Shiva Jute Baling Limited Vs. Hindley and
Company Limited [1959] INSC 105 (21 August 1959)
WANCHOO, K.N.
SINHA, BHUVNESHWAR P.
GAJENDRAGADKAR, P.B.
CITATION: 1959 AIR 1357 1960 SCR (1) 569
ACT:
Arbitration-Contract-Award Passed Pending
legal proceedings challenging the existence and validity of contract-Validity-
Breach of contract-Contract providing for Penalty as liquidated damages Award
granting maximum-Legality--Indian Contract Act, 1872 (9 of 1872), ss. 73,
74-Arbitration (Protocol and Convention Act, 1937 (6 of 1937) s. 7(e)-
Arbitration Act, 1940 (10 of 1940), ss 33, 35.
HEADNOTE:
The appellant company, incorporated in India, entered into a contract on June 18, 1945, for the supply of five hundred bales of
jute, with the respondent company which was incorporated in England and which had its registered office in London. The contract, inter alia, provided
that in the event of default of tender or delivery, the seller shall pay to the
buyer as and for liquidated damages 10s. per ton plus the excess (if any) of
the market value over the contract price, the market value being that of jute
contracted for on the day following the date of default. There was a provision
for arbitration, under which any claim or dispute whatever arising out of, or
in relation to this contract or its construction or fulfilment shall be
referred to arbitration in London in accordance with the bye-laws of the London jute Association. Disputes having arisen regarding the performance of the contract
the respondent referred the matter to the arbitration of the London jute
Association, who appointed two of its members as the arbitrators. The appellant
did not reply to the notice given by the arbitrators but filed an application
on 570 August 10, 1949, under s. 33 Of the Arbitration Act, 1940, in the
Calcutta High Court, praying, inter alia, (a) for a declaration that the
arbitration agreement was void on the ground of uncertainty, and (b) for a
declaration that there was in fact and in law no contract between the parties
on account of mutual mistake of the parties. Notice was given by the appellant
to the respondent and the London jute Association that further steps in the
arbitration proceedings should not be taken pending disposal of the application
under S. 33 Of the Arbitration Act, 1940. The arbitrators, however, proceeded
with the arbitration and gave their award on October 17, 1949. On November 26,
195i, an application was filed by the respondent in the Calcutta High Court
under s. 5 of the Arbitration (Protocol and Convention) Act, 1937, praying that
judgment be pronounced in accordance with the award. The appellant contended
that the award was invalid on the grounds, inter alia, (i) that the award was
bad under s. 35 of the Arbitration Act, 1940, as it was made after the receipt
of the notice of filing of the petition dated August 10, 1940, under s. 33 of
the Arbitration Act, by the respondent and the arbitrators and during the
pendency of the said application, and (2) that the liquidated damages provided
under the award included not only the difference between the contract price and
the market price on the date of default but also a further sum of 10s. per ton,
that the extra amount was against the provisions Of ss. 73 and 74 of the Indian
Contract Act, 1872, and that, therefore, the award was bad on the face of it
and could not be enforced in view of the provisions Of s. 7(e) of the Arbitration
(Protocol and Convention) Act, 1937, which lays down that an award cannot be
enforced in India if it is contrary to the Law of India.
Held: (i) that the subject-matter of the
legal proceedings under s. 33 Of the Arbitration Act, 1940, which relates to
the existence and validity of the arbitration agreement, are not matters within
the competence of the arbitrators, and do not therefore cover any part of the
subject-matter of the reference. Consequently, S. 35 of the Arbitration Act is
inapplicable.
(2) The award does not violate the provisions
of ss. 73 and 74 Of the Indian Contract Act, 1872, as the arbitrators have only
awarded the maximum amount named in the contract.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 262 of 1955.
Appeal by special leave from the, judgment
and decree dated February 4, 1953, of the Calcutta -High Court, in Appeal from
original decree No. 68 of 1952 arising out of the judgment and decree dated'
January 14, 1952, of the said High Court, in Special Suit No. 2 of 1951.
571 N. C. Chatterjee, C. B. Agarwala and
Sukumar Ghose, for the appellants.
B. Sen, S. N. Mukherjee, S. N. Andley, J. B.
Dadachanji and Rameshwar Nath, for the respondents. 1959. August 21. The
Judgment of the Court was delivered by WANCHOO J.-This is an appeal by special
leave against the judgment of the Calcutta High Court. The appellant is a
company, incorporated in India, with its registered office in Calcutta dealing
in jute. It entered into a contract on June 18, 1945, with the
respondent-company, which is incorporated in England and has its registered
office in London. The contract was for the supply of five hundred bales of jute
of crop 1945-46 to be shipped from Calcutta or Chittagong to Rio de Janeiro,
when freight became available.
