Jawahar Lal Burman vs Union Of India (Uoi)

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

Court: supreme-court

Case Number: Not extracted

Decision Date: 25 September 1961

Coram: B.P. Sinha, P.B. Gajendragadkar, Raghubar Dayal

The case titled Jawahar Lal Burman versus Union of India was decided on 25 September 1961 by a bench of the Supreme Court consisting of Justices B P Sinha, P B Gajendragadkar and Raghubar Dayal. Justice Gajendragadkar delivered the judgment. The principal question presented to the Court arose from an appeal by special leave concerning the construction of sections 32 and 33 of the Arbitration Act 1940. The factual backdrop involved a petition filed by the Union of India in the Court of the First Class Sub‑Judge at Delhi against the appellant, the firm J Burman & Co. through its proprietor Jawahar Lal Burman, invoking sections 33 and 28 of the Act. The Union asserted that a contract had been concluded on 31 August 1949 for the supply of 170 ½ cwt of coconut oil by the appellant to the Union. The Union had advertised the requirement in the Indian Trade Journal; the appellant responded with tender number SM‑I/104524, which the Union accepted, thereby establishing a contract. The contract was governed by the standard conditions known as Form W S B 133, which contained an arbitration clause. Subsequent disputes between the parties were, in accordance with that clause, referred to two arbitrators appointed jointly by the parties.

During the arbitration proceedings, the appellant challenged the arbitrators’ jurisdiction on the ground that no contract had been concluded. This objection compelled the Union to approach the Court for a determination of whether a contract existed and whether the arbitration agreement therein was valid. In its petition, the Union sought a declaration that a concluded contract containing a valid arbitration agreement existed and also requested, under sections 28 and 33, that an appropriate extension of time be granted to the arbitrators for making their award. The appellant, in its defence, contended that no contract had been concluded and that the Court possessed no jurisdiction to grant an extension under section 28. The appellant also denied all other allegations made by the Union.

Having considered the pleadings, the learned trial judge framed the relevant issues and concluded that the evidence established the existence of a concluded contract as described by the Union, that the contract incorporated a valid arbitration agreement, and that the Court had jurisdiction to entertain the petition. It is noteworthy that the appellant had not specifically challenged the Court’s jurisdiction under section 33 or section 32 of the Act. The trial judge observed that the appellant had not shown how the application was incompetent. Accordingly, the trial judge declared that a valid contract existed between the parties, that the arbitration clause was operative, and that the matter was properly referred to arbitration. Consequently, the judge granted the arbitrators a period of one month to render their award.

The trial judge observed that the appellant had not demonstrated how the application was incompetent. Relying on the evidence before him, the trial judge declared that a concluded contract existed between the parties and that the contract contained an arbitration clause which duly referred the dispute to arbitration. On the basis of that declaration, the trial judge concluded that a valid reference to arbitration existed between the parties. Accordingly, the trial judge granted the arbitrators a period of one month within which to make their award.

The appellant challenged this order by filing a revision petition in the High Court of Punjab at Chandigarh. The High Court affirmed the trial court’s finding that a concluded contract containing an arbitration agreement was present. The appellant contended before the High Court that the Court lacked jurisdiction under section 33 of the Act, drawing attention to conflicting judicial decisions on the issue. The High Court, however, held that because the petition was presented as a composite application under sections 28 and 33, the Court could, under section 28, examine the existence or validity of the contract. Consequently, the High Court found no merit in the appellant’s jurisdictional objection and dismissed the revision petition. The appellant subsequently obtained special leave to approach this Court, and counsel on his behalf raised the same two points for consideration. He argued that the High Court erred in holding that the trial court possessed jurisdiction to entertain the respondent’s petition, and he further submitted that, even if the jurisdictional argument failed, there was in fact no concluded contract between the parties, leaving no basis for referring the matter to arbitration. The first of these contentions was the primary issue slated for determination.

Before addressing the jurisdictional question, the material facts giving rise to the present dispute must be recalled. The appellant and the respondent each appointed an arbitrator. The arbitrators conducted extensive hearings, and the proceedings advanced to the point where an award could have been rendered. At that stage, the appellant attempted to halt the arbitration by asserting that no concluded contract existed. Despite this claim, the appellant declined to make an application under section 33, resulting in a stalemate because the arbitrators were unable to proceed in view of the appellant’s allegation. This background is essential for appreciating the jurisdictional issue. The question of jurisdiction raised by the appellant must now be answered by construing, in a reasonable manner, the material provisions of sections 32 and 33 of the Act.

