Messrs. Khimji Poonja And Company vs Shri Baldev Das C. Parikh

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

Court: Supreme Court of India

Case Number: Civil Appeal No. XXVI of 1949

Decision Date: 14 March 1950

Coram: Hiralal J. Kania, Saiyid Fazal Ali, Mehr Chand Mahajan, B.K. Mukherjea, Das, Sudhi Ranjan

The dispute was between Messrs Khimji Poonja and Company, who were the petitioners, and Shri Baldev Das C. Parikh, who was the respondent. The judgment was delivered on 14 March 1950 by a bench of the Supreme Court of India that comprised Chief Justice Hiralal J. Kania, Justice Saiyid Fazal Ali, Justice Mehr Chand Mahajan and Justice B.K. Mukherjea. The case was reported in the All India Reporter at page 7 of the 1950 volume and also in the Supreme Court Reporter at page 64 of the same year. The substantive law involved the Bombay Cotton Contracts Act of 1932, specifically section 8(1), together with several bye-laws of the East India Cotton Association, namely bye-laws numbered 51-A, 65-A, 80 and 82. The central issue was whether a contract note that specified a minimum deposit amount of Rs 25 and that did not follow the form prescribed by the Association’s bye-laws could be regarded as valid, and consequently whether the arbitration clause contained in that note could give rise to a lawful arbitration award.

The Court noted that section 8 of the Bombay Cotton Contractors Act, 1939, declared any contract entered into after the commencement of the Act to be void if it failed to comply with the bye-laws of a recognised cotton association. The East India Cotton Association, Ltd., was a recognised association within the meaning of that provision. Bye-law 80 required that contracts between members acting as commission agents and their constituents be subject to the Association’s bye-laws and that a contract note be issued in the exact form set out in the Appendix to those bye-laws. Initially, bye-law 51-A required a deposit of at least Rs 9.5 per bale, and the contract note therefore contained a clause to that effect. During the war, bye-law 51-A was amended, reducing the minimum deposit to Rs 12.8 per bale, and a new bye-law 65-A was introduced, which gave certain options to the last buyer. In addition, a Government Notification altered the prescribed form of the contract note by changing the minimum deposit figure to Rs 12.8 and by inserting two new clauses to give effect to bye-law 65-A. The contract note at issue was prepared after those amendments but it bore a rubber-stamp impression stating the older minimum deposit of Rs 9.5 and omitted the two new clauses required by the Notification. Although the note claimed that it was made in accordance with the bye-laws, the Court held that it was not because the deposit clause conflicted with the amended bye-law 51-A and because the two newly required clauses were missing. Accordingly, the note was declared void, and the arbitration clause contained in it could not support a valid arbitration award.

The Court observed that the parties had sought to challenge the two clauses that had been newly inserted in the prescribed contract-note form for the purpose of giving effect to bye-law 65-A. The appeal before the Supreme Court was taken from a judgment of the Bombay High Court. The appeal was styled Civil Appeal No XXVI of 1949 and concerned a decree dated 20 March 1947 issued by the Bombay High Court consisting of Stone C.J. and Coyajee J. That decree had reversed an earlier decision of Chagla J. which had dismissed an application filed by the respondent under the Indian Arbitration Act, 1940. In that original application the respondent had prayed, inter alia, that the arbitration agreement embodied in certain contract notes sent by the appellants to the respondent be declared invalid and void, and that the award made by the arbitrators appointed under those notes be set aside.

For the appellants, counsel appeared who was assisted by an additional practitioner. For the respondent, counsel also appeared with two assistants. The judgment of the Supreme Court was delivered by Justice DAS. Justice DAS explained that the present appeal arose out of the respondent’s application under the Indian Arbitration Act, 1940, in which the respondent asked that the arbitration agreement contained in several contract notes, including contract note No 17996 that had been sent by the appellants, be declared invalid, void and unenforceable, and further that a purported award made by the arbitrators appointed pursuant to those notes be set aside.

Justice DAS then set out the factual background leading to the application. The appellants were members of the East India Cotton Association Ltd., whereas the respondent was not a member of that association. In April 1945 the respondent engaged the appellants as his agents for the purpose of effecting forward contracts for the sale or purchase of cotton in accordance with the rules, regulations and bye-laws of the association. Between 9 April 1945 and 10 August 1945 the appellants, acting as agents, executed a number of contracts for the sale or purchase of cotton for delivery in July 1945 and September 1945. For each of those contracts the appellants issued a contract note to the respondent. All of the contract notes were printed, and a specimen copy of those notes was reproduced in pages 12 to 15 of the Paper Book.

