S.B. Wad, J.
(1) The question for decision in the present appeal is whether the learned single judge has judicially exercised the discretion under Section 34 of the Arbitration Act, as contended by the appellant.
(2) The answer to the question naturally depends upon the scope of the court's power under Section 34 of the Arbitration Act. Public Policy generally and the object of the Arbitration Act particularly, require that forum solemnly agreed upon by the parties should not be ousted unilaterally by a party to the agreement. The Civil Court, will, thereforee stay its hand and would not permit a party to denounce the private forum. The Civil Court will, thereforee, insist upon the parties to submit themselves to the arbitration proceedings.
(3) The assumption in this cautious approach of the Civil Court is that there is an existing valid arbitration agreement between the parties and that the claim is preferred under the agreement to which the arbitration agreement applies.
(4) There are cases, however) where either of these assumptions are not present. A case may arise, where the infirmities alleged in the contract go to the root of the matter and challenge the very existence of the contract or validity of the contract. In a given case, a claim may be wholly outside the contract and not one under the contract. Faced with these problems, a Civil Court will not be able to act on the general principle of respect to the forum of arbitration but will have to exercise its own jurisdiction and decide the matter. If the parties are to be bound down by their word, it must be found out first as to what are the exact obligation accepted by the parties to the contract. It cannot certainly be said that where the contract itself does not exist, that they have undertaken, any obligations upon them or where the contract is vitiated by fraud or mis-representation, that, inspire of the fraud or mis-representation, the contractual obligation arises. The very basis of sanctity of promise is negatived, where there is mis-representation or fraud. So also where the claim is not within the four corners of the contract, how can it be said that the parties have agreed to submit to arbitration even in regard to such matter.
(5) Section 33 of the Arbitration Act provides that where an application is made challenging the existence or validity of an arbitration agreement a party making a challenge shall apply to the court and the court shall decide the question. But if a party does not avail of the statutory remedy of S. 33, where the court is bound to decide the challenge such a party can still challenge before a Civil Court under Section 34. In these proceedings the challenge is in the form of a defense. The party making the challenge prays to the court that the suit should not be stayed as the arbitrators are not competent to decide the questions of the existence of the validity of an arbitration agreement.
(6) It is well established that the court's power under Section 34 are discretionary powers. The court cannot merely go by the assertion of an applicant that a valid arbitration agreement exists and that he is ready and willing to do all things necessary to the proper conduct of the arbitration. There are two options open, whether to stay the civil proceedings or whether to continue the civil proceedings. The court has to weigh between the conflicting claims. It should not force arbitration on a party, where in law the circumstances exists to show that the parties had not agreed for such an arbitration. The court must also ensure that, the plaintiff, is not permitted to avoid the agreed forum by false pretences or excuses. This exercise of discretion, however, must be based on sound reasons. The court would, look into the allegations made in the application for stay and the plaintiff's reply to the stay application as well as plaint.
(7) In the present case the appellant filed a suit against the Union of India urging that the contract, of which the arbitration clause forms part, was vitiated by fraud and mis-representation. The appellant had filed several documents to substantiate its challange. The appellant claimed that as the contract itself was vitiated the arbitrators would not be competent to go into this question. He also asserted that a civil suit is the only remedy available to him in law. In the application under Section 34, the Union of India contended that the contract was a valid contract with an arbitration clause. They prayed that the appellant's suit should be stayed. The learned single judge held that the allegation of fraud was fake. The learned judge further held that the parties must submit to the arbitration and stayed the suit. Feeling aggrieved the appellant has filed this appeal.
(8) Coming now to the facts of the case the appellant had averred that his tender for Rs. 2,57,147.00 for the work of provision of water supply, service connections, fire fighting item near Delhi, was accepted by Commander Works Engineer (purchase) Delhi Cantt of the Military Engineering Service on 17.9.1973. On 24.9.1973, the Garrison Engineer sent a telegram to the appellant to attend his office on 25th of September, 1973 to sign a works order. He further alleges that in the meantime he had come to know that the respondent had issued orders imposing general economic squeeze and had suspended works already taken in hand. The appellant was not aware of those orders at the time of submission of his tender. On 25.9.1973, he thereforee, wrote a letter to the respondents informing that he would not sign the works order or a formal contract unless an assurance was given to him that the work allotted to him will not be suspended. The Garrison Engineer again sent a telegram to the appellant on 29.9.1973 to discuss the matter. In the said discussion, it is alleged, the appellant again made it clear to the Garrison Engineer that he would not be able to sign the works order unless an assurance was given to him in terms of his letter dated 22.9.1973. Once more an urgent telegram was sent by the Garrison Engineer on 3.10.1973, asking the appellant to attend his office on 4.10.1973. On 4th October the appellant met the Garrison Engineer. He handed him a letter requesting him to give an assurance that the work would not to suspended. The Garrison Engineer first hesitated to receive the letter but after consultation with the Commander, Works Engineer, he accepted the letter and signed the office copy. The appellant alleges that this was an