1. This is an appeal under Section 39 of the Indian Arbitration Act (hereinafter referred to as the Act) by the defendant in Civil Suit No. 2-B of 1958 against the order of the First Additional District Judge, Raipur, passed on 25-3-1960 dismissing its application for staying the trial of the suit under Section 34 of the Act.
2. The plaintiff alleged that two previous contracts between the parties were settled on 26-9-1957 and replaced by a new contract and the defendant agreed to supply cloth on the terms contained in the new contract. At that time, the defendant had also agreed to pay compensation in respect of 54 bales of cloth which were not supplied under the earlier contracts. The suit is for recovery of damages for breach of the contract, dated 26-9-1957.
3. According to the defendant, two contracts were entered into on 28-5-1957 by the parties according to which it agreed to supply cloth to the plaintiff. These contracts contained Clause 21 as follows :
'All disputes and questions whatsoever which shall arise between the parties hereto out of or in connection with this agreement or as to the construction or application thereof or the respective rights and obligations of the parties hereunder or as to any clause or things herein contained, or any amount or valuation to be made hereunder or as to any other matter in any way relating to these presents, shall be referred to arbitration in accordance with the rules of the Millowners' Association, Bombay, for the time being in force regulating arbitration with respect to piece-goods.'
The allegation that these contracts were replaced by a new contract as alleged in the plaint was denied. The defendant explained that all that took place then was to alter the time and mode of delivery leaving the original contracts intact. The defendant thus claimed that the plaintiff was bound by the arbitration clause to have the dispute settled by arbitration and prayed for stay of the suit.
4. The plaintiff, in reply to the application, stuck to his allegation that the contracts were completely substituted by a new contract on 26-9-1957. He admitted the earlier contracts; but pleaded that the conditions which are printed on the back of the contract forms were not brought to his notice and he knew nothing about them. He thus denied that he had agreed to them. He pleaded that as the new contract does not contain a clause or reference to arbitration, there is no question of staying the suit.
5. The learned Judge of the trial Court observed that the existence of the arbitration clause in the earlier contracts was disputed by the plaintiff and further the plaintiff relied upon a new contract in the plaint which was disputed by the defendant. He thought that the dispute could be resolved only after evidence and not at that stage; so he dismissed the petition.
6. Shri A. P. Sen on behalf of the appellant contends that it was the duty of the trial Court to determine on the materials on record whether the parent contract subsisted as regards arbitration. He further contends that the correspondence itself shows that the so-called subsequent contract was nothing but a modification of some of the terms of the original contract and there was no substitution by a new contract. Shri R. K. Verma for the respondent contends that the suit as brought is based on a new contract and it will succeed or fail on the finding about the existence of that contract. He further says that the validity of the objection of the appellant has to be determined on the allegations contained in the plaint alone and the Court cannot look into any other material to decide whether there was or was not a new contract.
7. Before considering the merits of these contentions, we may refer to some cases which throw light on the matters in dispute in the context of stay of legal proceedings under Section 34 of the Act. That section corresponds to Section 4 of the English Arbitration Act, 1889, and the decisions are therefore helpful. In Monro v. Bognor Urban Council, 1915-3 KB 167, the plaintiff had entered into a contract to construct sewage drains for the defendant under an agreement which contained an arbitration clause.
The plaintiff contractor stopped work and sued for damages, He resisted an application by the District Council for stay on the ground that he was misled into entering the contract by the misrepresentations made by the opposite side regarding the nature of the soil. It was held that the arbitrator had no power to decide the question and the case could not therefore be sent to him. Stay was refused. In De La Garde v. Worsnop and Co., 1928-1 Ch 17, the plaintiff refused to purchase goods under a contract alleging that the defendant had not fulfilled some of its conditions which had the effect of putting an end to the contract.
The defendant applied for stay to enforce the arbitration clause. It was observed that the allegation of the plaintiff was that the contract came to an end in accordance with the terms in the contract itself and not by reason of occurrence of an event dehors the consideration of the contracting parties. Under these circumstances, the agreement to refer the dispute to arbitration was held binding and the action was stayed.
8. Heyman v. Darwins Ltd., 1942 AC 3.56, is so often cited as an authority in this connection. In that case, the vendees who were dissatisfied with the quality of steel supplied to them under a contract containing an arbitration clause, suggested to the vendors that the contract may either be cancelled or replaced by a new one. The vendors brought an action for damages etc. alleging that the vendees had repudiated the contract. The vendees applied for stay which was resisted on the ground that the contract was terminated by the vendees themselves and the arbitration clause did not therefore subsist. On this contention Lord Simon, L. C. observed as follows :
'The fallacy of the other view arises from supposing that, if the respondents have so acted as to refuse further performance of the agreement, this amounts to saying that they deny that the agreement ever existed. If the respondents were denying that the contract had ever bound them at all, such an attitude would disentitle them from relying on the arbitration clause which it contains, but that is not the position they take up. They admit the contract, and deny that they have repudiated it. Whether they have, or have not, is one of the disputes arising out of the agreement. Even if the arbitrator finds that they have, and that on the appellants' acceptance of the repudiation the contract is at an end, that finding does not oust the arbitrator's jurisdiction.'
