.C. 136; referred to.    U.P. Government v.  Nanhoo Mal,  A.I.R.  1960 All. 420, approved.     9. It is settled law that where the subject matter of  a reference is illegal, no award can be of any binding effect. If  the contract itself was illegal, the controversy  as  to whether it was illegal or not would not be a dispute arising out  of the contract as also would be the  question  whether the contract was void ab initio. When, however, it is  found that a binding contract was made which was not illegal  what follows from such a contract would be covered by the expres- sion "dispute arising out of contract". To stay a suit under Section  34 the Court has to see whether there was  a  valid agreement  to  have the dispute settled by  arbitration  and that  the proceedings are in respect of a dispute so  agreed to be referred. [498E, (;-H; 499A]     10.  Public  policy imposes certain limitations  on  the freedom  of  contract by forbidding the  making  of  certain contracts.  In  such cases though all other  requisites  for formation of the contract are complied with, parties to such forbidden  contracts are not allowed to enforce  any  rights under them. In clear cases the law strikes at the  agreement itself  by making the contract illegal. However, the  effect and  nature of illegality are by no means uniform  and  will depend upon the facts and circumstances of each case.  Where a  statute makes a contract illegal or where a certain  type of  contract is expressly prohibited there can be  no  doubt that such a contract will not be enforcible. [499B-D]     11. A contract which was not illegal from the  beginning may  be rendered illegal later by the method of  performance which  did not comply with the statutory  requirements.  The appellant’s  burden was to show that the charter  party  was illegal to take it out of the arbitration clause for if  the contract  is  illegal  and not binding on  the  parties  the arbitration  clause  would also be not binding. Once  it  is shown  to have been illegal it would be unenforcible  as  ex turpi causa non oritur actio. [499G-H]     12.  One who knowingly enters into a contract  with  im- proper  object  cannot enforce his  rights  thereunder.  The appellant in the instant case was also a party to the agree- ment of charter party in respect of the two imported  trawl- ers. Though it purported to be actual user’s licence 477 there  was  no violation of this condition in  view  of  the express permission granted by the Controller of Imports  and

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Exports  allowing the chartering of the two imported  trawl- ers.  The  modifications to the contract did  not  make  any alteration so as to make the agreement contrary to the terms and conditions of the permission inasmuch as the  permission was for a period of three years. The option to continue hire of the trawlers for a further period of three years did  not ipso facto violate the permission. There was also no  viola- tion as to the duration of the charter party. [499H; 500C-E]     Taylor v. Barnett, [1953] 1 W.L.R. 562; Anderson  Wright Ltd. v. Moran and Company, [1955] 1 S.C.R. 862; In Re  arbi- tration  between  Mahmoud and Isphani, [1921]  2  K.B.  176; applied.     13.  The  Courts below were right in  holding  that  the matters were arbitrable apart from the question of illegali- ty,  invalidity of the contract. The question of  invalidity of  the contract due to the alleged mutual mistake would  be de  hors and independent of the contract and as  such  would not be referable under the arbitration clause. In so far  as the question of illegality of the charter party is concerned as the appellant has not established that the charter  party was  illegal  or void as initio, the  question  whether  the modification  as alleged had rendered the  contract  illegal would be covered by the arbitration clause. [500F-G]     14. In the instant case, the reliefs claimed in the suit other than the question of ab initio invalidity or illegali- ty  of the contract would be referable. However, it will  be within  the  jurisdiction of the arbitrator  to  decide  the scope of his jurisdiction. The Court cannot make a  contract between the parties and its power ends with the  interpreta- tion  of the contract between them. The same principle  also applies  to the arbitration agreement unless the parties  to the  arbitration agreement authorises the court to make  and modify  the agreement. The arbitrator shall proceed  in  ac- cordance with law to decide the questions including that  of jurisdiction, if raised. [501C-1). E]

JUDGMENT:     CIVIL  APPELLATE JURISDICTION: Civil Appeal No. 1795  of 1982.     From the Judgment and Order dated 3.2. 1982 of the  High Court of Calcutta in Appeal No. 75 of 1981.     Shanti  Bhushan, Ms. Lira Goswami, S. Ganesh, R.  Narain and D.N. Mishra for the Appellant. 478     C.S.  Vaidyanathan,  S.R.  Setia, K.V-  Mohan  and  K.V. Viswanathan for the Respondents. The Judgment of the Court was delivered by     K.N. SAIKIA, J. This appeal by special leave is from the appellate judgment of the Calcutta High Court in Appeal  No. 75 of 1981 dismissing the appeal and upholding the  judgment of the learned Single Judge granting stay of the appellant’s suit on the respondent’s application under section 34 of the Arbitration Act, 1940.     The  appellant as plaintiff has instituted suit No.  736 of  1978  on  29.9.1978  in  the  original   side   of   the Calcutta   High  Court against the respondent as  first  de- fendant  and Canara Bank as second defendant stating in  the plaint,  inter alia, that the first defendant, was the  sole and absolute owner of two fishing trawlers, Ave Maria-I  and Ave maria-II, registered under No. 1567 dated 30th  January, 1974  and No. 1568 dated 30th January, 1974 with the  Regis- trar  of  Indian Ships, Cochin that the said  trawlers  were imported by the first defendant with financial assistance of

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the second defendant, Canara Bank, under Import Licence  No. P/CC/2062299 dated 3rd March, 1971 issued by or on behalf of the  Chief  Controller  of Imports &  Exports,  Ministry  of Commerce,  Government of India, New Delhi, that in or  about March,  1977 the first defendant as owner agreed to  charter and the plaintiff as charterer agreed to take on charter for the  purpose of deep sea fishing, the said two  trawlers  on the  terms and conditions contained in a "Bare Boat  Charter Party"  dated the 21st March, 1977, hereinafter called,  the agreement, executed at Calcutta, subject to the owner  first defendant obtaining the requisite permission in writing from the Chief Controller of Imports & Exports and the No  Objec- tion Certificate of the second defendant for chartering  the said  trawlers;  that within seven days of  receipt  of  the approval of the Chief Controller of Imports & Exports or  no objection certificate from the Canara Bank the first defend- ant  owner will deliver the said trawlers to  the  plaintiff charterer at the Port of Vishakapatnam for carrying out  the inspection of the said trawlers by its authorised agents  to ascertain  repairs  to be carried out to  the  trawlers  for making them fully operational without any defect  whatsoever and also to ascertain the cost of such repairs and  thereaf- ter the Chatterer will undertake the repairs at the cost  of the  owner  and bring them to  fully  operational  condition without  any defect including all aspects  of  refrigeration equipment;  that  the charterer will  then  conduct  fishing trials to ascertain actual condition of the trawlers and  in case  the  condition  is fully satisfied  according  to  the Charterer, and the 479 owner  furnishes to the Charterer all  documents  certifying sea-worthiness  and  also supplies proof  of  compliance  of pre-condtions, the Charter hiring shall commence on or  from the date fishing trials are ended; that the charterer  shall pay to the owner Rs.50,000 per trawler per month payable  in advance  every  month and shall continue to pay  up  to  and including  the  date of redelivery of each  trawler  to  the owner  at  Vishakapatnam (unless lost-sunk); that  he  shall keep a deposit of Rupees one lakh per trawler with the owner during  the period of the agreement to be  adjusted  without interest  towards  the  charter hire against  the  last  two months   of   charter   period;  that  by   a   Letter   No. CG/N-2-143-70-71 dated 18th August, 1977 the Chief  Control- ler  of  Imports & Exports granted permission to  the  first defendant to charter the said trawlers to the plaintiff on a charter  rental  of Rs.50,000 per month per  trawler  for  a period of three years; that the owner delivered the said two trawlers for repairs to the plaintiff at Vishakapatnam on or about  30th September, 1977 and thereafter on or  about  2nd February, 1978 the parties agreed to modify the agreement in the  manner stated in a subsequent written  agreement  dated 2nd February, 1978 executed at Calcutta; and that  according to  the agreement after modification, the charter hire  com- menced  from  15.1.1978  and the  charter  hire  revised  to Rs.6,25,000 per trawler per year.     The  plaintiff’s main averments in the plaint  are  that the permission dated 18th August, 1977 granted by the  Chief Controller  of Imports & Exports to the first defendant  for chartering  the  said trawlers to the  plaintiff  was  given under the said Import Licence to the first defendant and the permission was given subject to two conditions, namely, that the charter rental would be Rs.50,000 per month and that the charter would be for a period of three years but the  agree- ment  dated 21st March, 1977 was, in fact, for a  period  of two  years with an option to the plaintiff to  continue  the

