(1) This appeal involves a question of considerable interest and some importance, with regard to he impact of S. 34 of the Arbitration Act 10 of 1940, upon a pending suit, wherein the basis of the suit itself is the void nature of the contract between the parties. The facts, tersely stated and as essential for our present purpose, are as follows:
(2) The plaintiffs in this action are the Coromandel Engineering Co., (P.) Ltd., in 1956, the Government of India commenced a scheme for a building for the Madras Customs department. Tenders were invited for the construction of certain pile foundations, and the Central Public Works Department also furnished a Bore chart relating to the locality, and indicating the strata of soul at four places, as a result of boring operations. The plaintiffs then made a tender and entered into contract with the defendant, viz., the Union of India, represented by the Secretary to Government, Ministry of Works. According to the case of the plaintiffs, for the technical reasons furnished by them in paragraph 12 sub-clauses (a) to (g) of the plaint, the contract itself was void and unenforceable, for a mutual mistake of fact. It is not necessary, for our present purpose, to canvass the technical data, liberally furnished in the plaint, upon which this claim is funded. Ultimately, in paragraph 24 of the plaint, the plaintiffs prayed for a declaration that the suit contract was void for mutual mistake, and claimed a sum of Rs. 73,888 odd, being the value of the work done by them, upon the void contract, deducting certain deposits. In the alternative, the suit was for recovery of certain sums, in case the court held that the contract was valid and binding on the parties.
(3) In pursuance of the arbitration clause (clause 25) to be found in the contract, which is set out in the judgment of the learned Judge (Sadasivam J.) the defendant applied under Section 34 of the Arbitration Act, for stay of all further proceedings in the pending suit. This application was resisted by the plaintiffs upon two main grounds. Firstly, such an application for stay, which is a matter entirely within the judicial discretion of the court of trial, could not be granted, where the very basis of the action was the void character of the contract, whether this flowed from fraudulent misrepresentation or mutual mistake or any other ground admitted in law as an adequate ground for the avoidance of a contract.
Next, the arbitration clause itself made the Additional Chief Engineer, C.P.W.D. the sole arbitrator, and he was not merely a salaried employee of the defendant (the Government of India), but it happened that he had special knowledge of this contract on the facts relating to its attempted performance because of certain negotiations between the parties, which took place at Delhi prior to the filing of the application for stay. That special knowledge led the plaintiffs to a reasonable apprehension of a bias, hence, on principles of natural justice, this binding term as to the arbitration by the Additional Chief Engineer was no longer enforceable. On that ground also, the stay ought not to be granted.
(4) The matter was discussed by the learned Judge (Sadasivam J.) in an order, in which the main considerations are fully set forth. Following certain authorities cited by him, the learned Judge was clearly of the view that on both the grounds raised by the plaintiffs, the application for stay by the defendant (the Union of India) ought not to be allowed. It was dismissed with costs, and the State has instituted this appeal.
(5) At the outset, itself, a reference both to the pleadings and to one or two leading decisions in which the relevant principles are discussed becomes essential. One decision, which is of considerable interest, upon the principles is Monro v. Rognor Urban District Council, 1915-3 KB 167 also cited by the learned Judge. That was a case in which the plaintiff refused to complete a works contract, alleging that he had been induced to enter into the contract by fraudulent misrepresentations made in the specification, as to the nature of the subsoil. The defendant took out a summons under S. 4 of the Arbitration Act, 1889, to stay the proceedings and to refer the dispute to arbitration under the relevant clause. Discussing this matter Pickford L.J. observed as follows:
"The question was whether this action should be stayed, and this action is not, in my opinion, an action upon the contract in any case of the word. It is an action for damages for fraudulent misrepresentation which induced the plaintiff to enter into the contract and it is also an action for an injunction to prevent the defendants form applying the clause of the contract to his plaint and materials, and then, not exposed in the alternative but being really in the alternative, and a quantum merit which he could not maintain if his contract were in
existence......................................It is, therefore, in no sense an action on the contract at all. Nor do I think that it is an action in relation to, or in connection with the contract. In one sense, it is an action in relation to, and in connection with the contract, because if there had never been any contract, there would never have been any cause of action, there would never have been any claim for damages. But it is not in relation to or in connection with the contract, in my opinion, within the meaning of the arbitration clause".