Further, Lord Wright pointed out that the word 'repudiation' was ambiguous and said :
'Repudiation of a contract is sometimes used as meaning that the defendant denies that there ever was a contract in the sense of an actual consensus ad idem. If that is the case, a submission of disputes under the contract never comes into operative existence any more than the contract to which it was to be ancillary ..... There is, however, a form of repudiation where the party who repudiates does not deny that a contract was intended between the parties, but claims that it is not binding because of the failure of some condition or the infringement of some duty fundamental to the enforceability of the contract, it being expressly provided by the contract that the Failure of condition or the breach of duty should invalidate the contract. A dispute on such an issue would generally be within an ordinary submission of disputes under or arising out of the contract or similar words, though the award in a certain event might have the effect of declaring that the contract had ceased to be, or even had never become, binding.'
9. The effect of this decision is neatly summed up on page 63 of Russel on Arbitration (Sixteenth Edition) thus :
''The test in such cases has been said to be whether the contract is determined by something outside itself, in which case the arbitration clause is determined with it, or by something arising out of the contract, in which case the arbitration clause remains effective and can be enforced.'
10. The decision in Heyman's case, 1942 AC 355. (supra) was referred to in Union of India v. Kishorilal, AIR 1959 SC 1362, where the effect of the substitution of the parent contracts by a new contract was being considered. In that case, the new contract contained an express clause putting an end to the old contract. Their Lordships laid down the following principles :
'The following principles relevant to the present case emerge from the aforesaid discussion : (1) An arbitration clause is a collateral term of a contract as distinguished from its substantive terms; but none the less it is an integral part of it; (2) however comprehensive the terms of an arbitration clause may be, the existence of the contract is a necessary condition for its operation, it perishes with the contract; (3) the contract may be non est in the sense that it never came legally into existence or it was void ab initio; (4) though the contract was validly executed, the parties may put an end to it as if it had never existed and substitute a new contract for it solely governing their rights and liabilities thereunder; (5) in the former case, if the original contract has no legal existence, the arbitration clause also cannot operate, for along with the original contract, it is also void; in the latter case, as the original contract is extinguished by the substituted one, the arbitration clause of the original contract perishes with it; and (6) between the two fall many categories of disputes in connection with a contract, such as the question of repudiation, frustration, breach etc. In those cases it is the performance of the contract that has come to an end, but the contract is still in existence for certain purposes in respect of disputes arising under it or in connection with it. As the contract subsists for certain purposes, the arbitration clause operates in respect of these purposes.'
11. In the instant case, the allegation in the plaint is that the earlier contract was fully discharged by a new contract and it is on the basis of the new contract that the plaintiff has claimed relief. In our opinion, the substitution of an old contract by a new contract is a circumstance extraneous to the old contract. If such a contract is in fact entered, the arbitration clause ends with the earlier contract in view of the law laid down in the Supreme Court case, AIR 1959 SC 1362, referred to above, and cannot be enforced.
12. The appellant has, however, denied that any such contract was ever entered into to replace the old contract and that causes the real difficulty in the instant case. Should not the contention of the appellant be determined by the Court in deciding the application for stay? Incidentally, the respondent has stated that he was not aware of the existence of the arbitration clause in the parent contract and he has been induced to sign the same by the fraud of the appellant.
Should not this point be also decided by the Court in disposing of the application under Section 34 of the Act? The trial Court has rejected the application for stay on the ground that the matter can be decided only on evidence. The appellant rightly complains that on that view, he can never have a chance to press his case for stay. He will not be allowed to rely on Section 34, as he would then be deemed to have taken 'steps' in the progress of the suit.
Another consequence of the respondent's contention would be that the plaintiff in such cases would be able to avoid the arbitration agreement by merely denying the contract on some ground or alleging its termination on some reason not connected with the contract. It would not matter it his allegations are not finally substantiated; he would be relieved of the arbitration clause all the same. The point thus needs scrutiny.
