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First Appeal from Order No. 38 of 1957, decided on 12^th December 1957, from the order of Muhammad Siddique, Senior Civil Judge, Lahore, dated the 6th July 1957.

Suit on negotiable instrument‑‑Plea that it is not f or consideration can be raised‑Onus on defendant to show that it is not for consideration.

S. 34‑Application for stay‑Issue of consideration‑Question as to what are rights of parties under a previous agreement which was the basis f or con sideration and which was within arbitration clause becomes directly matter of dispute‑Question whether plaintiff has performed his part of agreement is to be decided by arbitrator and not by Court.

S. 34‑Existence of agreement for reference must be alleged‑Existence or validity of very agreement containing arbitration clause challenged Alternative ground that even if there was a valid agreement to refer suit maybe stayed for reference to arbitration, not maintain able.

(d) Arbitration Act (X of 1940), S. 34‑Dispute may be specified in application under section 34.

There seems to be a general impression that the dispute cannot possibly be specified in the application because the defendant is debarred from filing a written statement if he puts in an application for stay, and a statement as to what is the dispute will amount to the filing of a written state ment. This is a misapprehension. When a person applies under section 34, he has to satisfy the Court firstly that there is an agreement to refer and secondly that the suit relates to any matter agreed to be referred, that is, there is a dispute between the parties which is covered by the agreement. Unless that is shown the suit cannot be stayed. If a suit is filed on the basis of an agreement which contains an arbitration clause, the mere fact that the defendant is not prepared to pay the amount to which he is liable under the agreement does not mean that there is a dispute between the parties.

A dispute does not mean simply a refusal to pay money for which a person is liable. A dispute is constituted by a proposition of fact or law being alleged by one party and denied by the other. The defendant must state, though not in detail, the matters which the other party alleges and which he denies or he alleges and the other party denies and the decision of which would affect the rights of the parties. When the defendant thus states the dispute, the Court will determine whether it falls under the arbitration agreement.

The fact that the defendant sets out the dispute in his application under section 34 does not mean that he is putting in a written statement although he does state his own version of the facts or law. This does not amount to the taking of a step in the proceedings so as to debar him from securing an order of stay. He is bound to state the difference or dispute in the application.

F. M. Anwar for Appellant.

M. Iqbal Hussain and M. Inayat Ullah for Respondents.

Date of hearing: 12th December 1957.

This is an appeal against the order of Ch. Muhammad Siddique, Senior Civil Judge, Lahore, refusing to stay a suit under section 34 of the Arbitration Act. The plaintiff in the suit is Firdaus Films. The defendants are Novelty Cinema, Lyallpur, and S. M. Ashiq. The allegations are that defendant No. 1, Novelty Cinema, had entered into an agreement with the plaintiffs for the exhibition of the plaintiffs' film, "Mirza Sahiban". It was agreed between the parties that the total payment to be paid to the plaintiffs in respect of exhibition was Rs. 20,000. Rupees 2,000 were paid at the time when the agreement was executed and the remaining balance of Rs. 18,000 was paid by four cheques. These cheques were, however, subsequently dishonoured and the present suit was filed to recover the amount of the cheques. The second defendant, S. M. Ashiq, has been impleaded because he was the Manager of the Novelty Cinema at the relevant time and it is he who had signed the agree ment as well as the cheques on behalf of defendant No. 1. He was to be held liable only in case defendant No. 1 successfully impeached his authority to act on behalf of defendant No. 1.

2. Defendant No. 1 put in an application under section 34 of the Arbitration Act, saying that in accordance with the agreement on which the plaintiffs relied any dispute which arose between the parties out of the agreement was to be referred to arbitration and, therefore, the suit should be stayed. Faced with this application, the plaintiff's took up the position that they would confine this suit to the rights which arose out of the dishonouring of the cheques and they would not base it on the original cause of action at all. The learned Senior Civil judge was of the opinion that the plaintiffs took a grave risk in confining their claim, to the cheques, but he held that as the plaintiffs were thus limiting their cause of action the dispute would not be within the arbitration clause. He, therefore, dismissed the application.