(6) This passage well exemplifies the difficulty that may arise in applying the principle of stay of an action relating to a contract because of the consequence of an arbitration clause, to any given set of facts. The usual wording of such a clause, which is almost invariably to he found in these contracts, which are generally standardised, is that my dispute or controversy "in relation to or in connection with the contract" is within the ambit of arbitration. But as Pickford L. J. observes, if this is to be logically construed in it most rigorous sense, then, there could be no suit at all arising form the background of a contract between the parties which may itself be illegal or unenforceable for any ground, which will not be liable to be stayed under the Arbitration clause. Obviously, the true principles is that, if the suit proceeds on the contract, or is referable to any of the rights and obligations under the contract per se then the clause concerning the arbitration comes into full effect and either party may invoke it in bar of suit. But, if the basis for action is itself independent of the contract as void for fraud, mutual mistake etc., then, it would obviously defeat the very objective of such a suit, to claim that it has to be stayed pending the enforcement of the arbitration clause. Of course, there is also a question of bona fides, which is incidental to the application of the principle. The court has to peruse the plaint, the prior notice, the affidavit and counter affidavit in the petition for stay, and then come to a conclusion whether the action can be reasonably interpreted as a bona fide action or avoidance of the contract on any established principle; if it is not bona fide, and is colourable, the court may perfectly be justified in staying the action under S. 34.
(7) But, if the court is satisfied that the action is bona fide and it is, on the face of it, for avoidance of the contract upon the grounds shown then, the court has certainly a discretion to decline to stay in the suit pending the enforcement of the arbitration clause. As the learned Judge (Sadasivam J.) has observed the decision in 1915-3 KB 167 referred to by us, was cited and followed in Johurmal Parasram v. Louis Dreyfus and Co. Ltd., AIR 1949 Cal 179. Again in Birla Jute Manufacturing co. v. Dulichand, the court observed that it was not merely the form of the contract which governed the interpretation of the arbitration clause, but that it was equally relevant to consider whether the party suing, alleged that there was a valid contract, or that there was no valid contract. The matter was considered in considerable detail in Heyman v. Darwins Ltd., 1942 AC 356 which is the leading case on this subject. That case has also been cited and approbated in Anderson Wright Ltd. v. Moran, (S) as we shall presently point out.
(8) In 1942 AC 356 the following passages in the several judgments delivered, emphasise the principle that, where the action itself proceeds upon a total repudiation of the contract it may not be a proper course to enforce the arbitration clause by staying the action. Viscount Simon L. C. observed:
"Similarly, if one party to the alleged contract s 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."
Lord Macmillan stated the point thus:
"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 aide 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."
Lord Wright observed at page 378:
"..........................one party, though not denying that there was the appearance of assent, might claim that the consent was vitiated by fraud or duress or mistake or illegality, and, in that sense, it is often said that he repudiates the contract. There, again, it would be a question of construction whether the collateral arbitration clause could be treated as severable, and could be invoked for settling such a dispute."
Lord Porter said at page 398:-
"Where the contract itself is repudiated in the sense that its original existence or its binding force is challenged, e.g., where it is said that the parties never were ad idem, or where it is said that the contract is violable ab initio (e.g. in cases of fraud, misrepresentation or mistake), and that 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."
In (S) this identical principles was discussed, and their Lordships have cited a passage from the judgement of Lord Porter in 1942 AC 356 at p. 393. That passage relates to the function of Court which is called upon to decide whether the arbitration clause could be properly invoked by either party. The court must make up its mind whether the arbitrator has jurisdiction or not, as best it can upon the evidence before it.
