Shiva Jute Baling Limited vs Hindley And Company Limited

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 262 of 1955

Decision Date: 21 August 1959

Coram: K.N. Wanchoo, Bhuvneshwar P. Sinha, P.B. Gajendragadkar

In the matter of Shiva Jute Baling Limited versus Hindley and Company Limited, the Supreme Court of India delivered its judgment on the twenty-first day of August, 1959. The opinion was authored by Justice K.N. Wanchoo, and the bench was composed of Justice K.N. Wanchoo, Justice Bhuvneshwar P. Sinha and Justice P.B. Gajendragadkar. The case was recorded as a petition filed by Shiva Jute Baling Limited against Hindley and Company Limited, and the judgment is cited as 1959 AIR 1357 and 1960 SCR (1) 569. The dispute concerned an arbitration award that had been rendered while legal proceedings were pending, and the issues that the Court addressed included the existence and validity of the underlying contract, the question of breach of contract, the enforceability of a penalty clause that was characterised as liquidated damages, and the legality of the award under the Indian Contract Act of 1872, sections 73 and 74, as well as the relevant provisions of the Arbitration (Protocol and Convention) Act, 1937, section 7(e), and the Arbitration Act, 1940, sections 33 and 35.

The appellant company, Shiva Jute Baling Limited, was incorporated in India and had entered into a contract on June 18, 1945 with the respondent company, Hindley and Company Limited, which was incorporated in England and maintained its registered office in London. The contract required the respondent to supply five hundred bales of jute and stipulated that if the seller failed to tender or deliver the goods, the seller would be liable to pay the buyer liquidated damages at a rate of ten shillings per ton in addition to any excess of the market price over the contract price. The market price was to be measured as the price of jute contracted for on the day following the date of default. The agreement also contained an arbitration clause providing that any claim, dispute, or question arising out of, relating to, or concerning the contract or its construction or performance would be referred to arbitration in London under the bye-laws of the London Jute Association.

When disputes arose concerning the performance of the contract, the respondent invoked the arbitration clause and referred the matter to the arbitration mechanism of the London Jute Association. That body appointed two of its members as arbitrators. The appellant did not respond to the notice issued by the arbitrators; instead, it filed an application on August 10, 1949 in the Calcutta High Court under section 33 of the Arbitration Act, 1940. In that application the appellant prayed for a declaration that the arbitration agreement was void on the ground of uncertainty and also sought a declaration that, both in fact and in law, no contract existed between the parties because of a mutual mistake of fact. The appellant gave notice to both the respondent and the London Jute Association that no further steps in the arbitration should be taken until the section 33 application was disposed of. Despite this notice, the arbitrators proceeded with the arbitration and rendered their award on October 17, 1949. Subsequently, on November 26, 1951 the respondent filed an application in the Calcutta High Court under section 5 of the Arbitration (Protocol and Convention) Act, 1937, requesting that a judgment be pronounced in accordance with the award. The appellant contested the validity of the award, arguing that it was erroneous under section 35 of the Arbitration Act, 1940 because the award had been made after receipt of the appellant’s notice of filing a section 33 petition, and that the liquidated damages clause in the award, which added a sum of ten shillings per ton to the difference between contract and market price, contravened sections 73 and 74 of the Indian Contract Act, 1872. Consequently, the appellant contended that the award was void on its face and could not be enforced under section 7(e) of the Arbitration (Protocol and Convention) Act, 1937, which bars enforcement of an award in India that is contrary to Indian law.