3. Now, so far as the basis of the learned Senior Civil Judge's order is concerned, it does appear to one at first sight that a claim which is based on a cheque has no relation to the original cause of action for the liability for payment of money which arose under the agreement may be said to have been discharged by the issue of the cheques. Going, however a little deeper into the question, it will be clear that even if the suit is based on the cheques the Court may, on the plea of the defendant, be forced to go into the question whether the liability which the cheques purport to discharge was a true and valid liability. I have asked learned counsel for the plaintiff‑respondents to state whether it will not be a good defence to a suit based solely on a cheque that the cheque was issued on account of a non existent cause of action. He has frankly conceded that that would be a good defence. If defendant No. 1 proves, that although it had issued the cheques, the plaintiff had not in fact performed their part of the contract and that it was not in fact liable to pay the money for which the cheques were issued, the suit would have to be dismissed. It is a good defence to a suit based on a negotiable instrument that it was not for consideration even though the onus of proving that it was not for consideration is on the defendant. Consideration may be only a pre‑existing liability in respect of another agreement. When the issue of consideration is raised, the question as to what are the rights of parties under that agreement becomes directly a matter of dispute. Under the circumstances it cannot be said that even if the suit was based on the cheques, the Court would not be concerned with the dispute arising out of the agreement. The Court may have to adjudicate as to the question whether plaintiffs had performed their part of the agreement and that is a matter which, according to arbitration clause, would have to be decided by the arbitrator and not by the Court.

4. While the fact that the plaintiffs have agreed to confine their claim to the cheques may not have afforded a good ground for the dismissal of the application under section 34, there are two reasons why the application should be dismissed. The first is that defendant No. 1 is not alleging the existence of an agreement of reference. He did not say so in the application and I have asked his learned counsel to state now as to whether he asserts the existence between him and the plaintiffs of an agreement containing an arbitra tion clause. He says he is not making any such allegation. He only relies upon the fact that the agreement on which the plaintiffs rely contains an arbitration clause. I do not think, under these circumstances, he is entitled to make an application under section 34 of the Arbitration Act at all. It is necessary for a person who applies under section 34 of the Arbitration Act to allege that there is between him and the plaintiff an agreement to refer the dispute in suit to arbitration. Section 34 is attracted only when an agreement for reference exists, and he who wants to avail of the section must say that it exists. A simple statement that in the agreement on which the plaintiffs rely there is an arbitration clause is insufficient. It is to be remembered that a suit is stayed only in order that the party applying under section 34 may go and put in an application for reference to arbitration of the matter in dispute. If the defendant has to go and apply for such reference he will have to allege in the application the existence of an agreement for reference. He will not succeed by simply saying, if there is an agreement it may be referred to arbitration. Defendant No. 1 is not prepared to allege an agreement of reference because it does not want to give up the plea that defendant No. 2 was not its agent at all, and there is no valid agreement between it and the plaintiff. If it wants to take up that plea, it cannot pray that the suit be stayed under section 34. Persons who want to attack the existence or validity of the very agreement which contains an arbitration clause are deprived of an alternative defence that even if there is an agreement the suit should be stayed for a reference to arbitration. One reason for this result is that the question as whether there is an agreement has first to be decided by the Court and once the Court begins proceedings section 34 does not apply.

5. The second reason for the dismissal of this application is that it mentions no dispute. I have already experienced a difficulty in deciding some other cases under section 34 of the Arbitration Act because in the application for stay the dispute was not specified. There seems to be a general impression that the dispute cannot possibly be specified in the application because the defendant is debarred from filing a written statement if he puts in an application for stay, and a statement as to what is the dispute will amount to the filing of a written statement. This is misapprehension When a person applies under section 34, he has to satisfy the Court firstly that there is an agreement to refer and secondly that the suit relates to any matter agreed to be referred, that is, there is a dispute between the parties which is covered by the agreement. Unless that is shown the suit cannot be stayed. If a suit is filed on the basis of an agree ment which contains an arbitration clause, the mere fact G that the defendant is not prepared to pay the amount to which he is liable under the agreement does not mean that there is a dispute between the parties, It is not necessary to quote authorities to show that a dispute does not mean simply a refusal to pay money for which a person is liable. H A dispute is constituted by a proposition of fact or law being alleged by one party and denied by the other. The defendant must state, though not in detail, the matters which the other party alleges and which he denies or he alleges and the other party denies and the decision of which would affect the rights of the parties. When ‑the defendant thus states the dispute, the Court will determine whether it falls under the arbitration agreement.

6. The fact that the defendant states the dispute in his application under section 34 does not mean that he is r putting in a written statement although he does state his own version of the facts or law. This does not amount to the taking of a step in the proceedings so as to debar him from securing an order of stay. He is bound to state the difference or dispute in the application.

7. In the present case, the application does not mention the dispute at all. It simply says that as there is an arbitration clause in the agreement, the suit should be stayed. The application is, therefore, liable to be dismissed on this ground too. Of course, in view of the fact that on account of a misapprehension disputes are generally not stated in the applications under section 34, I would have been prepared to consider an application for amendment of the application for stay but no such request has been made. This appeal is dismissed with costs.

K. M. A. Appeal dismissed.

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