Applying this principle to the present case, we are satisfied that this is bona fide claim, for whatever it may be ultimately found to be worth, repudiating the contract altogether, as void for mutual mistake, upon the technical grounds exhibited in the relevant passage of the plaint. It is not for us to say whether that claim is well founded or otherwise; indeed, any anticipation of it would be contrary to the interests of justice. But, once the trial court is satisfied that there is such a bona fide claim repudiating the contract altogether, it will be a proper exercise of judicial discretion to hold that the arbitration clause does not come into play, and the defendant cannot obtain stay of trial of such a suit by invoking the clause. In this view, the order of the learned Judge appears to us to be perfectly justified. The learned Judge has not referred to the technical grounds which constitute the basis of the action; but we have been assured by learned counsel that the grounds were fully adverted to, at the hearing of the proceeding.
(9) We may here conveniently note that in Russell on Arbitration 17th Edn. page 45, the principle is expounded in the following form:
"Phrases such as 'disputes arising out of the contract' do not cover disputes as to whether the contract was entered into at all, or whether it was void ab initio (because, for example, its making was illegal), or whether it sets out the true intention of the parties."
This passage is based upon 1915-3 KB 167 and the subsequent case law in England.
(10) Under these circumstances, since the order can be sustained upon this major ground, it does not appear to be necessary to dilate, at any length, upon the subsidiary ground, namely, the bias apprehended by the plaintiffs with regard to the arbitrator specified under Cl. 25-an official to the Government of India, who was acquainted with the facts of the case and who had previously figured in negotiations prior to the application for stay of the suit. Not does it seem necessary to dwell particularly on the failure of the defendant (the Union of India) to reply to the notice of suit, and the considerable period that elapsed without any reply to the suit notice, before the action commenced. But we think it may be necessary to make one or two observations in this respect, because of the arguments before us, and certain facts as can be gleaned form the record. In the early case of Ives and Barker v. Williams, 1894-2 Ch 478 at p. 491, there is a citation from certain dicta of Lord Justice Bowen in an English case. Part of that citation runs as follows:
"It was an essential feature in the contract between the plaintiff and the railway company that a dispute such as that which has risen between the plaintiff and the company's engineer should be finally decided, not by a stranger or a wholly unbiased person, but by the company's engineer himself......virtually, the Engineer, on such an occasion, must be the judge, so to speak, in his own quarrel. Employees find it necessary in their own interests it seems, to impose such terms on the contracts whose tenders they accept, and the contractors are willing in order that their tenders should be accepted, to be bound by such terms. It is no part of contracts the contractor form the burden of a stipulation......................."
In the present case also, reliance has been placed on the part of the contract, which is explicitly to the effect that the previous knowledge of the arbitrator, in his capacity Government servant, of the facts of the instant case, will not deter the arbitration clause form having full effect.
(11) But we find that this view of the law has been superseded by later developments, even in the United Kingdom, and by an amendment of the English Arbitration Act. Undoubtedly, principles of natural justice have subsequently n received increased recognition in the case, and, if there is a well-founded apprehension of bias on the part of an arbitrator, because of his knowledge of the special facts, or the role that he has played in any negotiations pending the litigation, that would certainly constitute a legitimate justification for avoidance of the clause. It will be a question of fact whether such apprehension is well founded and such bias, or a reasonable possibility of it, may be inferred.
In the present case, the learned Government Pleader has argued that no more than one occasion, the defendant wrote to the plaintiffs for a panel of names outside the arbitrator specified in clause 25, form which the defendant was swilling to select on person as an arbitrator acceptable to both parties. But, as Sri V. Thyagarajan for the plaintiffs rightly emphasises, this is beyond the purview of the arbitration clause altogether, and, hence, irrelevant of the present context, however desirable it may be that the parties should finally settle the matter by some such means. In our view, the learned Judge (Sadasivam J.) was also justified in declining to grant the stay, or to enforce the arbitration clause, on this particular ground. In the affidavit, there are detailed averments regarding the part played by the named arbitrator during negotiations at Delhi; we are not able to se that they have been controverted, to any effect, in the counter affidavit of the defendant (the Union of India).
(12) Upon the above facts, and in the light of these considerations, the appeal fails and is dismissed with costs.