The contract provides that in the event of
default of tender or delivery, the seller shall pay to the buyer as and for
liquidated damages 10s. per ton plus the excess (if any) of the market value
over the contract price, the market value being that of jute contracted for on
the day following the date, of default. This date was to be the date in London
on declaration of default by telegram or without such declaration if default
was eventually made by lapse of time on the 21st day after expiry of the
extended period. There is also a provision for arbitration, which lays down
that any claim or dispute whatever arising out of, or in relation to this
contract or its construction or fulfillment shall be referred to arbitration in
London in accordance with the bye-laws of the London Jute Association, and it
was open to either party to claim arbitration whenever and as often as disputes
arose. The contract also provides for an appeal by any party dissenting from an
arbitration award to the London Jute Association in accordance with the
regulations in force for the time being. Lastly, it is provided that the
contract would be construed according to the laws ,of England whatever the
residence and nationality of the parties might be or become and would be deemed
to be performed there. The courts of England or 572 arbitrators, as the case
might be, would have exclusive jurisdiction over all disputes which might arise
under the contract, except for the purpose of enforcing in the Colonies or
abroad any arbitration award made under this contract, On. June 23, 1947,
thirty-nine bales of jute were consigned by the appellant to Rio de Janeiro in
part performance of the contract and information of this was given to the
respondent by letter on July 17, 1947. It was said in this letter that
difficulty had arisen because of the non- availability of quota and it was
hoped that the balance remaining under the contract would be shipped as soon as
quota was available. The respondent sent a reply to this letter on July 25,
1947, and the appellant wrote a further letter on August 1, 1947, in which it
was said that the remaining amount of jute under the contract would be shipped
as soon as the quota was available.
We do not know what happened thereafter till
we come to August 1948. It seems that the respondent received a cable on August
12, 1948, from the appellant stating that the contract stood cancelled long
ago. The respondent by its letter dated August 12, 1948, refused to %accept
this position. Thereafter there were disputes and differences between the
parties and eventually the respondent claimed default on or about June 1949 in
terms of the contract. On or about July 14, 1949, the respondent referred the
matter to the arbitration of the London Jute Association, which appointed two
of its member as arbitrators. The respondent filed its claim before the
arbitrators on July 23, 1949. On July 27, 1949, the arbitrators gave notice to
the appellant to file its answer by August 19, 1949. The appellant, however,
filed no answer before the arbitrators. What the appellant did in reply was to
file an application under s.
33 of the Indian Arbitration Act, 1940
(hereinafter called the Arbitration Act), on the original side of the Calcutta
High Court, in which it made three prayers, namely- (a) declaration that the
arbitration agreement, if any, between the parties was void ab initio on the
573 ground of uncertainty and was not binding on the appellant;
(b) declaration that there was in fact and in
law no contract between the parties on account of mutual mistake of the
parties; and (c) that the court might be pleased to adjudicate on the existence
and/or validity of the alleged arbitration agreement and the effect of the
same.
This application was moved on August 12,
1949. It appears that on August 13, 1949, the appellant sent a cable to the
respondent and the London Jute Association informing them that an application
had been made in the Calcutta High Court challenging the submissions contained
in the contract and that the arbitrators had become functus officio pending
disposal of the application, which was fixed for August 29.
The appellant received a reply to its cable
in which it was asserted that no such application as the appellant bad made to
the Calcutta High Court could be made there and that the arbitrators would
proceed with the adjudication on August 27 as already fixed. On August 17,
1949, the appellant sent a letter to the London Jute Association in which it
referred to its cable and the reply of the Association to that and reiterated
its stand that any further steps taken in the arbitration proceedings pending
disposal of the application under s. 33 would be invalid under the Arbitration
Act. The arbitrators, however, proceeded with the arbitration and gave their
award on October 17, 1949.
No proceedings thereafter were taken by the
appellant in London, nor does it appear that any steps were taken by it to have
its application under s. 33 decided, till we come to November 26, 1951. On that
date, an application was filed by the respondent in the Calcutta High Court
under s. 5 of the Arbitration (Protocol and Convention) Act, 1937, (hereinafter
called the Protocol Act). Along with this application it filed the award dated
October 17, 1949, and prayed that judgment be pronounced in accordance with the
award and decree be passed accordingly. Notice of this was issued to the
appellant, which filed its reply on January 14, 73 574 1952, We do not think it
necessary to set' out the petition of the respondent under s. 5 of the Protocol
Act and the appellant's reply thereto in detail, because when the matter came
to be heard in court only two points were urged on behalf of the appellant,
namely (1) that the award was made after the notice of filing of the petition
dated August 10, 1949, under s. 33 of the Arbitration Act had been given to the
respondent and the arbitrators, and consequently the award made after the
receipt of the said notice and during the pendency of the said application was
bad under s. 35 of the Arbitration Act;
and (2) that the award was bad on the face of
it and could not therefore be enforced in view of the provisions of s. 7(e) of
the Protocol Act, which lays down that an award cannot be enforced in India if
it is contrary to the law of India. It was contended that the award was
contrary to the law of India and this appeared on the face of it inasmuch as
the arbitrators had purported to award such damages as could not be done under
the provisions of the Indian Contract Act, 1872.
