Khardah Company Ltd. v. Raymon & Co. (India) Private Ltd.

In this 5-minute read, the readers will learn how the Supreme Court delved into an impugned contract to determine whether the parties could validly approach the arbitration system or not.
CITATIONAIR 1962 SC 1810
COURTSupreme Court of India
JUDGES/CORAMChief Justice B.P. Sinha, Justice T.L. Venkatarama Aiyyar, Justice K. Subba Rao, Justice N. Rajagopala Ayyangar and Justice J.R Mundholkar
DATE OF JUDGEMENT04.05.1962

Introduction

Contracts form an important part of our everyday lives, and especially in business and commerce. With the increase in popularity of arbitration as a dispute resolving mechanism, business contracts now contain arbitration clauses. These clauses may be in the same contract or form a supplementing arbitration agreement. The question in the present dispute arose from one such contract, which provided for arbitration to resolve any disputes but the respondent contended that the contract itself was invalid which made the arbitration clause also non-operational.

Facts

The facts of the case are as follows: Appellant, Khardah Company Ltd., was the owner of a Jute Mill at Calcutta and was engaged in the business of manufacture and sale of jute. The Company entered into a contract with the respondent, Raymon & Co. (India) Private Ltd., on 07.09.1995. As per the contract, the respondent had to sell and deliver to the appellant, the specific quantity of bales of jute at a specified rate in the months of October, November, and December of 1995. In the same contract, clause 14 provided the arbitration clause in the following terms: all disputes arising out of or concerning the contract should be referred to the arbitration of the Bengal Chamber of Commerce.

It is important to note one more event, which occurred prior to the formation of a contract: exercising its powers under the Forward Contracts (Regulation) Act, 1952, the Central Government issued a Notification on 29.10.1953 stating, “No person shall enter into any forward contract other than a non-transferable specific delivery contract for the sale or purchase of raw jute in any form”.

On the failure of the respondent to make the delivery as per the contract entered on 07.07.1995, the appellant applied to the Bengal Chamber of Commerce for arbitration in accordance with clause 14 of the contract. The respondent contested the award of arbitrators by an application under Section 33 of the Arbitration Act. Finally, the five-judge bench of the Apex Court held that the arbitration proceedings were invalid.

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Issues

The main issues in the case are:

  1. Whether or not the respondent was entitled to maintain their application under Section 33 of the Arbitration Act.
  2. Whether or not the respondents were estopped from questioning the validity of award because they had already submitted to the jurisdiction of the arbitrators at Bengal Chamber of Commerce.
  3. Whether or not the contract dated, 07.09.1995 was illegal. Whether or not the contract fell within the prohibition enacted by the Central Government through their Notification on 29.10.1953.

Summary of court decision and judgment

As soon as the respondent did not complete their obligation in the contract between the two parties, the appellant applied to the Bengal Chamber of Commerce. At the arbitration, the arbitrators gave the award in favor of the appellant. As per the award, the respondent had to pay Rs. 41,250 along with interest to the appellant. The award was duly filed under Section 14(2) of the Indian Arbitration Act in the Calcutta High Court.

Consequently, the respondents filed an application under Section 33 of the Arbitration Act, before the Calcutta High Court for declaration of the original contract as illegal as it was in contravention of notification by Central Government dated 29.10.1953; and, declaration of proceedings before Bengal Chamber of Commerce and their award also as void. The application was dismissed by the learned judge and he passed a decree in terms of the award.

Thus, the respondent appealed against the arbitral award as well as the High Court judgment before a Division Bench of the High Court. The Division Bench held the contract to be illegal as it was in contravention of the Central Government notification. The appeal was allowed and the arbitral award was set aside. Finally, the appellants applied for a certificate under Article 133(1) of the Constitution of India, and the same was granted, and they appealed before the Supreme Court. The 5-judge bench of the Supreme Court allowed their appeal.