The appellant argued that the arbitral award was void for two reasons. First, the award was rendered after the respondent and the arbitrators had received notice of the filing of a petition dated 10 August 1940 under section 33 of the Arbitration Act, 1940, and while that petition was still pending. The appellant contended that because the award was made during the pendency of the application under section 33, it fell outside the arbitrators’ authority. Second, the appellant maintained that the liquidated damages stipulated in the award consisted not only of the difference between the contract price and the market price on the date of default, but also of an additional sum of ten shillings per ton. The appellant claimed that this extra amount contravened sections 73 and 74 of the Indian Contract Act, 1872, and therefore the award was per se invalid. Accordingly, the appellant relied on section 7(e) of the Arbitration (Protocol and Convention) Act, 1937, which provides that an award that is contrary to the law of India cannot be enforced in India.

The Court examined the matters raised by the appellant and held that the subject-matter of the proceedings under section 33 of the Arbitration Act, 1940—namely the existence and validity of the arbitration agreement—does not lie within the competence of the arbitrators. Because the arbitrators were not authorised to decide questions concerning the validity of the arbitration agreement, the provisions of section 35 of the Arbitration Act could not be invoked. Regarding the allegation that the award violated sections 73 and 74 of the Indian Contract Act, the Court found that the arbitrators had awarded only the maximum amount that was expressly named in the contract. Thus, the award did not exceed the contractual ceiling and did not run afoul of the said provisions of the Indian Contract Act.

The judgment was rendered in the civil appellate jurisdiction in Civil Appeal No. 262 of 1955, which was filed by special leave against the decree of the Calcutta High Court dated 4 February 1953. The appeal arose from the original decree No. 68 of 1952, which itself stemmed from the judgment dated 14 January 1952 in Special Suit No. 2 of 1951. Counsel for the appellants appeared on behalf of the Indian company, while counsel for the respondents represented the English company. The judgment was delivered on 21 August 1959 by Justice Wanchoo.

The factual background of the dispute involved an agreement entered into on 18 June 1945 between an Indian jute-trading company incorporated in Calcutta and an English company incorporated in London. The contract required the supply of five hundred bales of jute from the 1945-46 crop to be shipped from Calcutta or Chittagong to Rio de Janeiro when freight became available. The contract stipulated that, in the event of a default in tender or delivery, the seller would pay liquidated damages calculated as ten shillings per ton plus any excess of the market value over the contract price. The market value was defined as the price of jute contracted for on the day following the date of default, which was to be the date in London on declaration of default by telegram or, if no telegram, after a lapse of twenty-one days following the expiry of any extended period. This provision formed the basis of the award that was later challenged.

The contract stipulated that a declaration of default could be made by telegram, and that if no such telegram was sent, default would be deemed to have occurred when twenty-one days elapsed after the expiry of any extended period. The agreement also contained an arbitration clause, providing that any claim or dispute arising out of, relating to, or concerning the contract or its interpretation would be referred to arbitration in London in accordance with the bye-laws of the London Jute Association. Either party was permitted to invoke arbitration whenever a dispute arose, and could do so repeatedly. In addition, the contract allowed any party dissatisfied with an arbitration award to appeal that award to the London Jute Association, following the regulations then in force. The contract further provided that it would be interpreted according to the laws of England, irrespective of the residence or nationality of the parties, and that it would be deemed to be performed in England. Accordingly, the courts of England or the arbitrators, as applicable, were granted exclusive jurisdiction over all disputes arising under the contract, except for the limited purpose of enforcing an arbitration award in the colonies or abroad.

On 23 June 1947 the appellant consigned thirty-nine bales of jute to Rio de Janeiro in partial performance of the contract and informed the respondent of this shipment by letter dated 17 July 1947. That letter explained that the shipment had been delayed because a quota was not available, and expressed hope that the remaining bales would be shipped as soon as a quota became available. The respondent replied on 25 July 1947, and the appellant sent another letter on 1 August 1947 reiterating that the balance of the contract would be shipped once the quota was obtained. The record does not indicate what occurred after this correspondence until August 1948. It appears that the respondent received a cable on 12 August 1948 from the appellant stating that the contract had been cancelled long ago. The respondent, by a letter dated the same day, refused to accept that the contract was cancelled. Subsequent disagreements led the respondent to claim that the appellant was in default around June 1949 pursuant to the contract terms. On or about 14 July 1949 the respondent referred the dispute to arbitration before the London Jute Association, which appointed two of its members as arbitrators. The respondent filed its claim with the arbitrators on 23 July 1949. On 27 July 1949 the arbitrators issued a notice requiring the appellant to file its answer by 19 August 1949. The appellant failed to file an answer with the arbitrators. Instead, the appellant applied, under section 33 of the Indian Arbitration Act, 1940, to the original side of the Calcutta High Court.