assurance to him that the work would not be suspended and, thereforee at 5 p.m. when the office was about to be closed, the appellant signed the works order. The appellant further contends that the office remained closed on 5th, 6th and 7th October, 1973 on account of Dusshera holidays. On 8th October, i.e. on the next working day, the site was handed over to the appellant and an entry to that effect was made in the site Order Book of the respondent. Simultaneously he was given an order by which the work in question was suspended forthwith for a period up to 30th of December 1973. This time was further extended up to 31.3.1974 by a separate order. When the orders suspending the work were received, the appellant realised that he was tricked into signing the works order by the respondent. According to the appellant, he recorded his protest to that effect on the office copy of the said order as well as in the site Order Book. The appellant further alleges that on. further enquiries the appellant was told by officers of the respondent that the Commander Works Engineers had on 18.9.1973 directed the Garrison Engineer vide his letter no. 8164/16/50/E. 8 to get the works order signed from the appellant and then to suspend the work forthwith. It is alleged that, in fact, the decision had been taken much earlier and tender was accepted only with a view to 'entrap the contractor and to pin him down to execute the work on some further date at lesser costs'. The appellant further alleges that the respondent was aware that the prices were rising very steeply and that the contractor's percentage was rising day by day. The appellant then states 'the said officers (G.W.E. and G.E.) and the defendants obtained the plaintiff's consent by mis-representing the facts by active concealment of the decision to suspend the work which they had already made and by making a promise of 4th of October 1973 without any inclination to perform. it and, thereby deceived the plaintiffs'. On 28.8.1974, the respondent asked the appellant to resume the work with effect from 1.3.1974. On March 4, 1974 the appellant sent a legal notice, under Section 20 of the Code of Civil Procedure, informing the respondent that he had been defruded and that the alleged contract being tainted by fraud was not binding on him. The appellant prayed for a declaration from the court that the alleged contract be cancelled. The suit was filed on 24.6.1974. The appellant has annexed copies of all the letters of the respondent and his letters to the respondent. The counsel relies on Anderson Wright Lid. v.Moran and Co. : 1SCR862 Johasmal Parasram and others v. Louie Dredfus & Co. Ltd. A.I.R. 1949 Cal 179, M/s Chiranji Lal Multani R.B. (Private Ltd.) v. Union of India through Secty. Deptt. of Food Ministry and Agri. New Delhi and Kashmiri Lal v. Union of India A.I.R. 1966 J&K; 184. The alleged contract between the parties contained an arbitration clause. The relevant portion of it runs as follows :
'ARBITRATION- ALLdisputes between the parties to the contract other than those for which the decision of the C.W.E. or any other person is by contract expressed to be final and binding'.
'AFTER written notice by either parties to the contract would be referred to the sole arbitration of an Engineering Officer to be appointed by the authority mentioned in the tendered document.'
On 21.10.1975 the respondent filed an application under Section 34 contending that the respondent was ready and willing to do all things necessary to the proper conduct of the arbitration and, thereforee, the suit was liable to be stayed.
(9) The learned Judge while allowing the application for stay of the suit observed: 'It is the duty of the court when considering a party's prayer for the stay of the suit to see whether the section sought to be stayed can be reasonably interpreted as a bona-fide action for avoidance of the contract on any established principle and if it finds that it is lacking in bona-fides and colourable it has all the competence to stay the proceedings under Section 34 of the Arbitration Act (see Union of India v. Goromandal Engineering Co. Madras supra). It was held in Mahamjah Sir Mahindra Chandra Nandey v. H.V. Low and Co. Ltd. A.I.R. 1924 Cal 706 that unless a prima-facie case of fraud is made out there proceedings should, when an arbitration agreement exists, be stayed and this view was endorsed in Badhu Lal v. Jagan Nath A.I.R. 1949 All 70. The learned Judge further held
'IT is open to the company to get rid of the agreement for arbitration by setting up a fake pleas of fraud'.
(10) The counsel for the appellant submits, that there is no mention of the specific averments of fraud made by the appellant in the plaint nor are they considered by the learned Judge. He submits that the allegations of fraud are specific and are directed against definite persons namely, the C.W.E. and Garrison Engineer. The juxta position of the dates of telegrams calling upon the appellant to sign the works order, the handing over to the site and simultaneously serving an order of suspending the work forthwith, has also, escaped the notice of the learned Judge. A positive averment of the appellant in para 1 of the plaint quoting the date and the number of letter whereby the C.W.E. had directed the G.E. (allegedly) to get the works order signed and then to suspend the work has also done un-noticed. We find a good deal of substance in these submissions.
(11) The learned Judge has correctly stated legal position (in regard to the exercise of the discretion by a court under Section 34 of the Arbitration Act) viz. that the court must find out whether a prima-facie case of fraud has been made out by the party alleging it or not. Unfortunately, the learned Judge has not given any reasons in support of his finding that plea of fraud is 'fake plea'. We feel that in face of material placed on the record, the plea could not be termed as baseless.
(12) We hold that the material as disclosed in the plaint makes out a triable issue. There is no material on the record to show that the plea set up by the appellant was not bona-fide. Even otherwise the balance of convenience is in favor of the appellant because he will be left without any remedy as the arbitrator would not .be competent to decide the question of fraud.
(13) We, thereforee, allow the appeal, set aside the order of the learned single Judge dated March 22, 1976 and direct that the suit shall proceed according to law. The appellant will have his costs here.