A.M. Mair and Co vs Gordhandass Sagarmull

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No. XLII of 1950

Decision Date: 30 November 1950

Coram: Saiyid Fazal Ali, Mehr Chand Mahajan, Fazl Ali, Saiyid Sastri, M. Patanjali Mahajan

A.M. Mair & Co. brought a petition before the Supreme Court of India against Gordhandass Sagarmull, and the judgment was delivered on 30 November 1950. The case was reported in 1951 AIR 9 and 1950 SCR 792, and it appears in several citator references including R 1952 SC 119, D 1955 SC 53, R 1955 SC 468, F 1976 SC 794, RF 1984 SC 1072, and RF 1989 SC 1498. The bench that heard the matter comprised Justice Saiyid Fazal Ali, Justice Mehr Chand Mahajan, Justice M. Patanjali Mahajan, and Justice S. Fazal Ali. The dispute concerned an arbitration clause incorporated in a contract for the sale of jute that had been executed by a firm of brokers, A. M. Mair & Co., acting as sellers and buyers under “sold” and “bought” notes. The “sold note” addressed to the respondents contained the customary clause providing that all matters, questions, disputes, differences or claims arising out of or relating to the contract would be referred to arbitration by the Bengal Chamber of Commerce, as stipulated under the Indian Arbitration Act, 1940.

The appellants, being brokers, invoked the arbitration clause when a disagreement emerged concerning the interpretation of the contract, and the matter was submitted to the arbitrators of the Bengal Chamber of Commerce. The respondents contended before the arbitrators that, because the appellants were merely brokers, they lacked the authority to enforce the arbitration clause. The arbitrators nonetheless rendered an award in favour of the appellants. The respondents subsequently applied to the Calcutta High Court seeking to set aside the award on the ground that the arbitrators had acted beyond their jurisdiction and that the award was void. The High Court refused to set aside the award. On appeal, the Supreme Court considered whether the respondents could raise the objection at that stage and held that the dispute, which required interpretation of the contract, fell within the scope of the arbitration clause. Consequently, the award could not be overturned under the Indian Arbitration Act. The Court referred to the decision in Heyman v. Darwins Ltd. (1942 AC 356) in support of its reasoning. The appeal was numbered Civil Appeal No. 42 of 1950 and was heard by Justices Fazal Ali and Patanjali Sastri, with the judgment delivered by Justice Fazl Ali.

The appeal arose from a judgment of a Bench of the High Court of Judicature at Calcutta in West Bengal, which had reversed the decision of a single Judge of that Court. The single Judge had refused to set aside an award that had been rendered by the arbitration tribunal of the Bengal Chamber of Commerce on a submission made by the respondents.

The factual background was that on 25 January 1946 the appellants entered into a contract with the respondents for the sale of five thousand maunds of jute. The contract was evidenced by a “sold note” labelled Exhibit A, which took the form of a letter addressed to the respondents and opened with the words, “We have this day sold by your order and for your account to the undersigned, etc.” In that document the term “undersigned” undeniably referred to the appellants, and beneath their signature the word “brokers” was written.

On the same day the appellants also prepared a “bought note” labelled Exhibit B, addressed to the Bengal Jute Mill Company. That note contained the statement, “We have this day bought by your order and for your account from the undersigned, etc.” Again, the expression “undersigned” referred to the appellants, and the word “brokers” appeared under their signature in the same manner as in the sold note.

The sold note contained numerous provisions relating to delivery of the jute, the non-delivery of documents, the non-acceptance of documents, claims, and other matters. However, the most material provisions were found in paragraphs ten and eleven. Paragraph ten provided that the sellers might, in certain circumstances, be granted an extension of time for delivering the jute for a period not exceeding thirty days from the original due date, and that such extension would be free of all penalties. If the contract were not performed within the extended period, the buyers would be entitled to a number of options, one of which was to cancel the contract and to charge the sellers the difference between the contract rate and the market rate on the day the option was exercised.

Paragraph ten also set out a notice requirement. It stipulated that the sellers must notify the buyers whether the goods would be shipped within the extended period. If the sellers informed the buyers that they would be unable to ship within the extended time, the buyers were to exercise their option within five working days of receiving that notice and to notify the sellers. In the absence of any such notice from the sellers, the clause deemed that the goods had not been shipped, and accordingly the buyers were to exercise their option within five working days after the expiration of the extended date and to inform the sellers.

Paragraph eleven dealt, among other things, with the scope of disputes. It declared that all matters, questions, disputes, differences and/or claims arising out of, concerning, in connection with, in consequence of, or relating to the contract—whether or not the obligations of either or both parties were subsisting at the time of such disputes and whether or not the contract had

In this case, the Court noted that clause 11 of the contract stipulated that any dispute, whether the contract was terminated, purported to be terminated, or completed, would be referred to the arbitration of the Bengal Chamber of Commerce under the rules then in force, and that the arbitration would be conducted according to those rules. It was undisputed that the respondents had delivered 2,256 maunds of jute under the contract, but they could not deliver the remaining 2,744 maunds within the agreed period. The parties mutually agreed to extend the time for performance up to 30 June 1946. On 2 July 1946 the respondents wrote to the appellants stating that the balance of jute could not be dispatched because of a shortage of wagons and requested an additional one-month extension. The appellants received this letter around 3 July 1946 and, in reply, extended the time until 31 July 1946. On the same day the respondents received the reply, namely 9 July 1946, they sent another letter asserting that the extension had not been communicated within the five-working-day period required by the contract and therefore the contract was automatically cancelled. Subsequent correspondence continued between the parties, and eventually the appellants forwarded a bill of difference for Rs 4,116, which the respondents refused to pay. The appellants then invoked the arbitration clause and referred the dispute to the Bengal Chamber of Commerce. On 6 February 1947 the Tribunal of Arbitration awarded the appellants Rs 4,116 with interest at four per cent per annum from 10 August 1946 until the award date, and also awarded Rs 210 to the appellants as costs.