13. Shri R. K. Verma strongly relies on Gaya Electric Supply Co. v. State of Bihar, AIR 1953 SC 182, for his contention that the Court should not look beyond the allegations in the plaint in such cases. Particular reliance is placed on the following observations in paragraph 9 :
'Now this is the very point which would be in issue in the suit itself, and the learned Judge was in error in considering and deciding this point in this enquiry under Section 34. The validity of the plaintiffs* contention in the suit cannot be gone into by that Court exercising jurisdiction under this section as its function is a very limited one. The only point in such cases to be decided is whether the claim which is brought -- whedier it is good, bad or indifferent -- comes within the submission, to arbitration. It may be that there are grounds upon which the defendant would be able to satisfy the proper tribunal that the plaintiff's claim was frivolous and vexatious, but those considerations, as pointed out by Bankes, L. J., in 1915-3 KB 167, are material only if the question to be considered is whether the case made was a frivolous and vexatious one, and ought to have had no weight at all upon the question of what the plaintiffs claim in fact was and one can only find out what his claim is by looking at the plaint.'
In that case, the arbitration clause was a very narrow one and provided for reference of a dispute about the valuation of the undertaking only. The dispute which was before the Court was whether time was the essence of the contrast and some other matters which were admittedly not connected with the question of valuation. These disputes could not therefore fall within the scope of the arbitration. The observations relied upon were made in this context. Nevertheless they sup-port the stand taken by the appellant to some extent.
14. The scope of the enquiry to be made in deciding an application under Section 34 of the Act was considered by the Supreme Court in Anderson Wright Ltd. v. Moran and Co., (S) AIR 1955 SC 53. In this case, the plaintiff had alleged in the plaint that he had acted as a broker only in bringing about two contracts of sale between their principals and the defendant. The relief claimed was a declaration that they were not liable under the contracts. The defendant applied under Section 34 for stay contending that the plaintiff was a party to the two contracts. The plaintiff resisted saying that he never entered into the contracts and was not therefore bound by the arbitration clause there in. On these facts, their Lordships observed in paragraph 10 :
'The question whether the plaintiff was a party to the agreement at all is undoubtedly one which cannot go before the arbitrators and with that question they cannot possibly deal. But as Lord Porter pointed out in 1942 AC 356 at page 393:'this does not mean that 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 opportunity for putting these and other considerations before the court that it may determine whether the action shall be stayed or not. Section 34 of the Indian Arbitration Act as is well known is a virtual reproduction of Section 4 of the English Arbitration Act of 1889. The observations quoted above were approved of by Mr. Justice S. R. Das in the case of Khusiram v. Hanutmal, 53 Gal WN 503 at p. 518, and it was held by the learned Judge that where on an application made under Section 34 of the Indian 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 applications 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 parent contract.'
This decision, in our opinion, clinches the issue and lays down clearly that when an application under Section 34 is made the issue about the existence or validity of the arbitration agreement has to be decided by the court as best as it can on the material before it. Ultimately, the case was remanded for deciding the question whether the respondent was or was not a party to the agreement.
15. On the basis of this decision, we have no difficulty in holding that the Court should decide the question of the existence of the contract. In this case, the allegation of the respondent that he signed the parent contract in ignorance of the arbitration clause has to be decided by the Court. The question whether the contract came to an end by substitution of a new contract stands on the same footing and must also be decided by the Court. Both these are matters which the arbitrator cannot decide and the Court must adjudicate on them to and out if a case for stay exists.
16. In view of the decision of tile Supreme Court, it is not necessary for us to discuss the view taken in other decisions, cited by the learned counsel for the appellant; but we shall briefly refer to them. In Bhagwandas v. Atmasingh, AIR 1945 Bom 494, it was held that if the plaintiff says that there is no agreement to refer the dispute to arbitration, an issue arises between the parties and there is nothing in Section 34 to prevent the Court from deciding it. In Mathu Kutty v. Varee Kutty, AIR 1950 Mad 64, the Court was held entitled to enquire into the plea about the invalidity of an agreement while deciding an application for stay under Section 34.
A similar view was taken in Budhu Lal v. Jagan Nath, AIR 1949 All 70. In Rungta Sons Private Ltd. v. Jugometal Trg. Republike, AIR 1959 Cal 423, the question whether the original contract containing the arbitration clause was substituted by a new one was directly considered and it was laid down that the Court has, in disposing of an application under Section 34, power to enquire into the fact whether the contract had been rescinded. The decision in (S) AIR 1955 SC 53 (supra), was relied upon in support of this view. The question was actually decided on the affidavits filed by the parties.
17. In the result, the appeal is allowed and the order of the trial Court refusing stay is set aside. The trial Court shall now decide whether the original contracts have been discharged by substitution of a new contract as alleged by the plaintiff. In deciding this matter, the Court may take into account the allegations in the plaint, the application for stay and its reply, the documents filed by the parties and any affidavits that may be filed by the parties in support of their respective claims. If the Court finds that the original contracts have not been discharged, the suit shall be stayed under Section 34 of the Act, otherwise the suit shall be allowed to proceed. The costs of this appeal shall be borne as incurred.