P L D 1956 Sind 96 (PLP)

INAMULLAH, J.‑This is an application under sections 33, 9 and (5) of the Arbitration Act of 1940 and arises under the following circumstances: On the 12th March 1953, the Ministry of Food, Govern ment of Pakistan, invited offers to sell 20,000 tons of joshi rice for export. The respondent Abdul Majid Opel in the present case made an offer on 28th March 1953 for purchasing the said rice for Rs. 65 per bag of 2 mds. The Ministry of Food asked the respondent to furnish a bank guarantee of Rs. 50,000 on 31st March 1953. The respondent asked for a further time of a week but the Ministry allowed time up to 7th April 1953 to furnish the bank guarantee. On 4th April 1953 the respondent furnished the bank guarantee by Muslim Commercial Bank. This bank guarantee, I may mention here, is contested by the petitioner, the Federation of Pakistan. On the 16th April 1953 a contract was signed between the parties for the sale of 20,000 tons of rice. Under para 9 of the said contract the respondent was required to furnish a bank guarantee of Rs. 7,08,000 which worked out at 5010 of the total value of the contract. The said bank guarantee or cash security was to be furnished by 20th April 1953. The respon dent failed to deposit the said amount or to furnish the security for the same with the result that the petitioner was obliged on the 22nd April 1953 to cancel the contract. The petitioner called upon the Muslim Commercial Bank which is alleged to have stood guarantee for Rs. 50,000 to pay the said amount to the petitioner. The bank, however, expressed ignorance about the said letter of guarantee. The respondent served a notice under section 80 Civil P. C dated the 8th June 1953 on the petitioner. The respondent, id under this notice repudiated the contract but in the alter native mentioned that he would refer the dispute to the arbitration of one Chaudhry Abdul Aziz and called upon the petitioner to appoint his arbitrator. The petitioner did not appoint any arbitrator with the result that the respondent appointed Chaudhry Abdul Aziz as the sole arbitrator. The main contention raised by Mr. Farooqi, the learned counsel for the petitioner is that the respondent having repudiated the contract it was not open to him to rely on the said contract to refer any dispute to arbitration. The respon dent cannot, it is urged, blow hot and cold in the same breath. It was open to the respondent to have accepted the agreement and compelled the petitioner to go to arbitration. It would be beyond the scope of an arbitrator to decide whether any contract was entered into between the parties or the same was void as the jurisdiction of the arbitrator pre‑supposes a valid agreement to refer to arbitration. In support of the contention Mr. Farooqi, the learned counsel for the petitioner relies on paras 11 and 16 of the notice under section 80, Civil P. C. given by the respondent to the Federation of Pakistan. The relevant portion of para 11 of the notice is as under "That the contract for the export of 20,000 tons Joshi Rice being varied from time to time and also not being finalised without proper security being furnished, there existed no legal contract between the parties authorising any one for demand of any liquidated damages whatsoever." The relevant portion of Para 16 of the said notice is as under: " That there being dispute between parties as to whether there was valid and binding contract and as to whether the security furnished was refundable and whether the Government itself could impose penalty etc . . . . . . ." The learned counsel for the petitioner also relied upon a portion of the objection filed by the respondent. In para 8 the respondent retreats the stand that he had taken in the notice in the following words: "No valid and subsisting and binding legal contract having come into force and the same being not signed in utter haste and under undue pressure and not being executed on proper stamp, the same had no binding effect. I have no doubt from a perusal of the notice and the objection filed by the respondent that the existence of the contract which embodies the agreement to refer to arbitra tion clause has been challenged and repudiated by the respon dent. The next question before me is whether the plaintiff can take advantage of this repudiation of the contract by in order to avoid reference to the arbitration as made by the defendant: The plaintiff to my mind can do so under section 33 of the Arbitration Act of 1940 and also under section 5 of Arbitra tion Act. So far as the first question is concerned, namely whether the present application can be granted under section 33 of the Arbitration Act the observation by Chagla C. J. in the case of M. Ghulamali Abdulhussain & Co. v. Vishwambharlal Puiya (A I R 1949 Bom. 158), is pertinent. " When the Legislature enacted section 32 and barred all suits with regard to the existence, effect or validity of an arbitration agreement, the object of the Legislature was that all questions with regard to these matters should be dealt with under the Arbitration Act, and not by substantive suits ; and it is open to a party to make any application with regard to which a suit is barred under section

32. Section 33 is merely one instance of such an application. The Legislature cannot conceivably deal with all possible applications that may arise with regard to which suits are barred under section