The Court turned its attention to sections 32 and 33 of the Arbitration Act. It acknowledged at the very beginning that the issue raised by the appellant presented a certain degree of difficulty. The two provisions were reproduced in full for the record. Section 32 states: “Notwithstanding any law for the time being in force, no suit shall lie on any ground whatsoever for a decision upon the existence, effect or validity of an arbitration agreement or award, nor shall any arbitration agreement or award be set aside, amended, modified or in any way affected otherwise than as provided in this Act.” Section 33 provisions read as follows: “Any party to an arbitration agreement or any person claiming under him desiring to challenge the existence or validity of an arbitration agreement or an award or to have the effect of either determined shall apply to the Court and the Court shall decide the question on affidavits: Provided that where the Court deems it just and expedient, it may set down the application for hearing on other evidence also, and it may pass such orders for discovery and particulars as it may do in a suit.” In order to understand the effect of these two sections, the Court considered the purpose behind the legislative enactment. It observed that the Legislature had clearly intended to curb the misuse of judicial processes. Before the enactment of the present Act, experience demonstrated that dishonest parties to arbitration agreements often denied the existence of such agreements even after the arbitral proceedings had concluded and awards had been rendered, thereby rendering the arbitration process ineffective. Although such denials were usually unsuccessful, they nonetheless caused substantial delays, wasted time and incurred considerable expense. Consequently, the Parliament introduced sections 32 and 33 with the aim of channeling disputes concerning the existence, validity or effect of an arbitration agreement or award to the appropriate courts through petitions rather than ordinary suits. The Court further noted that section 31(2) provides that all questions relating to the validity, effect or existence of an award or an arbitration agreement, whether between the parties themselves or persons claiming under them, must be decided by the court in which the award has been, or may be, filed, and by no other court. Moreover, section 2(c) defines “Court” to mean a civil court possessing jurisdiction to decide the matters that would have been the subject of a suit, expressly excluding a Small Causes Court except for purposes specified in section 21. On this basis, the Court concluded that the overarching intention behind the introduction of sections 31, 32 and 33 was to vest jurisdiction in the designated civil courts, to require parties to bring their challenges before those courts in the form of petitions, and to eliminate the remedy of a regular suit for such disputes. Finally, the Court observed that section 32 creates a complete bar against instituting any suit where the existence, effect or validity of an arbitration agreement or award is in question.

In this case the Court observed that Section 32 creates an absolute bar on instituting any suit when the existence, effect or validity of an arbitration agreement or of an arbitral award is contested on any ground. The provision states that no civil suit shall be filed for adjudicating such a dispute, and it further provides that no suit shall be instituted for setting aside, amending, modifying or otherwise affecting the arbitration agreement or the award. The expression “on any ground whatsoever” is therefore extremely wide; it means that even a bare allegation questioning the existence or validity of an arbitration agreement precludes the matter from being placed before a regular court. Consequently, when a party acknowledges that an arbitration agreement exists or that it is valid, that party cannot approach a court for a declaration confirming the existence or validity of the agreement, because such a suit is barred by Section 32. This principle is not in dispute. The statutory prohibition against filing a suit raises the further question of what remedy remains available to a party who wishes to obtain a judicial declaration concerning the existence or validity of an arbitration agreement. The answer to that question forms the core of the dispute before the Court. Before addressing the appropriate remedy, the Court examined the scope and effect of Section 33. Section 33 is divided into two distinct parts. The first part deals with a challenge to the existence or validity of an arbitration agreement or of an award, and it empowers only those persons who actually challenge the existence or validity to apply to the Court for a decision on that challenge. This limited class of applicants is undisputed. The second part of Section 33, however, relates to applications seeking a determination of the effect or purport of an arbitration agreement or an award. The crucial issue, therefore, is whether a party who affirms the existence of an arbitration agreement may invoke the second part of Section 33 to obtain a declaration about the agreement. Even if one were to assume that the restriction on applicants applying under the first part of Section 33 does not extend to the second part, it would still be difficult to accept that an application seeking to determine the effect of the agreement could also resolve a dispute concerning the very existence of that agreement. The first part of Section 33 expressly refers to existence and validity, and Sections 31 and 32 separately address existence, effect and validity. Accordingly, the effect of an arbitration agreement is treated as a distinct matter from its existence.