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hire  for  a further period of three years and as  such  the agreement was in contravention of and contrary to the  terms of  the said permission and consequently to the said  Import Licence, and hence, illegal, against public policy and void; that the plaintiff and the first defendant entered into  the agreement  and its modification dated 2nd February, 1978  on the  basic,  essential and fundamental assumption  that  the trawlers  would be made fully operational and free from  all defects by effecting repairs as contemplated thereby but the assumption  was mistaken and not true and  was  subsequently discovered to be so mistaken that it rendered the  agreement with its modifications void; that pursuant to the  agreement the plaintiff paid to the first defendant through the second defendant the initial deposit of Rupees two lakhs in respect of the said two trawlers of the 480 charter rent as agreed up to and for the month of July 1978, but  in or about early September 1978 the  plaintiff  having discovered  the  agreement  to have been  void  and  illegal called  upon  the  first defendant to take  back  or  obtain permission  of the said trawlers lying at  Vishakapatnam  at the  risk and cost of the first defendant but he failed  and neglected to do so; and that the first defendant is bound to pay or make compensation for all the advantages which he had received  under the agreement and its modifications and  the costs, charges and expenses which the plaintiff has incurred on  the said trawlers, being assessed at Rs. 39,64,34  1  as per  Schedule ’D’ to the plaint. In the alternative  it  has been  averred that in supplying the said trawlers the  first defendant  committed a fundamental breach of  the  agreement and  its modifications which went to the root  and  affected the  very substance of the same and which made its  perform- ance  impossible and such a breach on the part of the  first defendant  has produced a situation fundamentally  different from anything which the parties could as reasonable  persons have  contemplated when the agreement was entered into,  and as  the  plaintiff has not been able to use  or  obtain  any benefit  out of the said trawlers, the plaintiff  never  was nor  is bound by the obligation under the agreement and  the modification  thereof and was entitled to and had  duly  re- scinded  the  same  and the plaintiff had  in  the  premises suffered loss and damages which the first defendant is bound to compensate and such loss and damage is assessed  reasona- bly  at Rs.39,64 341 particulars whereof have been given  in Schedule ’D’ thereof; and that the plaintiff is entitled  to recover  the said sum of Rs.39,64,34 1 as money paid to  and or  on  account of the first defendant and expenses  so  in- curred  without any consideration and or  for  consideration which  has  totally failed and/or to the use  of  the  first defendant.     The plaintiff accordingly claimed, inter-alia, a  decla- ration  that the agreement dated 2 Ist March, 1977  and  the modifications thereof dated 2nd February, 1978 were, and are illegal,  against  public  policy and  void;  a  decree  for Rs.39,64,341  against the first defendant; alternatively  an enquiry into the amount due to the plaintiff from the  first defendant and decree for a sum found due on such enquiry; in the  alternative decree for the same amount as  compensation for  loss  and damage and or as money paid  to  or  expenses incurred  without  any consideration  or  for  consideration which has totally failed or to the use of the first  defend- ant; and further and other reliefs.     In  the  matter of the aforesaid Suit No. 736  of  1978, hereinafter  referred to as ’the suit’, the first  defendant after receiving summons

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481 and entering appearance moved on 25th April, 1979 and appli- cation under section 34 of the Arbitration Act, 1940,  here- inafter  referred to as ’the Act’, impleading the  plaintiff (instant  appellant)  as first respondent  and  Canara  Bank second  defendant as second respondent stating,  inter-alia, that  the agreement as modified on 2nd February,  1978  con- tained  an arbitration clause; that the agreement  has  been and is perfectly binding and not violative of the conditions of  the  permission granted by the Controller of  Imports  & Exports;  that  the defects in the refrigeration  system  as alleged  are factually wrong; that the plaintiff, his  serv- ants and agents have themselves materially deteriorated  the machines and hence no amount was payable to the plaintiff as claimed  in the plaint; and that all the  disputes,  conten- tions  alleged to have arisen between the plaintiff and  the defendant were wholly covered by the said arbitration clause contained  in  the agreement which was binding  between  the parties.  Accordingly, it was prayed that the suit  and  all proceedings therein be stayed and interim orders, costs  and other reliefs be granted. The plaintiffs filed affidavit  in opposition  to the application and the applicant  first  de- fendant filed affidavit in reply.     The  learned  Single Judge in his judgment  dated  11.2. 1981  held, inter alia, that there was no question of  inva- lidity  for non-compliance of the conditions of the  licence granted  to the first defendant-applicant as necessary  per- mission  was obtained in respect of the agreement  from  the Chief  Controller  of Imports and Exports  vide  his  letter dated  18th August, 1977 and the modification of the  agree- ment on 2nd February, 1978 could not and did not  materially alter  its terms to impair its validity and there  was  sub- stantial  compliance  with  the  obtained  permission;  that though  in  a particular case if there was any  doubt  about facts, the matter had to be decided by trial on evidence, in this  case, having regard to the admitted facts and  conduct of the parties, it was not necessary to set down the  matter for  trial  on evidence to determine the facts as  the  same could not be disputed; that having regard to the conduct  of the parties in admitted documents, being the licence of  the petitioner  granted  by  the Chief Controller  of  Import  & Export  in respect of the said two trawlers and  the  provi- sions of the Import and Export Control Act, 1947, and Appen- dix  31 of the Import & Export Trade Control Hand  Book  for Rules  and Procedures, 1979, the correspondence between  the parties  before the alleged discovery of  purported  mistake and illegality by the respondent (plaintiff) and particular- ly the letter dated 18th July, 1978 from the respondent  No. 1  (plaintiff) to the applicant 1(first defendant)  and  the Balance  Sheet  of the plaintiff (Respondent No.  1)  I.T.C. Ltd, for the year 1978, there is no question of any illegal- ity or any mutual mistake; that the alleged 482 fundamental  breach  is wholly covered  by  the  arbitration clause as it wide enough to include the same; that the arbitration clause is  valid and binding between the parties; that the  allega- tion  of breach of contract and the claims made  are  within the jurisdiction of the arbitrator; and that all the  condi- tions  under  section 34 of the Act have been  satisfied  in this case. Accordingly the learned Judge granted stay of the suit  and directed the parties to take immediate  steps  for initiation of reference under the arbitration agreement.     On  appeal, the learned Division Bench by  an  elaborate and  erudite judgment dismissed the appeal  holding,  inter-