Both these contentions were negatived by the
learned Single Judge and he ordered the award to be filed, in court and passed
a decree in terms thereof.
The appellant then went up in appeal, which
was heard by a Division Bench of the Calcutta High Court. The grounds of appeal
show that the same two points, which were urged before the learned Single
Judge' were reiterated therein.
When the matter came to be heard before the
Division Bench, the same two points were raised on behalf of the appellant
there also. The Division Bench negatived the two contentions raised before it
on behalf of the appellant and confirmed the judgment of the learned Single
Judge. It is curious, however' to notice that though all these proceedings were
being taken on the application under s. 5 of the Protocol Act the appellant
apparently took no steps to have its application under s. 33 of the Arbitration
Act, which seems to have been adjourned sine die, decided along with the
respondent's application under s. 5 of the Protocol Act, 575 This was followed
by an application for a certificate to appeal to this Court, which was refused.
Then the appellant applied to this Court for special leave to appeal, which was
granted. In the special leave petition also the appellant raised the same to
points, namely, (i) the construction of ss. 33 and 35 of the Arbitration Act
and the application of these provisions to the facts of this case, and (ii) the
construction of s. 7 of the Protocol Act and the Indian Contract Act with
respect to the damages awarded by the award.
In the statement of case also after narrating
the facts and circumstances, the same two points were mentioned as the
principal questions which arose for determination in the appeal, namely, (i)
the effect of ss. 33 and 35 of the Arbitration Act on the facts and
circumstances of this case, and (ii) the interpretation of s. 7 of the Protocol
Act in the light of ss. 73 and 74 of the Indian Contract Act and their bearing
on the damages awarded by the arbitrators and its effect on the validity of the
award.
Learned counsel for appellant, however,
wanted to raise before us other points arising out of s. 7 of the Protocol Act.
We do not think that the appellant should be permitted to raise at this late
stage any new point in addition to the two points which were urged before the
learned Single Judge and which only have all along been raised in the appeal to
the High Court and in the appeal before this Court. We shall therefore confine
the appellant to these two points only and proceed on the assumption in the
same manner as has been done by the High Court, namely, that an application
under s. 33 of the Arbitration Act would lie in the circumstances of this case
and therefore the provisions of s. 35 of the Arbitration Act would be
attracted.
Re. (1).
The part of s. 33 of the Arbitration Act,
relevant for our purpose, lays down that any party to an arbitration agreement
desiring to challenge the existence or validity of an arbitration agreement or
to have its effect determined shall apply to the court and the court shall
decide the question. It will thus be clear that 576 s.33 contemplates an
application for three purposes, namely, (i) when it is desired to challenge the
existence of an arbitration agreement, (ii) when it is desired to challenge its
validity, and (iii) when it is desired to have its effect determined. An
arbitration agreement may come into existence in one of two ways; it may either
arise out of an agreement which contains nothing else besides the arbitration
agreement, or it may arise out of a term contained in a contract which deals
with various other matters relating to the contract, which is the present case.
Where one is dealing with an arbitration
agreement of the second kind, s. 33 is concerned only with the term relating to
arbitration in the contract and not with the other terms of the contract which
do not arise for consideration on an application under that section.
Then we come to s. 35. It provides that no
reference or award shall be rendered invalid by reason only of the commencement
of legal proceedings upon the subject-matter of the reference, but when legal
proceedings upon the whole of the subject-matter of the reference has been
commenced between all the parties to the reference and a notice thereof has
been given to the arbitrators or umpire, all further proceedings in a pending
reference shall, unless a stay of proceedings is granted under s. 34, be
invalid. It will be seen, therefore, 'that s. 35 makes proceedings before the
arbitrators invalid in the absence of an order under s. 34 staying the legal
proceedings, where whole of the subject-matter of the reference is covered by
any legal proceedings taken with respect to it. In other words, an arbitrator
can continue the proceedings and proceed to make the award on the reference,
unless the whole of the subject- matter of the reference is covered by the
legal proceedings which have been instituted. Assuming that the proceedings
taken under s. 33 are " legal proceedings ", mentioned in s.
35, the question which immediately arises on
the facts of the present case is whether the whole of the subject-matter of the
reference in this case was covered by the legal pro- ceedings taken by the
appellant by its application under s.