On 10 August 1945 the purchase of nine hundred bales of cotton at a price of Rs 432 per candy for delivery in September 1945 remained open. According to the respondent, on 11 August 1945 he instructed the appellants to close that outstanding purchase by selling the nine hundred bales for September delivery at a rate not lower than Rs 426 per candy, which he claimed was the prevailing market rate on that date. The respondent reported that he did not receive any contract note from the appellants confirming the closing of the transaction. Consequently, on 18 August 1945 the respondent formally recorded the instruction he had given and requested that the appellants send the corresponding contract note. The appellants, however, denied that any such instruction had been given on 11 August 1945 and contested the respondent’s claim that a contract note had been issued for the alleged closing transaction.

In the dispute, the appellants asserted that the respondent had not given any instruction on 11 August 1945 to close the outstanding cotton purchase contract and that they had not received the respondent’s letter dated that day. According to the appellants, the agreed clearing date was 21 August 1945, on which a sum of Rs 18,900 became due and payable by the respondent to the appellants; the appellants further claimed that instead of paying this amount, the respondent fabricated a false story alleging that it had instructed the appellants to close the outstanding purchase. By a letter dated 22 August 1945, the appellants repudiated the respondent’s allegations, demanded immediate payment of Rs 18,900, and warned that if the respondent failed to pay by noon on 23 August 1945, the appellants would be forced to settle the outstanding contract at their own discretion, on account and at the risk of the respondent. The respondent, in a letter of 24 August 1945, denied having fabricated any false story, rejected any liability for Rs 18,900, and returned the appellants’ bill. On 27 August 1945, the appellants proceeded to close the outstanding contract for the purchase of 900 bales by selling the same at Rs 356 per candy for September 1945 delivery, and they accompanied this action with contract note No 17996 and a covering letter. The respondent, by a letter of 28 August 1945, reiterated its earlier claim that it had given prior instruction to close the contract, denied having instructed the appellants to close the contract on 27 August 1945, and returned contract note No 17996. On the same day, the appellants wrote to the respondent claiming Rs 34,313 and expressing the desire to refer the dispute to arbitration in accordance with the arbitration agreement contained in the contract notes; both parties subsequently appointed their respective arbitrators. The arbitrators set a meeting for 24 October 1945, but the respondent alleged that it received notice of the meeting only on 22 October 1945 and could not attend because it was required to appear before the Income Tax Officer on the same day; consequently, the respondent sent an agent to attend the arbitration meeting and to seek an adjournment. The arbitrators refused the request for adjournment and, proceeding ex parte, issued an award on the same day for Rs 34,313 together with interest and costs. Aggrieved by the award, the respondent filed an appeal on 10 November 1945 to the Board of the Association. The respondent further alleged that, while the appeal was pending, it discovered that the contract notes issued by the appellants, including contract note No 17996, were not prepared in the prescribed official form required by the Association and that, on that basis, the contracts were void under the provisions of the Bombay Cotton Contracts Act, rendering the arbitration agreement ineffective and any award unenforceable; consequently, the respondent amended its memorandum of appeal to point out the alleged invalidity of the contracts and simultaneously made a substantive application to the High Court under the Indian Arbitration Act for the reliefs previously summarized.

The Respondent argued that because the contract notes did not comply with the prescribed official form required under the Bombay Cotton Contracts Act (IV of 1932), the contracts were void. Consequently, he contended that no arbitration agreement existed between the parties and that, in the absence of such an agreement, no arbitration could be referred to and no award could be made. On that basis, the Respondent amended his memorandum of appeal to the Board, highlighting the purported invalidity of the contracts. Simultaneously, he filed a substantive application before the High Court under the Indian Arbitration Act seeking the reliefs previously summarized.

To understand the opposing positions, it was necessary to examine the relevant provisions of the Bombay Cotton Contracts Act, 1932, together with the bye-laws of the East India Cotton Association. Section 8(i) of the Act states: “Save as hereinafter provided in this Act any contract (whether either party thereto is a member of a recognised cotton association or not) which is entered into after the date on which this Act comes into operation and which is not in accordance with the bye-laws of any recognised cotton association shall be void.” There was no dispute that the East India Cotton Association qualified as a recognised cotton association under the Act.

The Association’s bye-laws 80 and 82 were quoted to illustrate the required form of contracts. Bye-law 80 stipulated that delivery contracts between members must be made on the official form set out in the Appendix, while hedge contracts could be verbal or written, and if written must also follow a form in the Appendix. All such contracts were subject to the bye-laws, except that delivery contracts were exempt from bye-laws 149 to 163. Bye-law 82 required that contracts between members acting as commission agents and their constituents be made subject to the bye-laws and that a contract note in the form specified in the Appendix (pages 92-95) be prepared for each such contract; bye-laws 130 to 166 did not apply to these contracts.