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alia,  that  in the facts and circumstances of the  case  it could  not be held that the trial court erred in  exercising its  discretion to decide the controversy,  namely,  whether the  contract  being void the arbitration  clause  also  was void,  in the application without evidence and on the  basis of pleadings only, nor was the discretion exercised  improp- erly; that the learned Judge was not wrong in coming to  the conclusion that the mistake as pleaded as to quality of  the goods was not a mistake of such nature as to make the  thing contracted  for  something different, and  in  holding  that there  was  no case of mutual mistake of such a type  as  to quality of the thing contracted for which could have avoided the parent contract which contained the arbitration  clause; and that the learned Single Judge was right in so far as  he held  that the matters were arbitrable apart from the  ques- tion of illegality of the contract. It was further held that there  was no breach of conditions of the permission or  the provisions of the Import & Export Control Act to render  the contract  illegal  or void; and that the Court  having  held that  all the contentions and allegations  were  arbitrable, the granting stay in the suit was reasonable and proper.     Mr.  Shanti Bhushan, the learned counsel for the  appel- lant  submits,  inter-alia, that the subject matter  of  the suit,  namely, the question whether the agreement  was  void ab-initio  for mutual mistake was not arbitrable at all  and the  learned  Courts below erred in holding  so;  that  even assuming  but  not  admitting that the  subject  matter  was arbitrable,  it  having involved  complicated  questions  of facts the court ought not to have exercised jurisdiction  on the  application under section 34 and in doing so  it  acted without jurisdiction and, assuming that the court had juris- diction,  it should have decided only after taking oral  and documentary evidence and not merely on affidavits; that  the agreement  itself having been void ab initio due  to  mutual mistake  the  arbitration clause, namely, clause 18  of  the charter party, also perished with it and there was no  scope for arbitration at all and the learned 483 courts  below  erred  in holding that  all  the  contentions raised  and  allegations made in the  suit  were  arbitrable under  the  arbitration clause; and that the  agreement  was void being violative of the conditions of the permission and for that matter the import licence and the provisions of the Import and Export Control Act.     Mr.  C.S.  Vaidyanathan,  the learned  counsel  for  the respondent refuting submits that there having been no mutual mistake  so as to invalidate the agreement, the  arbitration clause  remains binding and the subject matter of  the  suit has  rightly  been  held to be arbitrable;  that  the  court rightly  exercised  jurisdiction on  the  application  under section 34 of the Arbitration Act on the basis of the  affi- davits  and  at no stage before argument  the  appellant  as respondent  No.  1 applied to the court  for  permission  to adduce  oral evidence, and stay of the suit was  granted  in accordance with law on the basis of the evidence on  record; that the agreement as modified was not void on the ground of violation  of the permission or of the import licence or  of the provisions of the Import & Export Control Act; and  that the  direction to proceed to arbitration is just and  proper and  the  respondent has no objection to a  Retired  Supreme Court Judge being appointed arbitrator.     The first question to be decided in this appeal,  there- fore,  is whether in an application under section 34 of  the Indian Arbitration Act the court has jurisdiction to  decide the  validity  of the Contract  containing  the  arbitration

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clause,  and if so, whether it has to be decided on  affida- vits or on evidence.     To decide the question we may conveniently refer to  the provisions of section 34 of the Arbitration Act;               Section  34: Power to stay  legal  proceedings               where there is an arbitration agreement. Where               any  party to an arbitration agreement or  any               person claiming under him commences any  legal               proceedings  against  any other party  to  the               agreement or any person claiming under him  in               respect  of any matter agreed to be  referred,               any  party to such legal proceedings  may,  at               any time before filing a written statement  or               taking  any  other steps in  the  proceedings,               apply  to the judicial authority before  which               the  proceedings are pending to stay  proceed-               ings; and if satisfied that there is no suffi-               cient  reason  why the matter  should  not  be               referred  in accordance with  the  arbitration               agreement  and that the applicant was, at  the               time, when the proceedings were commenced, and               484               still  remains,  ready and willing to  do  all               things necessary to the proper conduct of  the               arbitration, such authority may make an  order               staying the proceedings.     This  section  deals with the staying of  a  suit  where there  is an arbitration agreement concerning  the  subject- matter  of  the suit and between the same parties,  for  the Court  to  have power to exercise the  discretion  conferred upon it by this section, there must have been a valid agree- ment  to submit to arbitration. Where the objection is  that the arbitration is a nullity, it amounts to an objection  of want  of  jurisdiction.  The  term  "arbitration  agreement" includes "agreement to refer", and "submission" to  arbitra- tor. A submission forming part of a void contract is  itself void and cannot be enforced. Where a firm of bookmakers  had engaged  in betting transactions with the defendants on  the terms that any dispute which might arise should be  referred to arbitration, it was held that the whole contract was void and  unenforceable  and  that the defendants  could  not  be compelled to submit to arbitration: Joe Lee v. Lord Dalneny, [1927] 1 Ch. 300. Where there is no valid arbitration agree- ment on the subject matter of the suit, there is no justifi- cation  for staying a suit for that will deprive the  plain- tiff of his fight to sue on that subject matter.     In  Heyman v. Darwins, [1942] A.C. 356,  Lord  Macmillan pointed out at Pages 370-371:               "If  it  appears that the dispute  is  whether               there has ever been a binding contract between               the parties, such a dispute cannot be  covered               by  an  arbitration clause in  the  challenged               contract.  If there has never been a  contract               at all, there has never been as part of it  an               agreement  to arbitrate. The greater  includes               the  less.  Further, a claim to  set  aside  a               contract  on such grounds as fraud, duress  or               essential  error cannot be the subject  matter               of a reference under an arbitration clause  in               the contract sought to be set aside. Again, an               admittedly   binding  contract  containing   a               general arbitration clause may stipulate  that               in  certain events the contract shall come  to               an  end. If a question arises where  the  con-               tract has for any such reason come to an end I

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             can  see no reason why the  arbitrator  should               not  decide that question. It is  clear,  too,               that  the parties to a contract may  agree  to               bring it to an end to all intents and purposes               and to treat it as if it had never existed. In               such a case, if there be an arbitration clause               in the contract, it perishes with the con-               485               tract.  If the parties substitute a  new  con-               tract  for the contract which they have  abro-               gated the arbitration clause in the  abrogated               contract cannot be invoked for the  determina-               tion of questions under the new agreement. All               this is more or less elementary."     Earlier  in  Monro  v. Bognor  Urban  District  Council, [1915]  3 K.B. 167; where a building contract had  been  en- tered  into between the plaintiff and the defendants  for  a construction  of  sewerage works  contained  an  arbitration clause  which  provided that if at any  time  any  question, dispute or difference should arise between the parties  upon or  in relation to or in connection with the  contract,  the matter  should  be referred to arbitration  and  during  the progress  of  the works disputes arose between  the  parties mainly as to the nature of the site upon which the works had to be carried out, which the plaintiff alleged was different from that which he had been led to believe by the specifica- tions.  The plaintiff having brought an action  against  the defendants  claiming,  inter alia,  damages  for  fraudulent misrepresentation  whereby he was induced to enter into  the contract, the defendants took out a summons asking that  all proceedings  in the action be stayed and the matter  be  re- ferred  to arbitration. It was held that the  action,  being based  on  fraud,  referred to matters  wholly  outside  the powers  of the arbitrator, with which he could not  possibly deal, and so could not be said to be a question, dispute  or difference upon or in relation to or in connection with  the contract  and  as such referable to  arbitration  under  the arbitration clause.     In Jawaharlal Burman v. Union of India, [1962] 3  S.C.R. 769  it  was held that section 32 of the Act creates  a  bar against the institution of suits with regard to an  arbitra- tion agreement or award on any ground whatsoever. Thus if  a party  affirms the existence of an arbitration agreement  or its validity it is not open to the party to file a suit  for the  purpose of obtaining a declaration about the  existence of  the said agreement or its validity. The bar to the  suit thus created by section 32 of the Act inevitably raises  the question  as to what remedy is open to a party to  adopt  in order to obtain an appropriate declaration about the  exist- ence  or validity of an arbitration agreement. 1t  was  held that  having regard to the scheme of sections 31, 32 and  33 of  the Act in matters which fail within the bar created  by section 32, if a suit cannot be filed it is not  necessarily intended  that an application can be made under the  Court’s powers  provided for by section 31 and impliedly  recognised by section 32 of the Act. In the later part of section 33 an application can be made to have the effect or purport of the agreement 486 determined but not its existence. That means that an  appli- cation  to  have  the effect of the agreement  can  be  made provided  the existence of the agreement is not in  dispute, and  that a party affirming the existence of an  arbitration agreement  cannot  apply  under section 3  for  obtaining  a decision that the agreement in question exists.

