Case Study: I.T.C. Limited v. George Joseph Fernandes

“The court upheld the contract’s validity, stating there was no mutual mistake.”

Citation: (1989) 2 SCC 1.

Date of Judgment: 6^th February, 1989

Court: Supreme Court of India

Bench: G.L. Oza (J), K.N. Saikia (J)

Facts

• The appellant and the respondent entered into an agreement to charter hire the trawlers for a period of two years, subject to approvals from the Chief Controller of Imports & Exports and a No Objection Certificate (NOC) from Canara Bank.
• As per the agreement, the respondent was to deliver the trawlers to the appellant at Visakhapatnam for inspection and repairs. The appellant was to inspect and carry out repairs, ensuring the trawlers were fully operational, with fishing trials to follow. The charter hire would commence only after successful trials and upon receiving certification of seaworthiness.
• The dispute arose when the appellant discovered the trawlers were defective and not fully operational. As per the appellant, the trawlers suffered from an inherent latent defect, which could not be ascertained by ordinary diligence at the time of entering into the agreement.
• Despite modifications, the trawlers could not be operational as per the standard minus 20F; they could attain only minus 10F. The appellant argued that the agreement was based on the mistaken belief that the trawlers would be in good working condition. The appellant claimed the agreement was void and against public policy due to this fundamental defect.

Decision of the trial court

The learned trial court exercised its discretion to examine the contract’s validity. It ultimately concluded that there was no illegality on the grounds of violation of the permissions or conditions imposed by the Chief Controller of Exports and Imports.

Decision of the High Court

The Appellate Court upheld the trial court’s judgment. The court ruled that the trial court was correct in ascertaining the validity of the contract. Furthermore, the court ruled that the contract did not involve a situation of mutual mistake.

Decision of the Supreme Court

The apex court ruled that it has jurisdiction to rule on the validity of a contract containing an arbitration clause under Section 34 of the Arbitration and Conciliation Act. Furthermore, the court observed that while there was a mutual mistake about the refrigeration system’s performance, it did not invalidate the contract. The court determined that the contract remained valid despite the performance issues.

Key legal issues discussed

1. Does the court have jurisdiction to rule on the validity of a contract with an arbitration clause when an application under Section 34 of the Arbitration and Conciliation Act is filed?

Yes

The court referred to Section 34 of the Arbitration and Conciliation Act, 1996, while deciding the issue. The court stated that Section 34 confers discretion upon the court to exercise its power when there has been a valid agreement to submit to arbitration. The court stated that if an arbitration agreement squarely covers the issue, the provisions of the Arbitration and Conciliation Act 1996 would be adopted. The court observed that it has the discretion to decide the validity of a contract when an issue is raised about the validity of the arbitration agreement, even though it may incidentally involve a decision regarding the validity or existence of the challenged contract.

The court further stated that the arbitration clause must cover the dispute in question for the court to stay the proceedings. If the dispute falls outside the scope of the clause, the court may have jurisdiction to resolve it. The court relied upon Renusagar Co. v. General Electric Co.[1] in the 17^th para, remarking that “it has been reiterated that though section 34 of the Arbitration Act, 1940 confers a discretion upon the Court in the matter of granting stay of legal proceedings where there is an arbitration agreement, it cannot be disputed that before granting the stay the Court has to satisfy itself that arbitration agreement exists factually and legally and that the disputes between the parties are in regard to the matters agreed to be referred to arbitration and that decided cases have taken the view that the Court must satisfy itself about these matters before the stay order is issued.”  

The court concluded that the trial court correctly addressed the validity and legality of the parent contract. This determination was based on careful consideration of the issues presented, the arbitration clause, the surrounding context, and the actions of the parties from the execution and modification of the charter party up until the appellant raised an objection.

2. Can the agreement be deemed void ab initio on the grounds of mutual mistake?

No

The court stated that a contract is void if something implied in both the offer and the acceptance stops the contract from being operative while relying upon Smith v. Hughes[2]. In the 23rd para, the court remarked, “There is no doubt that the application of the doctrine of mutual mistake depends upon the true construction of the contract made between the parties. A mutual misunderstanding will not nullify a contract but only if terms of the contract construed in the light of the nature of the contract and of the circumstances believed to exist at the time it was done show that it was never intended to apply to the situation which in reality existed at that time, will the contract be held void. 

The court noted that, in this case, the issue was not the complete absence of a refrigeration system in the vessels but rather its inadequate performance. Despite extensive repairs, the system failed to achieve the desired temperature of -20 degrees Fahrenheit, operating only at -10 degrees Fahrenheit. The court’s primary inquiry was whether both parties had considered this specific temperature requirement when entering into the contract or if a mutual mistake had occurred regarding this aspect. The court concluded that there was no such mutual mistake, as evidenced by the parties’ actions in attempting to repair the refrigeration system and the contract’s provisions, including its modifications. Therefore, the court determined that the contract remained valid.

[1] AIR 1985 SC 1156..

[2] (1871) LR 6 QB 597.