Bye-law 51-A originally mandated a deposit of not less than Rs 25 per bale. Accordingly, the contract note presented by the agent to the constituent contained the clause: “In addition to the above, the deposit (not carrying interest) payable under bye-law 51-A; namely, at a rate not less than Rs 25 per bale shall, when demanded, be made by you to me/us in Bombay.” During the war, bye-law 51-A was amended to reduce the minimum deposit to Rs 12-8-0 per bale. In exercise of the powers conferred by the Bombay Options in Cotton Prohibition Act, 1939 (Act XXV of 1939), the Government of Bombay issued a Notification on 19 September 1945, providing for this amendment.

The Government of Bombay directed that the contract note be revised so that the previously quoted clause would read as follows: “In addition to the above, the deposit (not carrying interest) payable under bye-law 51-A, namely, at a rate not less than Rs 12-½ per bale shall, when demanded, be made by you to me/us in Bombay.” To maintain wartime controls, a further amendment to the bye-laws introduced a new provision designated as bye-law 65-A. In consequence of this addition and to ensure that the contract note used by agents and constituents conformed to the new bye-law, the same Notification dated 19 September 1944 required the insertion of two specific clauses into every contract note. The first clause stipulated that if the contract was a contract for sale, the parties, acting under the bye-laws, would become the first seller of the cotton and, should the last buyer exercise the right granted by bye-law 65-A, the constituent would be bound by the provisions of that bye-law as between the constituent and the agent. The second clause dealt with contracts of purchase, stating that the parties, unless they received written instructions to the contrary, would be deemed the last buyers under the bye-law, and that the agent could, at its option and without further reference to the constituent, exercise the right of the last buyer under bye-law 65-A; if the agent exercised that right, the constituent would again be bound by the provisions of the bye-law.

Following all these amendments, the contract note that an agent had to issue to a constituent had to follow a prescribed form, a specimen of which is reproduced on pages 17 and 18 of the Paper Book. The contracts entered into by the appellants and the respondent were executed after this prescribed contract-note form had become operative. The official contract-note form, as amended, began with the following introductory clause: “I/we have this day sold/bought for you in Bombay subject to the following conditions and to the Bye-laws of the East India Cotton Association Ltd., in force from time to time and subject also to my/our usual charges and terms of business as Commission Agents.” After this opening, the form required the insertion of the particulars describing the cotton, including its description, quantity, price and other relevant details. Subsequently, the clause governing the payment of margin was inserted, and the final sentence of that clause provided for the payment of the deposit stipulated by bye-law 51-A as amended, namely at a rate not less than Rs 12-½ per bale.

In the amended contract note form, the clause dealing with the margin required that a deposit be payable under bye-law 51-A at a rate not less than Rs 12½ per bale. At the conclusion of this form, the two new clauses that the Government Notification mandated for inclusion in every contract note were printed. However, the contract notes actually issued by the appellants to the respondent were different; copies of those notes appear on pages twelve to fifteen of the paper book. When the two versions of the contract note are compared, two material differences become apparent. First, the contract note supplied by the appellants omitted the final sentence that stipulates the deposit at the end of the margin clause. Instead, a rubber-stamp impression placed on the upper reverse side of the contract stated: “In addition to the above, the deposit (not carrying interest) payable under bye-law 51-A, namely, at a rate not less than Rs 25 per bale shall, when demanded, be made by you to me/us in Bombay.” This stamp reproduces the wording that had previously been part of the margin clause before bye-law 51-A was amended by the 1944 Government Notification. Second, the two new clauses that the Government Notification required to be inserted in the appellant’s form were also absent from the appellant’s note.

The respondent argued that because the contract notes issued by the appellants did not conform to the association’s bye-laws, the notes were void under Section 8 of the Bombay Cotton Contracts Act, 1932. Consequently, the respondent maintained that the arbitration agreement embedded in the contract note was likewise void, precluding any reference to arbitration and invalidating the award purportedly rendered by the arbitrators on the basis of those void contracts. The issue was placed before Mr. Justice Chagla, who rejected the respondent’s contentions and dismissed the application on 2 July 1946. In his judgment, the learned judge observed that bye-law 80 required delivery contracts to be executed on the official form and that hedge contracts, when reduced to writing, had to follow the form set out in the appendix. By contrast, bye-law 82 did not obligate contracts between members acting as commission agents and their constituents to be in writing or to follow any particular form. According to the judge, bye-law 82 required two conditions: first, that the contracts be made subject to the bye-laws, and second, that a contract note in the prescribed form be prepared for each such contract. He further concluded that Section 8 of the Bombay Cotton Contracts Act, 1932, only invalidated contracts that violated the first condition—failure to make the contract subject to the bye-laws—and did not address non-compliance with the second condition concerning the form of the contract note.