The Court observed that the term “agreement” was treated as separate from the existence of the agreement, and where the legislation intended to refer to both existence and effect, the words “existence and effect” were expressly used. Consequently, under the latter part of section 33 an application could be made to determine the effect or purport of the arbitration agreement, but not to determine its existence. This meant that a request to ascertain the effect of the agreement could be entertained only when the existence of the agreement was not contested. Moreover, if a person who affirmed the existence of an agreement were permitted to approach the Court under the latter part of section 33 for a declaration concerning that existing agreement, the first part of section 33 would become entirely unnecessary. Hence, the Court concluded that a party who affirmed the existence of an arbitration agreement could not rely on section 33 to obtain a decision that the agreement indeed existed. In fairness, the Court added that the learned Solicitor‑General, who appeared for the respondent, did not dispute this position.

The Court then turned to the question marked as point nine, asking what remedy remained available to a party who affirmed the existence of an arbitration agreement if section 33 could not be invoked. The analysis returned to section 32, which created an absolute bar against instituting a suit for a declaration of the agreement’s existence. The Court warned that, unless the creation of this bar itself conferred a right to make an application under the Act, the result would be that the party had no remedy to enforce his right, an outcome that ordinary rules of construction seek to avoid because the Legislature could not have intended such an unreasonable and unconscionable consequence. In the Court’s view, considering the overall scheme of sections 31, 32 and 33, it was not unreasonable to hold that where section 32 barred the filing of a suit, the law necessarily intended that an application could still be made, and that such an application could be brought under the Court’s powers provided in section 31 and implicitly recognised by section 32. On this construction, section 33 could not be regarded as an exhaustive catalogue of all situations in which applications were permissible. The Legislature had provided for the cases covered by section 33 because they represented the typical disputes arising under arbitration agreements. A contrary interpretation would either produce a deadlock or effectively force a party affirming the existence of an agreement to abandon the procedural mechanism stipulated in that agreement and instead sue on the underlying contract. The Court was satisfied that a fair construction of sections 31, 32 and 33 avoided such an anomalous position. Mr Din Dayal contended.

The counsel argued that the Act contains a genuine gap because section 32 creates a bar while the legislature failed to provide a remedial mechanism through an application. After examining sections 31, 32 and 33 together, the Court concluded that it is not compelled to find any lacuna in the statute. It observed that even when dealing with applications under the first part of section 33, the Court may accept the opponent’s pleading and hold that an arbitration agreement exists if the challenge to that existence raised in the petition is rejected. In effect, many applications filed under the first part of section 33 result in a finding that the arbitration agreement does indeed exist. In a similar vein, when an application is filed under section 20 of the Act and a dispute arises as to the existence of the arbitration agreement, the Court may rule in favour of its existence and subsequently issue an order of reference as contemplated by section 24. Consequently, it is clear that in the applications expressly provided for by sections 33 and 20, a party affirming the existence of the agreement is entitled to prove that existence, and, if successful, obtains a decision to that effect. Accordingly, by holding that section 32 implicitly recognises the Court’s inherent jurisdiction to entertain applications made by parties affirming the existence of arbitration agreements, the Court aligns the provisions of section 32 with those of sections 33 and 20. The Court further noted that section 33 serves as a corollary to section 32 and, in a sense, illustrates the most common types of cases that arise in arbitration proceedings.

The Court stated that section 28 of the Act has no material bearing on the point under consideration. The power to extend the time for making an award, which is the subject‑matter of section 28, cannot be interpreted to include a power to entertain petitions like the present one. Moreover, the learned Solicitor‑General did not attempt to justify the High Court’s conclusion that section 28 confers such a power. Even assuming that the Court possesses inherent jurisdiction to entertain an application supporting the existence of an arbitration agreement, a further question remains whether that inherent jurisdiction extends to an application seeking a declaration that the contract, which includes the arbitration agreement as defined by section 2(a), covers cases where the arbitration agreement is itself part of the contract. The argument advanced is that, although an application may be filed under the Court’s inherent jurisdiction to obtain a declaration concerning the existence or validity of an arbitration agreement, no such application can be filed to obtain a declaration concerning the existence or validity of the main contract itself. In addressing this argument, the Court emphasized that the substance rather than the form of the matter must be considered.