32. The right to make such applica tions is implicit in the very terms of section 32 itself. Hence though there is no provision in the Act to enable a party to establish the existence or validity of arbitration agreement, a suit in respect of which is barred by section 32, an application for the purpose can be entertained by the Court under the Arbitration Act, though not under section 33 thereof. Section 33 enables a party to challenge the existence or validity of an arbitration agreement and it does not enable him to establish its existence or validity." In view of the above observations of Chagla, C. J., which I respectfully adopt, it is clear that an application lies to have the validity or the existence of the arbitration agreement declared by Court. The respondent who has challenged the existence of the contract cannot be allowed to proceed with the arbitration as he now desires to proceed. In this connection some observations by Raymond, A. J. C. in the case of Jivraj Lakhamsi v. Tahkandas Mohandas (A I R 1920 Sind 27) are also relevant: " In other words, is it permissible for them to rely upon a subsidiary term in the contract, if they elect to treat the contract as void? If the contract is void, there can, of course, be no reference to arbitration." To the same effect is the case of A. E. G. India Electric Co. Ltd. v. General Electric Trading Co., (A I R 1929 Bom. 242). It was held in this case that: " Where an arbitration clause is inserted in the contract the general rule is that the dispute is referable to arbitra tion in a case where the avoidance of the contract arises out of the terms of the contract itself. Where, however, a party seeks to avoid the contract for reasons " dehors " it, the arbitration clause cannot be resorted to as it, together with the other terms of the contract is set aside. In other words, a party cannot rely on a term of the contract to repudiate it and still say the arbitration clause should not apply. If he relies on the contract he must rely on it for all pur poses." The respondent having challenged the existence of the contract he cannot be allowed to rely upon the existence of the arbitration clause contained therein. Mr. Ihsan‑ul‑Huq the learned counsel for the respondent relied on the case of Chhabildas Nandlal & Co. v. Damodar Khetsey & Co., (A I R 1943 Boon. 199). It was held in that case that where notwithstanding the arbitration clause in a contract which was binding on the plaintiff and the,‑‑defen dant, the plaintiff instituted a suit against the defendant without asking him whether he desired to go to arbitration the fact that before the suit the defendant had taken up the attitude that he had a right to cancel the contract containing the arbitration clause cannot preclude him from relying on the arbitration clause and is no reason for not granting his application for stay." Mr. Ihsan‑ul‑Haq contended that the mere fact that the defendant has repudiated the contract is no ground for grant ing any relief under section 33 of the Arbitration Act. It. would however appear from further perusal of the case that this authority is not in any way contrary to the conclusion to which I have arrived. Blackwell, J., observed while con sidering the question whether the defendant was entitled under section 34 of the Arbitration Act to have the proceeding of the suit stayed observed as under " I come now to the next point argued by Mr. Desai, viz. that the defendants were not ready and willing at the date of the filing of the suit to submit the disputes to arbitration. This is not a case in which the defendants had ever denied the factum of the contract. In the letter of 16th December 1941, from the defendants' attorney to which I have already referred, they expressly admitted that they had accepted the order. The attitude taken up by the defendants has been that while admitting that a binding contract had been concluded, they had, in the events which supervened, become entitled to cancel it. That is a dispute which arises out of an admitted contract . . . . . . . " It would appear from the above observation that where the existence of the contract itself is denied the party denying it cannot rely on the arbitration agreement. Moreover section 5 of the Arbitration agreement is a very wide section which reads as under " The authority of an appointed arbitrator or Umpire shall not be revocable except with the leave of the Court, unless a contrary intention is expressed in the arbitration agreement. Under this section the Court has been given power to revoke a reference to an appointed arbitrator or .umpire under circumstances which may tend to miscarriage of justice. Mr. Ihsan‑ul‑Haq submitted‑that the Court under section 5 of the Arbitration Act cannot revoke the Arbitration agree ment. His contention is quite correct. Under section 5 of the Arbitration Act the Court can revoke the reference to arbitration or umpire and not the Arbitration agreement itself. Under section 5 of the Arbitration Act of 1940 the power of revocation vested in the Court is discretionary and should be exercised with caution. The applicant must establish that there will be a failure of justice if the reference is allowed to proceed. I have no doubt that if the reference is allowed to proceed, it will amount to failure of justice inasmuch as it will involve unnecessary expense if the petitioner, were to attend the proceeding, though under protest, before the arbitrator. Moreover it would always be open to the plaintiff to challenge the award under section 30 of the Arbitration Act on the ground that the contract having been challenged and denied by the defendant, the reference to the Arbitrator was illegal and the arbitrator had no jurisdiction to proceed with the matter. I would under these circumstances revoke the reference of the alleged dispute to the arbitrator. I would also, for the reasons given above, hold that in view of the denial of the contract by the defendant and challenging its validity there could not be a valid reference toll' an arbitrator. A.H. Reference revoked.