Source: https://www.legalcrystal.com/case/502377/century-spinning-manufacturing-co-ltd-vs-motilal-dhariwal
Timestamp: 2019-04-20 16:47:47+00:00

Document:
Judge T.C. Shrivastava and ;S.P. Bhargava, JJ.
Appellant Century Spinning and Manufacturing Co. Ltd.
Appellant Advocate A.P. Sen, Adv.
Respondent Advocate R.K. Verma, Adv.
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.
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.
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.
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.
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.

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