In the instant matter the respondent maintained that the parties had entered into a concluded contract and that the said contract incorporated a valid arbitration agreement. When the substance of the dispute was examined, the first request made by the respondent concerned the existence and the validity of the principal contract, and the second and principal request concerned the existence of a valid arbitration agreement within that contract. The decision on this issue could not be based merely on the terminology employed in the petition. Because the appellant’s defence challenged the contract in a manner that was common to both the contract itself and the arbitration agreement contained therein, the petition filed by the respondent, in its substantive effect, amounted to a petition for a declaration as to the existence of a valid arbitration agreement. A suit seeking such a declaration was expressly barred by section 32 of the Arbitration Act. Consequently, the fact that the respondent also sought an incidental declaration regarding the existence and validity of the main contract did not alter the essential nature of the application. The application was, in effect, an application for a declaration that the arbitration agreement existed and was valid. It was further noted that an arbitration agreement that forms part of the contract is, on the one hand, an integral component of the contract and, on the other hand, may be conceptually distinct from it. Lord Macmillan, speaking in Hayman v. Darwins, Ltd. ([1942] A.C. 356, S.C. [1942] 1 All. E.R. 337 at p. 347), observed that “the arbitration clause is quite distinct from the other clauses. The other clauses set out the obligations which the parties undertake towards each other hinc inde; but the arbitration clause does not impose on one of the parties an obligation in favour of the other. It embodies the agreement on both the parties that, if any dispute arises with regard to the obligations which the one party has undertaken to the other, such dispute shall be settled by a tribunal of their own constitution. Moreover, there is this very material difference that whereas in any ordinary contract the obligations of the parties to each other cannot in general be specifically enforced and breach of them results only in damages, the arbitration clause can be specifically enforced by the machinery of the Arbitration Acts.” In theory, a contract may terminate while the arbitration agreement survives, and conversely an arbitration agreement may be void while the contract remains valid; thus a conceptual distinction exists between the two. However, in the present case the challenge to the contract itself inevitably entailed a challenge to the arbitration agreement. If a concluded contract existed, the arbitration agreement was valid; if no contract had been concluded, the arbitration agreement was invalid. Accordingly, any request for a declaration of the contract’s existence and validity inevitably gave rise to a consequential request concerning the arbitration agreement’s existence and validity.

The Court observed that if there is no concluded contract, the arbitration agreement is consequently invalid. In such circumstances, a request for a declaration that the contract exists and is valid inevitably includes a consequential request concerning the existence and validity of the arbitration agreement. Because the respondent’s prayers in the present case fall squarely within the clause “on any ground whatsoever,” a suit solely for a declaration that the arbitration agreement is valid could not be entertained. The Court further noted that, in the overwhelming majority of cases where the arbitration agreement forms part of the main contract, a challenge to the existence or validity of one necessarily amounts to a challenge to the existence or validity of the other. Accordingly, the Court held, albeit for reasons different from those previously discussed, that the High Court was correct in concluding that the petition filed by the respondent was competent under section 32 of the Arbitration Act and had been properly entertained by the trial Court. The Court then referred to earlier judicial decisions on the same question. In Messrs M Gulamali Abdulhussain & Co. v. Messrs Vishwambharlal Ruiya (I L R. [1950] Bom. 333) a petition was filed seeking a declaration that the respondents had entered into a contract for the purchase of five hundred bars of silver dated about 30 January 1948, governed by the rules of the Marwari Chamber of Commerce, Ltd., and that all disputes arising from that contract were to be decided by arbitrators appointed under those rules. The jurisdiction of the Court to entertain that petition was contested, but both the trial judge and the Court of Appeal rejected the respondents’ argument and held that the Court possessed an inherent jurisdiction to entertain petitions concerning matters within the bar created by section 32. By contrast, in Bajranglal Laduram v. Agarwal Brothers (A I R 1950 Cal. 267) and in State of Bombay v. Adamjee Hajee Dawood & Co., Ltd. (I L R. [1952] 2 Cal. 49) a different approach was adopted. In the latter case, a suit filed in the original side of the Calcutta High Court sought a declaration that a contract had never been concluded between the parties and was therefore not binding on the plaintiff, along with a further claim that the defendant was not entitled to any relief under that contract and that the contract should be declared void and cancelled. The trial judge interpreted the plaint as a claim that the arbitration agreement contained in the contract was invalid and, on that view, held that the suit was not maintainable under sections 32 and 33 of the Act. On appeal, the higher court agreed that the suit was not maintainable for that reason.

The Court observed that the suit was not merely for challenging the validity of the arbitration agreement; it also sought other reliefs. Consequently, the statutory bars contained in sections 32 and 33 could not be invoked as a defence. The Court expressed that it was inclined to agree with the judgment of the Bombay High Court, finding that the earlier decision was substantially correct.

