Shiva Jute Baling Ltd. v. Hindley and Company Ltd.

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 21^st 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 fulfilment 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

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

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,

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,

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

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.

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.

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

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.