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   In  Waverly Jute Mills Co. Ltd. v. Raymon & Co.  (India) Pvt.  Ltd.,  [1963] 3 S.C.R. 209; A.I.R. 1963  S.C.  90  the Constitution  Bench reiterated the decision in  Khardah  Co. Ltd.  v. Raymon & Co. India Ltd., [1963] 3 S.C.R. 183  where it  was  held that if a contract is illegal  and  void,  the arbitration clause which is one of the terms of the contract thereof  must also perish along with it and that  a  dispute relating  to the validity of the contract is in such a  case for  the court and not for the arbitration to decide.  Where the arbitration clause is a term of the particular  contract whose validity is in question it has no existence apart from the impugned contract and must perish with it.     In  Renusagar  Co.  v. General Electric  Co.,  [1985]  1 S.C.R.  432 at page 507 it has been reiterated  that  though section 34 of the Arbitration Act, 1940 confers a discretion upon  the  Court  in the matter of granting  stay  of  legal proceedings  where  there is an  arbitration  agreement,  it cannot  be disputed that before granting the stay the  Court has  to  satisfy itself that  arbitration  agreement  exists factually  and  legally and that the  disputes  between  the parties  are in regard to the matters agreed to be  referred to  arbitration and that decided cases have taken  the  view that  the  Court  must satisfy itself  about  these  matters before the stay order is issued. In other words, Court under section 34 must finally decide those issues before  granting stay.     Among  High  Court decisions reference may  be  made  to Banwari Lal v. Hindu College, Delhi, A.I.R. 1949 East Punjab 165 wherein it has been held at paragraph 33 that the  Arbi- tration  Act  has  been enacted merely with  the  object  of consolidating  the  law relating to  arbitrations,  and  the question  of the existence or validity of the contract  con- taining an arbitration agreement being not a matter  falling within  the purview of the Act, it cannot be said, with  any show of reason, that section 32 takes away the  jurisdiction of  the  courts to give appropriate relief in  suit  brought either to contest or to establish, the existence or validity of the contract. In Johurmull Parasram v. Louis Dreyfus  Cx. Ltd.,  52 C.W.N. (1947-48) 137; A.I.R. 1949 Cal. 179 it  was held at para 14 that the court must consider a suit as it is pleaded and framed. If it comes to a conclusion that a  suit as  pleaded in a suit on the contract or arising out of  the contract containing the arbitration clause 487 then the suit should be stayed. But on the other hand if the suit  is pleaded as a suit independent of the contract  then the  Court  has  no power to stay the suit  although  it  is satisfied  that the frame of the suit is merely a  means  of avoiding the consequences of alleging the true nature of the claim.  In considering the question of stay of the suit  the Court is not entitled to go into the question as to what  is substantially  the nature of the claim. So also  in  Pramada Prasad  v. Sagar Mal Aggarwal, A.I.R. 1952 Patna 352 it  was observed  that  from the language of the Section  34  it  is clear  that party can apply to stay a legal proceeding  only when  the repudiation is of the right or obligation  in  re- spect of any matter agreed to be referred, and not when  the very  existence  of the agreement is repudiated.  The  court relied  on  the decision in Monro v. Bognor  Urban  District Coun,  [1915]  3  K.B. 167. In Narsingh  Prasad  v.  Dhanraj Mills, I.L.R. 21 Patna 544; A.I.R. 1943 Pat 53 Harries, C.J. held  that where an agreement is impeached on the ground  of fraud  and  the dispute is as to the factum or  validity  of contract, such a dispute does not fail under the arbitration clause  and  should be decided by the  Court.  Similarly  in

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Birla  Jute  Manufacturing Co. Ltd. v. Dulichand,  AIR  1953 Calcutta  450 it was held at paragraph 15 that a dispute  as to the validity of the contract cannot be held to be  within an  arbitration agreement contained in the  contract  itself and  such  a dispute cannot be referred  to  arbitrators  or dealt  with  by  them under such an  agreement,  unless  the parties  agreed  to include it in  the  arbitration  clause. Otherwise  where  the contract itself is repudiated  in  the sense  that its original existence or its binding  force  is challenged,  for example, where it is said that the  parties were  never ’ad idem’ or where it is said that the  contract is voidable ad initio on the ground of fraud, misrepresenta- tion or mistake and it has been avoided, the parties are not bound  by any contract and escape the obligation to  perform any  of its terms, including the arbitration clause,  unless the provisions of that clause are wide enough to include the question  of jurisdiction as well. In W.F. Ducat & Co.  Pvt. Ltd. v. Hiralal Pannalal, A.I.R. 1976 Calcutta 126, Salil K. Roy  Choudhary, J. held at paragraph 8 that where in a  suit the  plaintiff  alleges  that the  contract  containing  the arbitration  clause is void and illegal and prima  facie  it appears  that  there  are sufficient grounds  on  which  the legality  of the said contract has been challenged for  non- compliance  of the statutory requirement, the  court  should decline to exercise discretion in favour of the stay of  the suit. Similarly in General Enterprises v. Jardine  Handerson Ltd., A.I.R. 1978 Calcutta 407, Sabyasachi Mukharji, J.,  as his Lordship then was, held that if the contract  containing the arbitration clause was obtained by fraud the stay of the suit could not be granted under Section 34 of the Act. Thus, while there is not doubt 488 about the law as enunciated in the above English and  Indian decisions, namely, where the validity, existence or legality of  the  contract is challenged in the suit  on  grounds  de hors,  independent of, or external to the terms or  stipula- tions  of  the contract, the court in an  application  under Section 34 of the Act shall have no jurisdiction to go  into the  question, and that in large majority of cases it  would be  applicable, in appropriate cases, having regard  to  the nature  of the dispute raised in the pleadings of the  suit, the  compass  and  scope of the arbitration  clause  in  the contract,  the  surrounding facts and circumstances  of  the case  having a bearing on the question of genuine  grievance falling outside or inside the arbitration agreement and  the objects and spirit of the Arbitration Act, the court may  be justified in deciding the validity, existence or legality of the  challenged contract containing the  arbitration  agree- ment.  In  Heyman v. Darwins, (supra) Viscount  Simon,  L.C. stated thus:               "if the dispute is whether the contract  which               contains the clause has ever been entered into               at  all  that issue cannot go  to  arbitration               under  the  clause, for the party  who  denies               that he has ever entered into the contract  is               thereby denying that he had ever joined in the               submission.  Similarly,  if one party  to  the               alleged contract is contending that it is void               ab initio (Because for example, the making  of               such  a contract is illegal), the  arbitration               clause  cannot  operate for on this  view  the               clause  itself also is void. But, in a  situa-               tion where the parties are at one in asserting               that they entered into a binding contract, but               a  difference has arisen between them  whether