The next issue before the Court was whether a concluded contract existed between the parties. The Court noted that, in reply to an advertisement placed by the respondent in the Indian Trade Journal, the appellant had submitted a tender. It was accepted as common‑ground that the tender was made subject to the standard conditions governing Department of Supply contracts, which are reproduced in Government Publication Form W.S.B. 133. The Court focused on clauses 4(a) and 4(b) of those conditions because they dealt with the requirement of a security deposit. Clause 4(a) stipulated that, upon acceptance of a tender, the contractor, at the option of the Secretary of the Department of Supply and within a time specified by the Secretary, must deposit a security amount as prescribed. Clause 4(b) provided that if the purchaser required the contractor to furnish the security and the contractor failed to do so within the stipulated time, such failure would amount to a breach of contract, authorising the Department of Supply to make alternative arrangements at the contractor’s risk and with the contractor’s consent. From these provisions the Court inferred that the security deposit operated as a condition subsequent rather than a condition precedent, and that failure to pay the deposit would constitute a breach of the contract itself. This view was not contested. However, counsel for the appellant, Mr Din Dayal, argued that the effect of the standard clauses was materially altered by the manner in which the respondent accepted the appellant’s tender. He contended that the wording of the acceptance letter transformed the security deposit into a condition precedent to the acceptance, thereby implying that no contract had been concluded. The Court indicated that the resolution of this point depended on the proper construction of the acceptance letter issued by the respondent after receipt of the tender. The Court then reproduced the acceptance letter dated 31 August 1949, which stated: “Dear Sirs, Ref:—Your tender No. and date Nil. Your offer is hereby accepted for a quantity of 1704 Cwts. and 2 qrs. (One thousand seven hundred and four hundred weights and two quarters only) of Oil Cocoanut conforming to specification No. IM 1370(d) at Rs. 89/6/- (Rupees eighty‑nine and annas six only) per Cwt., packed in non‑returnable sound, strong 45‑gallon drums, delivery ex‑godown at Calcutta by 39‑9‑49 or earlier if possible subject to your depositing 10 % as security. The security money which comes to Rs. 15,230/- (Rupees fifteen thousand two hundred and thirty only) should please be deposited immediately into a Government Treasury…”.

In the acceptance letter the Government officer instructed that the security money be paid in favour of the Deputy Accountant General, I and S., Akbar Road, New Delhi and that the Treasury Receipt be forwarded to the office; the letter further stated that the security money would be refunded after the contract was completed, that the contract was concluded by this acceptance, and that a formal acceptance of the tender would follow immediately on receipt of the Treasury Receipt, and it asked the appellant to acknowledge receipt. The appellant’s entire argument relied on the clause “subject to your depositing 10 % as security.” At first sight that clause might suggest that the security deposit was a condition precedent, but the Court observed that the true effect of the clause must be understood in the context of the whole letter, which had been drafted not by a lawyer but by a Government officer performing his ordinary duties. The first sentence of the first paragraph plainly indicated that the offer was accepted for the quantity specified. The second paragraph merely reminded the appellant to deposit the stipulated amount immediately into the Government Treasury, a wording that corresponded with clause 4(a) of the general conditions. It therefore read as a reminder of an existing condition rather than a new condition precedent, and the letter concluded with an unequivocal statement that the contract was concluded by this acceptance. The Court agreed with the submission that section 7 of the Contract Act requires an acceptance to be absolute and unqualified, and found that the lower courts were correct in holding that the letter constituted an absolute, unqualified acceptance of the appellant’s offer. The Court also recalled that the general conditions of the contract prescribed by Form W.S.B. 133 formed part of the tender and that the contract was intended to be executed promptly. The tender itself showed that the appellant had represented that delivery could be effected within twenty days of receiving the order and that it possessed the full quantity of coconut oil required. Consequently, the tender treated the security deposit as a subsequent condition, the contract was for immediate supply of goods, and the acceptance complied with the relevant Government rules, expressly stating that the contract was concluded by the acceptance. In the Court’s opinion, after a full reading of the letter, it was impossible to accept the appellant’s contention that the letter sought to vary the contract substantially by making the security deposit a condition precedent rather than a condition subsequent.

The Court held that the appeal could not succeed and consequently ordered its dismissal. Having examined the arguments that the appellant sought to rely upon, the Court found that those submissions did not establish any ground for overturning the earlier determination. The Court therefore concluded that the appeal failed on its merits. In accordance with this conclusion, the Court directed that the appeal be dismissed and that the appellant be liable to pay the costs incurred in the proceedings. Thus, the final order of the Court was that the appeal was dismissed with costs, and the matter was thereby concluded.