33 of the Arbitration Act.
577 In dealing with this aspect of the case,
learned counsel for the appellant raised the question of frustration of the
contract and the powers of the court and the arbitrator in that behalf. It is
true that the words " frustration of contract " have been used in
paragraph 8 of the application.
But the prayers do not show that any relief
was claimed on that ground, relief (c) being merely a repetition of the words
of s. 33 of the Arbitration Act. Learned counsel relied on Heymen v. Darwins
Ltd. (1) in this connection. We do not think we should permit the appellant to
raise this contention at this late stage and would content ourselves by
pointing out incidentally that even if the dictum in Heymen's case (1) is
accepted, it will not help the appellant, for on that dictum the question of
frustration would be for the arbitrators to decide on the basis of the terms
used in this contract which are of the widest amplitude and would not be a
matter for consideration of the court. On this basis there would be no identity
of subject- matter between what can be raised in an application under s. 33 on
the facts of this case and what can be decided by the arbitrators. However, we
do not propose to pursue this matter any further and to decide it.
Then we turn to prayers (a) and (b) of
paragraph 9 of the application based on paragraphs 6 and 7 thereof. These
prayers undoubtedly cannot be the subject-matter of arbitration, for they go to
the very root of the contract and imply that there was no contract between the
parties at all and therefore no arbitration agreement. These prayers can
certainly form the basis of an application under s. 33, for they relate to the
existence and validity of the arbitration agreement contained in the contract;
but not being matters within the competence of the arbitrators, there can be no
identity of the subject-matter under reference to the arbitrators and the
subject-matter of prayers (a) and (b). The conclusion, therefore, is that
prayers (a) and (b) can be the subject-matter of an application under s. 33 but
they cannot be the subject- matter of the reference to the arbitrators.
Therefore, (1) [19421 2 A.C. 356.
578 the subject-matter of the legal
proceedings under s. 33 in this case cannot and does not cover any part of the
subject- matter of the reference. Section 35 in consequence can have no
application and the award cannot be assailed as invalid on the ground that it
violates s. 35 of the Arbitration Act.
The first contention, therefore, must fail.
Re. (2).
The argument under this head is that the
liquidated damages provided under cl. (1 2) of the contract include not only
the difference between the contract price and the market price on the date of
default but also a further sum of 10s.
per ton. Reference in this connection is made
to ss. 73 and 74 of the Indian Contract Act, and it is said that the extra
amount of 10s. per ton included in the sum of liquidated damages is against the
provision of these, sections and therefore the award being against the law of
India is bad on the face of it and should not be enforced in India. Section 73
provides for compensation for loss or damage caused by breach of contract. It
lays down that when a contract has been broken, the party who suffers by such
breach is entitled to receive from the party who has broken the contract
compensation for any loss or damage caused to him thereby, which naturally
arose in the usual course of things from such breach, or which the parties
knew, when they made the contract, to be likely to result from the breach of
it. Section 74, provides for breach of contract where penalty is stipulated for
or a sum is named and lays down that when a contract has been broken, if a sum
is named in the contract as the amount to be paid in case of such breach, or if
the contract contains any other stipulation by way of penalty, the party
complaining of the breach is entitled, whether or not actual damage or loss is
proved to have been caused thereby, to receive from the party who has broken
the contract reasonable compensation not exceeding the amount so named or, as
the case may be, the penalty stipulated for. What cl. (12) of the contract
provides in this case is the measure of liquidated damages and that consists of
579 two things, namely, (i) the difference between the contract price and the
market price on the date of default, and (ii) an addition of 10s. per ton above
that. There is nothing in s. 73 or s. 74 of the Contract Act, which makes the
award of such liquidated damages illegal. Assuming that the case is covered by
s. 74, it is provided therein that reasonable compensation may be awarded for
breach of contract subject to the maximum amount named in the contract. What
the arbitrators have done is to award the maximum amount named in the contract.
If the appellant wanted to challenge the reasonableness of that provision in
cl. (12) it should have appeared before the arbitrators and represented its
case.
It cannot now be heard to say that simply
because cl. (12) provided for a further sum of 10s. per ton over and above the
difference between the contract price and the market price on the date of the
default, this was per se unreasonable and was therefore bad according to the
law of India as laid down in ss. 73 and 74, of the Contract Act.
Both these sections provide for reasonable
compensation and s. 74 contemplates that the maximum reasonable compensation may
be the amount which may be named in the contract. In this case the arbitrators
have awarded the maximum amount so named and nothing more. Their award in the
circumstances cannot be said to be bad on the face of it, nor can it be said to
be against the law of India as contained in these sections of the Contract Act.
The second contention must also fail.
We, therefore, dismiss the appeal with costs
to the respondent.
Appeal dismissed.
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