The respondents later filed a petition on 19 February 1949 under the Indian Arbitration Act, 1940, in the Calcutta High Court, seeking to have the award declared void for lack of jurisdiction and not binding. Their principal argument was that the appellants were not a party to the contract; according to them, the Bengal Jute Mill Company was the true contracting party and the appellants had acted merely as brokers. In response, the appellants contended that the respondents’ claim of no privity was incorrect. They maintained that the contract was directly between the respondents and the appellants, and therefore the arbitration clause was validly invoked. The Court’s proceeding on this petition formed the basis for the subsequent judicial review of the arbitration award.

The appellants refuted the respondents’ allegation that they were not parties to the contract. In paragraph 16 of their affidavit they wrote: “With reference to paragraph 7 of the petition, I request that the contract be interpreted according to its true construction and effect. As I have already stated, under the custom, usage, or practice of the trade the respondent is entitled to charge brokerage and also to enforce the terms of the said contract.” The matter was first heard by Justice Sinha, who dismissed the respondents’ petition on the ground that the contract was directly between the respondents and the appellants. Justice Sinha further observed that if the appellants’ right to enforce the contract depended upon a trade custom, the existence of such a custom should have been proved by evidence, and that the arbitrators would have been competent to decide the question of that custom’s existence. Dissatisfied with Justice Sinha’s decision, the respondents appealed to a Division Bench of the High Court consisting of the Chief Justice and Justice Chakravarthi. The Division Bench held that, because the appellants themselves contended that they had acted as brokers and claimed to enforce the contract on the basis of trade usage, it was improper for Justice Sinha to treat them as principals. Consequently, the award was liable to be set aside on the ground that the arbitration tribunal lacked jurisdiction to render an award at the instance of a person who was not a principal party to the contract. After obtaining a certificate under section 109(c) of the Code of Civil Procedure, the appellants filed the present appeal.

The Court noted that the appeal could be decided on a concise ground. After a careful reading of the affidavit filed by the appellants in the trial court, the Court found no basis to conclude that the appellants argued that they were not parties to the contract or that they sought relief solely on the basis of trade custom. The Court summarized the appellants’ position as follows: (1) they rejected the respondents’ allegation that they were not parties to any arbitration agreement with the respondents; (2) they asked the Court to interpret the contract and its effect and asserted that they were entitled to enforce it; and (3) they claimed that the contract could be enforced according to the custom or usage of the trade. The principal dispute in the case concerned whether the extension of time for delivery had been granted within the period limited by the contract, a question that fell within the arbitration clause. The subsequent dispute, concerning whether the brokers (the appellants) were parties to the contract in their own right as principals or only as agents of the Bengal Jute Mill Company, was not raised until the arbitrators were approached. The Court therefore regarded the principal dispute as covered by the arbitration clause.

The Court observed that the question of whether the brokers, who were the appellants, were parties to the contract in their own right as principals or whether they had entered into the contract solely on behalf of the Bengal Jute Mill Company was not raised until the matter was referred to the arbitrators. The Court assumed that, at that stage, the respondents could have raised such an objection after the other dispute, which clearly fell within the arbitration clause, had already been referred to the arbitrators. The Court explained that this additional dispute also depended on the true interpretation of the contract. Consequently, the respondents would have to rely on the contract to prove their claim that the appellants were not bound as principals, while the appellants maintained that they were bound. The Court noted that a dispute requiring the true construction of the contract is a dispute “under or arising out of or concerning the contract.” In support of this principle, the Court quoted a passage from Heyman v. Darwins Ltd.(1) in which Lord Dunedin stated, “If a party has to have recourse to the contract, that dispute is a dispute under the contract.” Applying this test, the Court held that the respondents must have recourse to the contract to establish their case and therefore the dispute fell within the arbitration clause.

The Court then identified the error made by the learned Judges of the appellate Bench of the High Court, who had treated the dispute raised by the respondent concerning the appellants’ position under the contract as tantamount to a dispute about whether the contract had ever been entered into. The Court concluded that if both of the disputes raised by the respondents were found to be within the scope of the arbitration clause, the arbitrators would have jurisdiction to adjudicate those disputes, and the Court would not be concerned with any alleged error of law or fact on the part of the arbitrators, nor with any omission by them to consider any of the matters. Accordingly, the Court held that it was not necessary to determine the true construction of the contract or to decide whether the respondents’ contention was correct. Once a dispute is found to be within the arbitration clause, the Court’s jurisdiction does not extend to the merits of that dispute. In the result, the Court allowed the appeal, set aside the judgment of the appellate Bench of the High Court, and restored the order of Sinha J. The appellants were awarded their costs throughout. Mahajan J. agreed with his brother Fazl Ali that the appeal should be allowed with costs. The appeal was therefore allowed. The agents for the parties were recorded as P.K. Chatterjee for the appellants and M.G. Poddar for the respondents. (1) [1942] A.C. 356