The Court considered the second requirement, namely that contract notes be in the prescribed form. The learned Judge distinguished between a contract and the contract note, treating the note merely as evidence. He held that even if a contract note failed to follow the prescribed form, the underlying contract remained unaffected, because the contract only needed to be subject to the bye-laws and did not have to be in writing. Consequently, the learned Judge dismissed the application. The Respondent, dissatisfied with that decision, appealed. The appeal was heard by Stone C.J. and Coyajee J., who allowed the appeal, set aside the dismissal of the Respondent’s petition, granted the declaration sought, and annulled the award. The present appellants have now appealed to this Court after securing the required certificate from the Bombay High Court. The Court agrees with the appellate Court’s decision. Generally, when parties place their agreement in writing, that writing becomes the sole source for determining the contract’s terms, and if the writing does not comply with the bye-laws, the contract must be considered void. The Court does not feel compelled to stress this point because, assuming there existed a prior oral agreement apart from the written contract note, as noted by Chagla J., the Court has not examined whether that oral agreement complied with the bye-laws; if it did not, it would fall under section 8 of the Bombay Cotton Contracts Act, 1932. No allegation has been made that the terms of any alleged oral agreement differ from those later recorded in the issued contract notes. The Court observes that the final sentence of the margin clause, to satisfy the bye-laws, should have read: “In addition to the above, the deposit (not carrying interest) payable under bye-law 51-A, namely, at a rate not less than Rs. 121⁄2 per bale shall, when demanded, be made by you to me/us in Bombay.” Instead, the rubber-stamp impression contains the wording: “In addition to the above, the deposit (not carrying interest) payable under bye-law 51-A, namely, at a rate not less than Rs. 25 per bale shall, when demanded, be made by you to us in Bombay.” The Respondent argues that this term is inconsistent with the Association’s bye-laws. The appellants argue that a provision of “not less than Rs. 25 per bale” does not conflict with the requirement of “not less than Rs. 121⁄2 per bale.”

In the present case, the Court observed that any rate higher than Rs 12½ per bale could be stipulated in accordance with the commercial terms to which the contract was subjected, because such a higher rate did not violate the requirement that the rate must not be less than Rs 12½ per bale. The Court noted that, although the opening clause of the contract note made the contract subject to the Appellants’ usual charges and terms of business, the contract was simultaneously subject to the bye-laws of the Association. To reconcile the two, the Court held that only those terms of business which were not inconsistent with the bye-laws could be permitted to prevail. The Court found that the rubber-stamp provision imposed on the Respondent, as constituent, a liability to deposit a higher minimum amount, and that this provision therefore was not in conformity with bye-law 51-A. The Court further identified a serious objection to the rubber-stamp provision: its wording indicated that it intended to summarise and set out the amount payable under bye-law 51-A, yet bye-law 51-A had been amended and the amount payable under the amended rule was not Rs 25 per bale but Rs 12½ per bale. Consequently, the Court concluded that the rubber-stamp provision falsely summarised the provisions of bye-law 51-A and was therefore not in accordance with that bye-law. The Respondent’s contention was that the omission of two clauses at the end of the contract note actually issued by the Appellants rendered the contract non-compliant with the bye-laws. The Court considered the argument advanced by the Attorney-General for the Appellants, who contended that the contract was expressly made subject to the bye-laws and that the provisions of the new bye-law 65-A had been incorporated by reference into the contract. The Court found this contention unsound because bye-law 65-A regulated the relationship between members and its incorporation into a contract between a member-agent and an external constituent would be meaningless on a plain reading. Moreover, under bye-law 65-A, the last buyer possessed certain options; since the outstanding contract involved the purchase of nine hundred bales, the Appellants, if they became the last buyers, could exercise any of those options at their discretion. In the second of the omitted clauses, that option was made subject to the constituent’s express written instructions to the contrary before the commencement of the delivery period (if the contract was entered into before that period) or with the order (if the contract was entered into during the permitted trading days). The Court held that because those two clauses were omitted, the Respondent’s right as constituent was not made a term of the contract, and therefore the alleged pre-existing oral contract was also not in accordance with the bye-laws. For these reasons, the Court concluded that the appeal failed and should be dismissed with costs.

The Court observed that because the two clauses were omitted, the provision granting the Respondent, as a constituent, the right to act on the “permitted days of trading in the delivery period” was not incorporated as a term of the written contract between the parties. Consequently, the Court held that the alleged pre-existing oral agreement could not be said to comply with the bye-laws, since the essential clause required by bye-law 65-A was missing. For this reason, the appeal was found to lack merit and was ordered to be dismissed, with the parties to bear costs. The judgment was signed by Justice Patanjali Sastri, who expressed agreement with the dismissal on the basis of costs, but indicated a preference to base the decision solely on the omission of the two clauses that should have been included in the contract in the prescribed form to give effect to bye-law 65-A. Accordingly, the appeal was formally dismissed. The agents acting for the parties were recorded as Rajinder Narain on behalf of the appellants and M.S.K. Sastri on behalf of the respondent.