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             there  has  been a breach by one side  or  the               other,  or whether circumstances  have  arisen               which have discharged one or both parties from               further  performance, such differences  should               be  regarded as difference which  have  arisen               ’in respect of’ or ’with regard to’ or ’under’               the contract, and an arbitration clause  which               uses these, or similar, expressions should  be               construed accordingly." Section 34 of the Arbitration Act, deals with the staying of a suit where reference concerning the subject matter of  the suit  and between the same parties is pending. This  section corresponds  to  Section 4 of the English  Arbitration  Act. Whether  a  particular dispute arising out of  a  particular contract is referable to arbitration or not must necessarily depend  on the intention of the parties as embodied  in  the arbitration  clause. If the dispute is squarely  covered  by the arbitration clause the 489 relevant provisions of the Act will be attracted. Section 32 puts  a  bar to suits contesting  arbitration  agreement  or award by providing that notwithstanding any law for the time being  in force, no suit shall lie on any ground  whatsoever for a decision upon the existence, effect or validity of  an arbitration  agreement or award, nor shall  any  arbitration agreement or award be enforced, set aside, amended  modified or in any way affected or otherwise than as provided in  the Act.  Section  33 of the Act provides that any party  to  an arbitration  or  any person claiming under him  desiring  to challenge the existence or validity of an arbitration agree- ment  or  an award to have the effect of  either  determined shall  apply  to the Court and the Court  shall  decide  the question on affidavits: Provided that where the Court  deems it  just and expedient it may set down the  application  for hearing on other evidence also, and it may pass such  orders for discovery and particulars as it may do in a suit.     It  may be noted that section 32, 33 and 34 speak of  an arbitration  agreement as defied in section 2(a) of the  Act which means a written agreement to submit present or  future differences  to arbitration, whether an arbitrator is  named therein  or not. In the instant case the arbitration  clause forms  a part of the agreement, namely, the  charter  party. The  question  is whether the validity or otherwise  of  the charter party itself can be said to have been covered within the  arbitration  clause. On scrutiny of clause 18  we  find that  any dispute or difference in respect of the  construc- tion, meaning or effect or as to the rights and  liabilities of the parties 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  answer is in the  negative.  The  arbitration agreement  is  not the same as the contract in  the  charter party.  It cannot, therefore, be said that the  validity  or otherwise of the chartery party was covered by clause 18. In Khardah  Company  Ltd. v. Raymon & Co.  (India)  Pvt.  Ltd., [1963]  3  S.C.R. 183 the appellant company entered  into  a contract  on September 7, 1955 for the purchase  of  certain goods  and  clause  14 thereto provided  that  all  disputes arising out of or concerning the contract should be referred to  the arbitration of the Bengal Chamber of  Commerce.  The respondents having failed to deliver the goods as agreed the

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appellants  applied  to the Bengal Chamber of  Commerce  for arbitration  and an award made in favour of  the  appellant. Thereupon  the respondent filed an application in  the  High Court of Calcutta under 490 section  33  of the Arbitration Act,  1940  challenging  the validity of the award on the ground that the contract  dated September 7, 1955 itself was illegal as it was in contraven- tion  of  the notification of the Central  Government  dated October  29,  1953. It was held that the dispute as  to  the validity  of the contract dated September 7, 1955,  was  not one  which  the arbitrators were competent to  decide  under clause  14  and that in consequences  the  respondents  were entitled to maintain the application under section 33 of the Act and that where an agreement is invalid every part of  it including  clause as to arbitration contained  therein  must also be invalid. In Anderson Wright Ltd. v. Moran and Compa- ny, [1955] 1 S.C.R. 862 it has been laid down that in  order that  a stay may be granted under section 34 of the Act,  it is necessary, among others, that the legal proceeding  which is sought to be stayed must be in respect of a matter agreed to be referred and the Court must be satisfied that there is no  sufficient reason why the matter should not be  referred to  an arbitrator in accordance with the arbitration  agree- ment.  The  question whether the dispute in the  suit  falls within the arbitration clause really pre-supposes that there is such agreement and involves consideration of two matters, i.e.  (i)  what  is the dispute in the suit  and  (ii)  what dispute the arbitration clause covers. It is incumbent  upon the Court to decide whether there is a binding contract  for arbitration  between  the parties. If it is found  that  the dispute in the suit is not covered by the arbitration clause the application for stay may be dismissed. In Damodar Valley Corporation v.K.K. Kar, [1974] 2 S.C.R. 240 it has been held that as the contract is an outcome of the agreement  between the parties it is equally open to the parties thereto and to Court  to  bring  to an end or to treat it as  if  it  never existed.  It  may also be open to the parties  to  terminate previous contract and substitute in the place a new contract or alter the original contract in such a way that it  cannot subsist. In all these cases since the entire contract is put to an end to, the arbitration clause, which is a part of it, also  perishes along with it. Where, therefore, the  dispute between  the  parties is that the contract itself  does  not subsist either as a result of its being substituted by a new contract or by rescission on alteration, that dispute cannot be  referred  to the arbitration as the  arbitration  clause itself  would perish if the averment was found to be  valid. As the very jurisdiction of the arbitrator is dependent upon the  existence of the arbitration clause under which  he  is appointed,  the  parties have no right to  invoke  a  clause which  perished with the contract. In case of rescission  it would  put an end to the rights of the parties to  the  con- tract in future but it may permit claiming of damages either for previous breaches or for the breach which constitute the termination.  The  contract being consensual,  the  question whether the 491 arbitration clause survives or perishes would depend on  the nature of the controversy and its effect upon the  existence of  survival  of the contract itself. A dispute  as  to  the binding  nature  of  the contract cannot  be  determined  by resort to arbitration because the arbitration clause  itself stands or falls according to the determination of the  ques- tion  in dispute. As was held in Hirji Mulji v.  Cheong  Yue

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Steamship Co., [1926] A.C. 497, "a contract that has  deter- mined  is  in the same position as one that has  never  been concluded at all". In Heyman v. Darwins, (supra) Lord Porter pointed out "that it is not in every instance in which it is claimed  that the arbitrator has no jurisdiction the  Court, will refuse to stay an action. If this were the case such  a claim would always defeat an agreement to submit disputes to arbitration, at any rate, until the question of jurisdiction had been decided. The Court to which an application for stay is made is put in possession of the facts and arguments  and must in such a case make up its mind whether the  arbitrator has  jurisdiction  or  not as best it can  on  the  evidence before it. Indeed, the application for stay gives an  oppor- tunity for putting these and other considerations before the court  that  it may determine whether the  action  shall  be stayed  or  not." These observations were accepted  by  S.R. Das, J in the case of Khusiram v. Hanutmal, [1948] 53 C.W.N. 505,518  wherein  it was held that where on  an  application made  under section 34 of the Arbitration Act for stay of  a suit,  an issue is raised as to the formation, existence  or validity of the contract containing the arbitration  clause, the  Court  is  not bound to refuse a stay but  may  in  its discretion, on the application for stay, decide the issue as to  the existence or validity of the  arbitration  agreement even though it may involve incidentally a decision as to the validity  or  existence of the  present  contract  (Emphasis supplied). Their Lordships in Anderson Wright Ltd. v.  Moran and Company, (supra) reiterating the above passage observed: "We are in entire agreement with the view enunciated above." Thus, where in an application under section 34 of the Act an issue  is  raised  as to the validity or  existence  of  the contract containing the arbitration clause, the court has to decide  first of all whether there is a binding  arbitration agreement,  even though it may involve incidentally a  deci- sion as to the validity or existence of the parent contract. The  court has to bear in mind that a contract is an  agree- ment  enforcible  at law and that it is for the  parties  to make  their own contract and not for the court to  make  one for  them.  Court  is only to interpret  the  contract.  The stipulations in the contract have, therefore, to be examined in  the light of the dispute raised in the pleadings of  the suit. If it is found that the dispute raised in the suit outside  or independent of the contract it follows that  the arbitration clause will not encompass that dispute. However, as the parties were 492 free to make their own contract they were also free to  have agreed as to what matters would be referred to  arbitration. If the arbitration clause is so wide as to have included the very validity or otherwise of the contract on the grounds of fraud,  misrepresentations,  mutual  mistake  or  any  valid reason  the  arbitrator  will surely  have  jurisdiction  to decide  even  that  dispute. Two extreme cases  have  to  be avoided,  namely, if simply because there is an  arbitration clause  all suits including one questioning the validity  or existence or binding nature of the parent contract is to  be referred to arbitrator irrespective of whether the  arbitra- tion  clause  covered it or not, then in all cases  of  con- tracts  containing arbitration clause the parties  shall  be deprived of the right of a civil suit. On the other hand  if despite the arbitration clause having included or covered ex facie even a dispute as to the existence, validity or  bind- ing  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