In the proceedings before the Calcutta High Court, the appellant submitted an application on 12 August 1949 that contained three specific prayers. First, it sought a declaration that any arbitration agreement allegedly existing between the parties was void from the outset because it was uncertain and therefore not binding on the appellant. Second, it requested a declaration that, both in fact and in law, no contract existed between the parties owing to a mutual mistake on the part of the parties. Third, it asked that the court be pleased to adjudicate on the existence and/or validity of the alleged arbitration agreement and on the legal effect of that agreement. After filing this application, the appellant, on 13 August 1949, transmitted a cable to both the respondent and the London Jute Association informing them that the Calcutta High Court application had been filed, that the application challenged the contractual submissions contained in the contract, and that, pending the disposal of that application, the arbitrators were deemed functus officio. The appellant further indicated that the hearing on the arbitral matter was scheduled for 29 August. In reply, the London Jute Association asserted that the appellant’s claim could not be made in the Calcutta High Court, and that the arbitrators would continue with the arbitration and proceed to a hearing on 27 August as previously fixed. On 17 August 1949, the appellant sent another letter to the London Jute Association, referring to its earlier cable and the Association’s response, and reiterated that any further steps taken in the arbitration proceedings while the application under section 33 of the Arbitration Act remained pending would be invalid under that Act. Nevertheless, the arbitrators continued with the arbitration and subsequently rendered their award on 17 October 1949. No further proceedings were taken by the appellant in London, nor is there any record of the appellant seeking determination of its section-33 application until the date of 26 November 1951, when the respondent filed an application under section 5 of the Arbitration (Protocol and Convention) Act, 1937, in the Calcutta High Court. Together with that application the respondent lodged the award dated 17 October 1949 and prayed that judgment be pronounced in accordance with the award and that a decree be passed accordingly. Notice of this filing was served on the appellant, which filed its reply on 14 January 1952. The court did not set out in detail the respondent’s petition under section 5 of the Protocol Act nor the appellant’s reply, because when the matter was heard only two points were advanced by the appellant. The first point contended that the award was rendered after notice of the petition dated 10 August 1949—notice required under section 33 of the Arbitration Act—had been given to the respondent and the arbitrators, and that consequently the award, being made after receipt of that notice and during the pendency of the application, was invalid under section 35 of the Arbitration Act. The second point argued that the award was void on its face.