Analysis

With regards to the first issue, Section 33 of the Arbitration Act is provides for the following: a party to an arbitration agreement who desires to challenge the existence or validity of an arbitration agreement should apply to the Court for determination of the question. Thus, the arbitrators were not the ones to decide about the illegality of the contract under clause 14 of the original contract, rather it was the jurisdiction of the Court, under Section 33 of the Act.

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Next, clause 14 of the 1995 contract used expressions like “arising out of” and/or “concerning” and/or “in connection with” and/or “in consequence of” and/or “relating to this contract” which imply that any dispute regarding the validity of the agreement shall also be referred to Bengal Chamber of Commerce. If the agreement itself was illegal and invalid, clause 14 could also not be held valid as per the principle of ex nihilo nil fit. Following this, if the agreement was void, then there was no actual submission before the arbitrators, and the proceedings before them would be wholly without jurisdiction. What actually confers jurisdiction on arbitrators is an arbitration agreement as defined in Section 2(a) of the Arbitration Act.

Before moving on issue 3, there are some important definitions as per the Forward Contracts (Regulation) Act, 1952

  1. Section 2(n) defines ‘transferable specific delivery contract’ as “a specific delivery contract which is not a non- transferable specific delivery contract”. 
  2. Section 2(f) defines ‘non-transferable specific delivery contract’ as meaning “a specific delivery contract the rights or liabilities under which or under any delivery order, railway receipt, bill of lading, warehouse receipt or any other document of title relating thereto are not transferable”
  3. Section 2(m) defines ‘specific delivery contract’ as a “forward contract which provides for the actual delivery of specific qualities or types of goods during a specified future period at a price fixed thereby or to be fixed in the manner thereby agreed and in which the names of both the buyer and the seller are mentioned”.
  4. Section 2(c) defines ‘forward contract’ as “a contract for the delivery of goods at a future date and ‘which is not a ready delivery contract”.
  5. Section 2(i) defines ‘ready delivery contract’ as “a contract which provides for the delivery of goods and the payment of a price, therefore, either immediately or within such period not exceeding eleven days after the date of the contract”.

Chapter IV of the Forward Contracts (Regulation) Act, 1952 confers authority on the Central Government to prohibit certain classes of forward contracts. Under the same chapter, Section 16 provides that all forward contracts falling within the notification shall be deemed to be closed out and that the seller shall not be bound to give and the buyer shall not be bound to take delivery of the goods. Exercising its powers under the Chapter the Central Government issued a Notification on 29.10.1953 stating “no person shall enter into any forward contract other than a non-transferable specific delivery contract for the sale or purchase of raw jute in any form”.

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The impugned contract was entered in September of 1955, which was almost 2 years since the Notification was in force and so it could be hit by the Notification unless it was a non-transferable specific delivery contract. The contract was clearly a specific delivery contract as there were named parties, specified goods, and specified periods of actual delivery along with the fixed price. As regards to transferability, the import license of appellants prohibited them from expressly assigning their rights to goods. Thus, they were non-transferable, which is also supported by the fact that as per their license the goods to be imported are not to be sold to any party but to be utilized for manufacture in the factory of the licensee. Furthermore, conditions regarding shipping documents and status of parties were very clearly fixed by the agreement and thus, the contract was non-transferable specific delivery contract and hence, not hit by the Notification.

Hence, in tandem with the above analysis, it can be said that the Supreme Court correctly allowed the appeal as the main question was one regarding the validity of the contract. On this point regarding non-operation of the whole contract due to an invalid arbitration clause, the Supreme Court held when an agreement is invalid, every part of it including the clause as to arbitration contained therein must also be invalid and the subsequent proceedings too. Hence, the Supreme Court rightly answered in positive to the first issue and in negative to the second and third issues.

Conclusion

The reasoning and rational given by the Court in the case was logically correct and the Court examined all aspects arising from the contract. Invariably, the Courts have tried adjudging such arbitration clauses and agreements that leave gaps for one of the parties to contest the contract itself. Though the main aim of arbitration is to prevent court litigations, such contracts do ultimately land in courts, which makes the whole concept of arbitration futile and redundant.