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objects  of the Arbitration Act as embodied in Sections  32, 33 and 34 of the Act. Both the extremes have, therefore,  to be  avoided.  The proper approach would be  to  examine  the issues  raised  in  the suit and  to  ascertain  whether  it squarely fails within the compass of the arbitration  clause and take a decision before granting the stay of the suit. If an issue is raised as to the formation existence or validity of the contract containing the arbitration clause, the court has  to exercise discretion to decide or not to  decide  the issue of validity or otherwise of the arbitration  agreement even  though  it may involve incidentally a decision  as  to validity or existence of the challenged contract. Should the court  find  the present contract to be void  ab  initio  or illegal or non-existent, it will be without jurisdiction  to grant stay. If the challenged contract is found to be  valid and  binding and the dispute raised in the suit  covered  by the  arbitration clause, stay of the suit may be  justified. In  the  instant  case considering the  issues  raised,  the arbitration  clause  and surrounding circumstances  and  the part  played  by the parties pursuant to the  charter  party since  execution  to the modification  and  thereafter  till objection  raised by the appellant plaintiff, we are of  the view that the learned trial court did not err in  proceeding to  decide the issue of validity or legality of  the  parent contract.     The  question whether the validity and legality  of  the parent  contract could be decided without taking  oral  evi- dence  need not detain us long. All the  relevant  documents and  affidavits were before the court and  were  considered. Mr. Shanti Bhushan submits that in deep sea fishing, use  of trawlers,  requirement and standard of refrigeration  system in  the trawlers so as to maintain 20F temperature in  their fish- 493 holds are highly technical matters and given the opportunity the appellant plaintiff could have produced expert  evidence in the matter. Counsel, however, states, that at no stage of the  proceedings  before argument any written or  even  oral application  was  made  seeking permission  to  adduce  oral evidence. Admittedly, it was only during agreement that oral prayer  was  made. We are, therefore, of the  view  that  no illegality  was committed by the trial court in this  regard considering  the  facts and circumstances of the  case.  The learned  judge rightly observed that if there was any  doubt about  facts, the matter had to be decided by trial on  evi- dence, in this case the admitted facts could not be  disput- ed.  The  learned courts have also exercised  discretion  to grant  stay.  Even if it appears that the  discretion  could have  also been exercised to decide the issue of  invalidity in a trial on evidence adduced, this court would not substi- tute  its view for that of the trial court, unless the  ends of justice required it to be done. Since it was said by  the Court of Appeal in Ormerod v. Todmordon, [1882] 8 Q.B.D. 664 that while it had jurisdiction to review the descreation  of the  judge it would not do so except in a case in  which  it clearly  though  that the judge had  wrongly  exercised  his discretion  and that an injustice had thereby been  done  by his  order.  This was approved in Charles Osenton &  Co.  v. Johnston, [1942] A.C. 130 holding that a legitimate exercise of  the jurisdiction would not be disturbed in appeal but  a wrongful exercise of the discretion will be corrected by the House  of Lords. Referring to Gardner v. Jay, [1885] 29  Ch. D. it was ruled in the Printers (Mysore) Pvt. Ltd. v. Pothan Joseph, [1960] 3 S.C.R. 713 that this court would not light- ly interfere under Article 136 of the Constitution with  the

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concurrent exercise of discretion of the Courts below  under Section  34  of  the Act. Before it can justly  do  so,  the appellant  must  satisfy the court, on  the  relevant  facts referred  by  the courts below, that  they  exercised  their discretion  in  a manifestly unreasonable or  perverse  way, which  was likely to defeat the ends of justice. The  appel- lant has failed to do so in this case.      The  next question is whether the learned courts  below were correct in holding that there was no mutual mistake  so as  to render the agreement void ab initio under section  20 of the Contract Act.      Section  20 of the Indian Contract Act,  1872  provides that  where  both the parties to an agreement  are  under  a mistake  as to a matter of fact essential to the  agreement, the  agreement is void. The explanation to the section  says that an erroneous opinion as to the value of the thing which forms subject-matter of the agreement is not to be deemed  a mistake  as  to  a matter of fact. Where  the  parties  make mutual mis- 494 take misunderstanding each other and are at cross  purposes, there is no real correspondence of offer and acceptance  and the parties are not really consensus ad idem. There is  thus no agreement at all; and the contract is also void. A common mistake  is there where both parties are mistaken about  the same vital fact although both parties are ad idem, e.g.  the subject-matter  of  the contract has already  perished.  The contract in such a case is void as the illustrations to  the section make clear. In U.P. Government v. Nanhoo Mal, A.I.R. 1960  Allahabad 420 it has been observed that section 20  is concerned  with common mistake of fact and not  mutual  mis- take. A common mistake is made or shared alike by both while mutual  means  made or entertained by each  of  the  persons towards  or with regard to each other. In Cooper v.  Phibbs, [1867] L.R. 2 H.L. 149, A agreed to take a lease of a  fish- ery from B, though contrary to the belief of both parties at the time, A was tenant for life of the fishery and B had  no title  at all. Lord Westbury applied the principle  that  if parties contract under a mutual mistake and  misapprehension as  to their relative and respective rights, the  result  is that  the  agreement  is liable to be set  aside  as  having proceeded  upon a common mistake. The transfer of  ownership being  impossible,  the  stipulation  was  naturali  ratione inunitilis.  This  principle of Cooper v.  Phibbs  has  been followed  in  Earl Beauchamp v. Winn [1873] 6 H.L.  223  and Hudders  field Banking Co. v. Henry Lister & Sons, [1895]  2 Ch.  273.  However, Lord Atkin in Bell v. Lever  Bros  Ltd., [1932]  A.C.  161; (1931) All E.R. Rep. 1,  27  followed  in Kennedy v. Panama Royal Mail Co., [1867] L.R. 2 Q.B. 580 and Smith v. Hughes, [1871] L.R. 6 Q.B. 597 described the state- ment of Westbury too wide and said that the correct view was that there was a contract which the vender was either  inca- pable of performing or had committed breach of a stipulation as to title; the contract was unenforceable but not void. In Bell  v.  Lever Bros Ltd., (supra) an agreement  of  service between the company and two of the directors of its subsidi- ary  company was terminated on payment of compensation.  The parties proceeded on the assumption that the service  agree- ment  was not liable to immediate termination by  reason  of misconduct  of the directors which assumption proved  to  be mistaken.  Fraud was however negatived. In an action by  the company  for recession of contract and repayment  of  moneys paid  the  agreement was set aside on the ground  of  mutual mistake  as  to  the quality of the  service  contract.  The accepted proposition was that whenever it is to be  inferred