It was argued that the award could not be enforced because, under section 7(e) of the Protocol Act, an award is unenforceable in India if it is contrary to Indian law; the appellant claimed that the award was indeed contrary to Indian law because, on its face, the arbitrators had attempted to grant damages that the Indian Contract Act, 1872, does not permit. Both of these arguments were rejected by the learned Single Judge, who ordered that the award be filed in court and that a decree be passed in accordance with it. The appellant then appealed, and the appeal was heard by a Division Bench of the Calcutta High Court. The appeal grounds showed that the same two points raised before the learned Single Judge were reiterated, and when the Division Bench heard the matter, the appellant again relied on those two points. The Division Bench likewise rejected the appellant’s contentions and affirmed the judgment of the learned Single Judge. It is noteworthy that, although all of the proceedings were commenced under section 5 of the Protocol Act, the appellant apparently did not pursue its own application under section 33 of the Arbitration Act; that application appears to have been adjourned sine die and decided together with the respondent’s application under section 5 of the Protocol Act. After this, the appellant applied for a certificate to appeal to this Court, which was denied, and subsequently applied for special leave to appeal, which was granted. In the special leave petition the appellant again raised the same two points: first, the construction and applicability of sections 33 and 35 of the Arbitration Act to the facts of this case; and second, the construction of section 7 of the Protocol Act together with the Indian Contract Act concerning the damages awarded by the arbitral award. The statement of case, after recounting the facts, identified those same two issues as the principal questions for determination on appeal: (i) the effect of sections 33 and 35 of the Arbitration Act on the facts and circumstances of this case, and (ii) the interpretation of section 7 of the Protocol Act in light of sections 73 and 74 of the Indian Contract Act and the impact of that interpretation on the validity of the award. Counsel for the appellant, however, sought to raise additional points arising from section 7 of the Protocol Act. The Court held that the appellant should not be permitted to introduce new issues at this stage, and that the appeal would be confined to the two points that had been consistently raised before the learned Single Judge, before the Division Bench, and now before this Court.

In view of the submissions that had previously been presented before the learned Single Judge and that have continuously been raised in the appeal to the High Court as well as in the present appeal before this Court, the Court decided to limit the appellant’s arguments to the two issues that had already been identified. Accordingly, the Court proceeded on the same assumption adopted by the High Court, namely that an application under section 33 of the Arbitration Act was appropriate in the facts of this case and that, consequently, the provisions of section 35 of the Arbitration Act were attracted. Section 33, for the purpose of this discussion, provides that any party to an arbitration agreement who wishes to challenge the existence of that agreement, to question its validity, or to have its legal effect determined must make an application to the court, and the court is required to decide the matter. Thus, section 33 contemplates three distinct types of applications: one to contest the existence of the arbitration agreement, another to contest its validity, and a third to obtain a determination of its effect. An arbitration agreement may be created in one of two fashions. It may be the sole content of a separate agreement, or it may be included as a clause within a broader contract that contains many other provisions relating to the contract, which is the situation in the present case. When the arbitration agreement is of the latter type, section 33 is concerned only with the arbitration clause itself and does not extend to the remaining provisions of the contract, which are therefore not subject to consideration under that section. The Court then turned to section 35, which states that a reference to arbitration or an award cannot be rendered invalid merely because legal proceedings have been commenced concerning the subject-matter of the reference. However, if legal proceedings concerning the entire subject-matter of the reference have been instituted between all the parties to the reference, and a notice of such proceedings has been given to the arbitrators or umpire, then, unless a stay of the arbitration proceedings is granted under section 34, any further arbitration proceedings in the pending reference become invalid. In effect, section 35 makes arbitration proceedings invalid when the whole subject-matter of the reference is already covered by legal proceedings, unless the court orders a stay. Conversely, an arbitrator may continue the proceedings and render an award on the reference so long as the legal proceedings do not encompass the entire subject-matter of the reference. Assuming that the application made under section 33 constitutes “legal proceedings” within the meaning of section 35, the immediate question that arises from the facts of this case is whether the legal proceedings initiated by the appellant under section 33 encompass the entire subject-matter of the arbitration reference.

In examining whether the entire subject-matter of the arbitration reference was encompassed by the legal proceedings commenced by the appellant under section 33 of the Arbitration Act, the Court considered the arguments presented by counsel for the appellant. Counsel raised the issue of contractual frustration and inquired about the respective powers of the court and the arbitrator to address that matter. Although the term “frustration of contract” appeared in paragraph 8 of the appellant’s application, the relief sought in that paragraph did not expressly rely on that ground; relief (c) simply reiterated the language of section 33 of the Arbitration Act. Counsel also cited the decision in Heymen v. Darwins Ltd. (1) in support of the contention. The Court refrained from allowing the appellant to introduce the frustration argument at such a late stage and noted that, even assuming the proposition in Heymen’s case were accepted, the question of frustration would fall within the arbitrators’ jurisdiction, to be decided on the basis of the contract’s terms, which were drafted in broad language. Consequently, there was no overlap between the subject-matter that could be raised under section 33 and the subject-matter that the arbitrators could determine. The Court therefore declined to pursue this line of argument further.

Turning next to prayers (a) and (b) set out in paragraph 9 of the application, which were based on paragraphs 6 and 7, the Court observed that these prayers could not constitute the subject-matter of arbitration. They struck at the very foundation of the contractual relationship, essentially asserting that no contract existed between the parties and, consequently, that there was no arbitration agreement to be enforced. While such prayers could legitimately form the basis of an application under section 33, because they concerned the existence and validity of the alleged arbitration clause, they lay outside the competence of the arbitrators. Hence, there was no identity of subject-matter between the matters that could be adjudicated by the arbitrators and those raised in the application under section 33. The Court concluded that prayers (a) and (b) could be addressed by the court under section 33 but could not be the subject of the arbitration reference. Accordingly, the legal proceedings under section 33 did not cover any portion of the arbitration reference, rendering section 35 inapplicable and precluding any challenge to the arbitral award on the basis that it contravened section 35 of the Arbitration Act. The first contention therefore failed.

The appellant contended that clause twelve of the contract required liquidated damages to consist not only of the difference between the contract price and the market price on the date of default but also of an additional sum of ten shillings per ton. It was further argued that the reference to sections seventy-three and seventy-four of the Indian Contract Act rendered the extra ten shillings per ton unlawful, and consequently the arbitral award, being contrary to Indian law, should be void and unenforceable in India. Section seventy-three of the Contract Act provides that a party suffering loss or damage from a breach of contract is entitled to compensation that naturally arises in the ordinary course of events from such breach, or that the parties, at the time of contracting, knew was likely to result from the breach. Section seventy-four deals with situations where a contract stipulates a fixed sum or a penalty for breach, and it provides that the aggrieved party may claim reasonable compensation, which must not exceed the amount named in the contract, even if actual loss is not proven. Clause twelve of the contract specifies the measure of liquidated damages as comprising two elements: first, the difference between the contract price and the market price on the date of default; second, an addition of ten shillings per ton to that difference. There is no provision in either section seventy-three or section seventy-four that declares such a liquidated-damage award illegal. Assuming that the case falls within the ambit of section seventy-four, that provision permits the award of reasonable compensation up to the maximum amount expressly named in the contract. The arbitrators, in this instance, awarded precisely the maximum amount stipulated in clause twelve. If the appellant wished to dispute the reasonableness of the ten-shilling addition, it should have raised that issue before the arbitrators and presented arguments at that stage. The appellant cannot now assert, without any prior objection, that the inclusion of ten shillings per ton is per se unreasonable and therefore contrary to Indian law as embodied in sections seventy-three and seventy-four, which both envisage reasonable compensation within the contractual ceiling.

In its discussion of section 74 of the Contract Act, the Court observed that the provision allows the parties to prescribe the maximum amount of reasonable compensation within the contract itself. Accordingly, the Court noted that the arbitral tribunal had granted precisely the amount that had been specified in the contract and had not exceeded that limit. Because the award corresponded exactly with the contractual ceiling, the Court held that there was no basis for declaring the award to be improper on its face. The Court further stated that the award could not be characterized as being contrary to Indian law, as embodied in sections 73 and 74 of the Contract Act, since the award fell within the permissible range contemplated by those sections. The Court then turned to the second ground raised by the appellant. It found that the second contention did not survive scrutiny and therefore failed. On the basis of these findings, the Court concluded that the appeal should be dismissed. The Court ordered that the costs of the proceedings be borne by the appellant and affirmed that the appeal was dismissed. The order also directed that the respondent's legal expenses incurred during the arbitration would be recovered from the appellant in accordance with the applicable procedural rules.