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from  the terms of the contract or its  surrounding  circum- stances  that the consensus has been reached upon the  basis of a particular contractual assumption, and that  assumption is  not  true, the contract is avoided; i.e. it is  void  ab initio if the assumption is of present fact and it ceases to bind if the assumption is of future 495 fact.  The  assumption  must have been  fundamental  to  the continued validity of the contract or a foundation essential to its existence. Lord Atkin observed that the common stand- ard  for  mutual mistake and implied conditions  as  to  the existing  or  as to future fact is: Does the  state  of  new facts  destroy the identity of the subject-matter as it  was in  the original state of facts? In the words of Lord  Than- kerton the error must be such that it either appeared on the face of the contract that the matter as to which the mistake existed  was an essential and integral element of  the  sub- ject-matter  of the contract or was an inevitable  inference from the nature of the contract that all parties so regarded it.  Where each party is mistaken as to the  other’s  inten- tion,  though neither realises that the respective  promises have been misunderstood, there is mutual mistake. The illus- tration  in  Cheshire and Fifoots Law of Contract is,  if  B were to offer to sell his Ford Comina Car to A and A were to accept in the belief that the offer related to a Ford  Zeph- yr.  In such a case, no doubt, if the minds of  the  parties could be probed, genuine consent would be found wanting. But the question is not what the parties had in their minds, but what  reasonable third parties would infer from their  words or  conduct.  The court has to ascertain "the sense  of  the promises".  In  other words, it decides whether  a  sensible third  party would take the agreement to mean what A  under- stood it to mean or what B understood it to mean, or whether indeed any meaning can be attributed to it at all.  Blackman J  in Smith v. Hughes, [1871] L.R. 6 Q.B. 597,607  said  "if whatever  a man’s real intention may be he so conducts  him- self what a reasonable man would believe that he was assent- ing to the terms proposed by the other party, and that other party  upon that belief enters into the contract  with  him, the man thus conducting himself would be equally bound as if he had intended to agree the other party’s terms".     This  case  establishes that a contract is void  at  law only  if some term can be implied in both offer and  accept- ance which prevents the contract from coming into operation. In  Solle v. Butcher, [1950] 1 K.B. 671 (691)  Lord  Denning said  that  once a contract has been made, that is  to  say, once  the  parties, whatever their in most states  of  mind, have  to  all  outward appearances  agreed  with  sufficient certainty in the same terms on the subject-matter, then  the contract is good unless and until it is set aside for  fail- ure of some condition on which the existence of the contract depends, or for fraud, or on some equitable ground.  Neither party  can  rely upon his own mistake to say that it  was  a nullity from the beginning, no matter that it was a  mistake which  to his mind was fundamental, and no matter  that  the other party knew that he was under a mistake. A fortiori, if the other party did not know of the 496 mistake  but shared it. There is no doubt that the  applica- tion of the doctrine of mutual mistake depends upon the true construction  of  the contract made between the  parties.  A mutual misunderstanding will not nullify a contract but only if  terms  of  the contract construed in the  light  of  the nature of the contract and of the circumstances believed  to exist at the time it was done show that it was never intend-

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ed  to  apply to the situation which in reality  existed  at that time, will the contract be held void. Mistake as to the quality  of the article contracted for may not always  avoid the contract. As Lord Atkin said in Bell v. Lever Bros  Ltd. (supra)  mistake as to the quality of the  thing  contracted for  raises more difficult questions. In such a case a  mis- take will not affect assent unless it is the mistake of both parties,  and is as to the existence of some  quality  which makes  the thing without the quality  essentially  different from the thing as it was believed to be. A distinction  has, therefore,  to be made between a mistake as to substance  or essence  on  the one hand, and a mistake as  to  quality  or attributes on the other. A mistake of the former type,  will avoid the contract whereas a mistake of the latter type will not. Such a distinction was made in Kennedy v. Panama, Royal Mail  Co.  Ltd., (supra). It may be said that  if  there  be misapprehension as to the substance of the thing there is no contract;  but  if  it be a difference in  some  quality  or accident, even though the misapprehension may have been  the actuating motive to the purchaser, yet the contract  remains binding.  Thus  a mistake as to an  essential  and  integral element in the subject-matter of the contract will avoid the contract. A mistake will not affect assent unless it is  the mistake of both parties, and is as to the existence of  some quality which makes the thing without the quality essential- ly  different  from the thing as it was believed  to  be.  A distinction, therefore, should be drawn between a mistake as to  the  substance of the thing contracted for,  which  will avoid the contract and mistake as to its quality which  will be without effect. According to circumstances even a mistake as  to  the substance of the thing contracted  for  may  not necessarily render a contract void as was observed in  Solle v. Butcher (supra). Similarly in Frederick E. Rose  (London) Ltd. v. William H. Pim Junior & Co. Ltd., [1953] 2 Q.B.  450 where  both parties entered into a contract for the sale  of horse-beans,  which were quite different from the  feveroles which  they each believed them to be, yet the  contract  was held  not  to be void. Thus there must be  a  difference  so complete  that, if the contract were enforced in the  actual circumstances  which have unexpectedly emerged,  this  would involve  an  obligation fundamentally  different  from  that which the parties believed they were undertaking. In Sheikh. Brothers Ltd. v. Arnold, [1957] A.C. 136; Belly. Lever  Bros (supra) was applied. 497     Applying the above principles of law to the facts of the instant  case,  we find that the two  fishing  trawlers  Ave Maria-I  and Ave Mariall were imported by the respondent  on 30.1.1974  and were operated by him based at  Vishakapatnam. At  the time of negotiations survey report relating  to  the trawlers  dated  20.2.  1977 of ABS  Worldwide  &  Technical Services  India Pvt. Ltd. was handed over by the  respondent to  the appellant and thereafter the agreement was  executed on 21.3.1977. Delivery of the trawlers was to be made  seven days after receipt of the approval or no objection  certifi- cate for carrying out inspection to ascertain repairs to  be carried out for making the trawlers fully operational and to ascertain  the cost of such repairs. On 10.7. 1977  trawlers were delivered to the charterer for inspection and  repairs. On  12.11.1977 the charterer wrote to the owner  asking  for payment  of  hire charges from 1.10.1977  and  pointing  out delays in repairs. The owner also requested the charterer to pay port charges with effect from 1.10.1977. On 2.2.1978 the charter  party was modified to the extent that charter  hire would commence from 15.1.1978 and that as the charterer  had

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incurred substantial charges on repairs the owner shall bear only Rs. 1.5 lakhs per trawler for repairs carried out up to the  commencement of the charter hire. The charter hire  was revised to Rs.6,25,000 per trawler per year and an amount of Rs.6,70,000  paid  towards  deposit and  charter  hire  from 15.1.1978 to May 1978. In the first week of March, 1978  the charterer  paid Rs. 1,04,000 towards charter hire  for  June 1978. On 18.7.1978 the charterer wrote to the owner  setting out  payments  made  and claiming  adjustment  of  Rs.90,000 towards  repair charges and transferring  Rs.14,000  towards charter  hire. It was only on 14.9.1978 that  the  charterer for the first time raised some complaints and objections  on the trawlers and questioned the very validity of the  agree- ment. On 14.9. 1978 the trawlers were inspected by Kamath  & D’Abrie Marine Surveyors who submitted their report on 26.9. 1978 and the suit was filed on 29.9. 1978.     The  appellant-plaintiff’s averment, as we have  already mentioned,  is that the trawlers suffered from inherent  and latent  defects  in the refrigeration system  which  was  an essential part of such trawlers and which were not discover- able by ordinary diligence at the time of entering into  the agreement on 21st March 1977 and as such they were not fully operational.  It  is not their grievance that there  was  no refrigeration system at all in the trawlers but that only it was  not  of a particular standard, namely that  even  after extensive repairs it could not be brought to the standard of minus  20 degree F but attained only minus 10 degree F.  The learned counsel for the appellant submits that 498 for deep sea fishing the temperature in the trawler’s  fish- hold has to be minus 20 degree F and minus 10 degree F would not be adequate and as a result the trawlers cannot be  used for  deep sea fishing. The grievance has been made  that  no opportunity  to  lead expert evidence on this  question  was available to the appellant. The question, therefore,  arises under  the  facts  and circumstances of  the  case,  namely, whether  the deficiency in the refrigeration systems to  the extent  of minus 10 degree F made the  trawlers  essentially different from trawlers with a refrigeration system of minus 20 degree F. The other question is whether this standard  of the refrigeration system was in the minds of the parties  at the  time  of  entering into the contract and  there  was  a mutual  mistake  regarding this, and the  contracting  minds were, therefore, not ad idem. From the series of steps taken for  repairs and the stipulations in the charter  party  in- cluding the modifications thereof we are unable to hold that it  was a case of mutual mistake as to a quality which  made the  trawlers  transferred essentially  different  from  the trawlers that the parties in their minds agreed to transfer. This  being the position we have to agree with  the  learned courts  below that there was no mutual mistake and the  con- tract would not be avoided on this ground.     The next question is that of illegality or otherwise  of the agreement. The learned trial court exercised its discre- tion to go into the question and arrived at the finding that there  was no illegality on the ground of violation  of  the permission or the condition of licence granted by the  Chief Controller of Exports and Imports. The learned lower  appel- late court upheld that finding. It is settled law that where the subject matter of a reference is illegal no award can be of  any binding effect. In Taylor v. Barnett, [1953]  W.L.R. 562;  the  plaintiff had agreed to purchase goods  from  the defendants. The defendants had agreed to deliver. The  goods were subject to the price control, sales at price in  excess of  the control price being forbidden by regulations at  the

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time  of making the contract (though not at the time of  the delivery). The control price was less than the agreed price. The umpire awarded the plaintiffs damages and the award  was good  on  the  face of it, but it was held  that  the  award should  be set aside for illegality. If the contract  itself was illegal, the controversy as to whether it was illegal or not  would not be a dispute arising out of the  contract  as also would be the question whether the contract was void  ab initio.  When, however, it is found that a binding  contract was  made  which was not illegal what follows  from  such  a contract would be covered by the expression "dispute arising out of the contract". To stay a suit under section 34 of the Act  the Court has to see, inter-alia, whether there  was  a valid  agreement  to have the dispute concerned  settled  by arbitration and that the 499 proceedings  are  in respect of a dispute so  agreed  to  be referred.  In  Taylor v. Barnett, (supra) Singleton  J;  ex- pressed the opinion that an arbitrator is guilty of  miscon- duct  if he knows or recognises that a contract  is  illegal and  thereafter proceeds to make award upon dispute  arising under that contract. The illegality of a contract can be  an issue in deciding want of jurisdiction. The first and essen- tial pre-requisite to making an order of stay under  section 34 of the Act, as was ruled in Anderson Wright Ltd.  (supra) is that there is a binding arbitration agreement between the parties  to  the suit which is sought to be  stayed.  Public policy  imposes certain limitations on the freedom  of  con- tract by forbidding the making of certain contracts. In such cases  though  all  other requisites for  formation  of  the contract  are complied with, parties to such forbidden  con- tracts are not allowed to enforce any rights under them.  In clear  cases  the  law strikes at the  agreement  itself  by making the contract illegal. However, the effect and  nature of  illegality  will depend upon on the  facts  and  circum- stances of each case. Thus, the effects of illegality are by no  means uniform. In other words, the effect of  illegality is  not the same in all cases. Where a statute makes a  con- tract  illegal  or where a certain type of contract  is  ex- pressly  prohibited there can be no doubt that such  a  con- tract  will  not  be enforcible.  In  Rearbitration  between Mahmoud and Isphani, [1921] 2 K.B. 716 by a war time  statu- tory  order  it  was forbidden to buy or  sell  linseed  oil without  a licence from the Food Controller.  The  plaintiff had  a licence to sell to other licenced dealers. He  agreed to  sell and deliver to the defendant a quantity of  linseed oil,  and before the contract was made, asked the  defendant whether  he possessed a licence, the defendant  falsely  as- sured him that he did. Subsequently; however, the  defendant refused  to  accept  the oil on the ground that  he  had  no licence. The plaintiff having brought an action for  damages for nonacceptance, the Court of Appeal refused to  entertain the  action even if the plaintiff-was ignorant, at the  time the contract was made, of the facts which brought it  within the statutory prohibition observing that it was a clear  and unequivocal  declaration  by the legislature in  the  public interest that this particular kind of contract shall not  be entered  into.  A contract which was not  illegal  from  the beginning  may  be rendered illegal later by the  method  of performance which did not comply with the statutory require- ments.  The appellant’s burden was to show that the  charter party  was illegal to take it out of the arbitration  clause for  if the contract is illegal and not binding on the  par- ties the arbitration clause would also be not binding.  Once it is shown to have been illegal it would be unenforcible as

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ex  turpi  causa  non oritur actio. Again it  is  a  settled principle that one who knowingly enters into a contract with improper  object cannot enforce his rights  thereunder.  The learned 500 counsel  for  the  appellant submitted that  the  import  of trawlers  was  subject to the conditions of the  import  li- cence, and one of the conditions was that the goods imported under it will be utilised in the licence holder’s  factories and that no portion thereof will be sold or will be  permit- ted  to  be utilised by any other party or placed  with  any financier  other  than the banks authorised to deal  in  the foreign  exchange and State Financial Corporation,  provided that particulars of goods to be pledged are reported by  the licence  to  the licencing authorities. We are of  the  view that  this  was  a proforma condition  in  the  licence  No. P/CC/206299  dated3.3.1971  and could not  appropriately  be applied  to the two imported trawlers. Needless  to  observe that the appellant plaintiff was also a party to the  agree- ment of charter party in respect of the two imported  trawl- ers. We are also of the view that though it purported to  be actual user’s licence there was no violation of this  condi- tion  in view of the express permission granted by the  Con- troller  vide  his  Memo  No.  GG.IV/28/143/70/71/374  dated 17.8.1977   with   specific   reference   to   the   licence No.P/CC/2062299  dated 3.3.1971 allowing the  chartering  of the two imported trawlers to be delivered to plaintiff  M/s. I.T.C.  India  Ltd. We also agree with  the  learned  courts below that the modifications dated 2.2.1978 did not make any alteration so as to make the agreement contrary to the terms and conditions of the permission inasmuch as the  permission was for a period of three years. The option to continue hire of  the trawler for a further period of three years did  not ipso facto violate the permission. There was also no  viola- tion as to the duration of the charter party.     The  next  question  is whether the  dispute  under  the charter  party raised in the suit are arbitrable. The  divi- sion  bench held that the learned Single Judge was right  in so  far  as he held that the matters were  arbitrable  apart from the question of illegality, invalidity of the contract. We  agree with this view inasmuch as it is obvious that  the question  of invalidity of the contract due to  the  alleged mutual  mistake  would  be de hors and  independent  of  the contract and as such would not be referable under the  arbi- tration  clause, In so far as the question of illegality  of the  charter party is concerned as the  appellant  plaintiff has  not established that the charter party was  illegal  or void  ab  initio the question whether  the  modification  as alleged  had rendered the contract illegal would be  covered by arbitration clause which reads:               "Any dispute or difference at any time arising               between  the parties hereto in respect of  the               construction  meaning or effect or as  to  the               rights  and liabilities of the parties  afore-               said hereunder or any other matter arising out               of this               501               agreement, shall be referred to arbitration in               accordance  with the subject to the  provision               of  the  Indian Arbitration Act, 1940  or  any               statutory modification or re-enactment thereto               or thereof for the time being in force and the               venue  of Arbitration shall be Madras or  Cal-               cutta,  and  not elsewhere and  the  Award  or               Awards  in  such arbitration shall be  made  a

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             rule of court of competent jurisdiction at the               instance of either party".     We agree that under the above clause the reliefs claimed in the suit other than the question of ab initio  invalidity or  illegality of the contract would be referable.  However, it  will  be within the jurisdiction of  the  arbitrator  to decide the scope of his jurisdiction as we have said earlier that  the court cannot make a contract between  the  parties and  its  power  ends with interpretation  of  the  contract between  them. The same principle also applies to the  arbi- tration  agreement  unless  of course, the  parties  to  the arbitration  agreement  authorises  the court  to  make  and modify the agreement for themselves.     Mr.  C.S. Vaidyanathan for the respondents  states  that the respondent shall have no objection to a retired Judge of the  Supreme  Court being appointed as  Arbitrator  and  the respondents  shall not raise the question of  limitation  as indicated  by  Mr. Shanti Bhushan learned  counsel  for  the appellant. We have no doubt that the Arbitrator so appointed shall proceed in accordance with law to decide the questions including that of the jurisdiction, if raised.     In the result, we find no merit in this appeal and hence it is dismissed leaving the parties to bear their own costs. T.N.A.                                         Appeal   dis- missed. 502