Khardah Company Ltd vs Raymon and Co. (India) Private, Ltd

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

Court: supreme-court

Case Number: Civil Appeals Nos. 98 and 99 of 1960

Decision Date: 4 May 1962

Coram: Bhuvneshwar P. Sinha, N. Rajagopala Ayyangar, J.R. Mudholkar, T.L. Venkatarama Aiyar

In this matter, the Supreme Court of India delivered its judgment on 4 May 1962 concerning the dispute between Khardah Company Ltd, the petitioner, and Raymon & Co. (India) Private Ltd, the respondent. The case was reported in 1962 AIR 1810 and 1963 SCR (3) 183, which constitute the primary official citations for the decision. Subsequent citations of the judgment include F 1963 SC 90, APL 1964 SC1526, R 1969 SC 9, R 1974 SC1579, D 1985 SC1156, and F 1989 SC 839. The bench that heard the appeal comprised Chief Justice Bhuvneswar P. Sinha, Justice N. Rajagopala Ayyangar, and Justice J. R. Mudholkar. The same bench also included Justices AIyyar, T. L. Venkatarama, and Subbarao K. Ayyangar, as recorded in the official report. The issues before the Court involved the validity of a forward contract for the sale of jute cuttings. The Court also examined the enforceability of the arbitration clause within that contract and the question of estoppel arising from the parties’ participation before an arbitral tribunal. The applicable legislation comprised the Forward Contracts (Regulation) Act, 1952, specifically sections 2(c), 2(f), 2(i), 2(m), 2(n), 15(1), 17, and 18(1), together with the Arbitration Act, 1940, section 33. The Court’s decision thoroughly examined the statutory provisions mentioned above and evaluated the factual circumstances surrounding the parties’ agreement and subsequent dispute.

In the factual background, the appellant company entered into a written agreement with the respondents on 7 September 1955 for the purchase of certain bales of jute cuttings. The contract required the respondents to deliver the jute cuttings in equal monthly installments during October, November, and December 1955. Under clause three of the agreement, the sellers were entitled to receive payment only after they had presented the buyers with the complete set of shipping documents for each delivery. Clause eight granted the sellers the right to resale the goods if the buyers refused to accept the shipping documents. Clause fourteen stipulated that any dispute arising out of or relating to the contract should be referred to arbitration conducted by the Bengal Chamber of Commerce. When the respondents failed to deliver the goods according to the schedule, the appellant invoked the arbitration clause and applied to the Bengal Chamber of Commerce for arbitration. The respondents appeared before the appointed arbitrators, contested the appellant’s claim, and the arbitral tribunal ultimately rendered an award in favor of the appellant. Dissatisfied with the award, the respondents filed an application before the Calcutta High Court under section thirty‑three of the Arbitration Act, 1940, challenging the award on the ground that the underlying contract dated 7 September 1955 was illegal. They asserted that the contract contravened a Central Government notification dated 29 October 1953 issued under section seventeen of the Forward Contracts (Regulation) Act, 1952, which prohibited any forward contract except a non‑transferable specific delivery contract for the sale or purchase of raw jute. Consequently, the appellant presented three principal arguments, the first of which was that the arbitration clause assigned the question of the contract’s legality to the arbitrator, thereby excluding review in the section thirty‑three proceeding. The second argument asserted that the respondents were estopped from challenging the arbitral award because they had voluntarily submitted themselves to the arbitrators’ jurisdiction. The third argument maintained that, irrespective of the earlier issues, the contract satisfied the definition of a non‑transferable specific delivery contract under section two‑f of the Forward Contracts (Regulation) Act. Consequently, the appellant argued that because the contract met the statutory definition, it was therefore not subject to the prohibition contained in the 1953 government notification.

The appellant contended that, first, under the arbitration clause the question of whether the contract dated 7 September 1955 was illegal should have been decided by the arbitrators and therefore the respondents could not raise the issue in an application under section 33 of the Arbitration Act; second, that the respondents were estopped from challenging the award because they had submitted to the jurisdiction of the arbitrators; and third, that the contract was in fact a non‑transferable specific‑delivery contract within clause 2(f) of the Forward Contracts (Regulation) Act and therefore was not affected by the government notification of 29 October 1953. The Court held that the dispute concerning the validity of the 7 September 1955 contract was not within the competence of the arbitrators under clause 14, and consequently the respondents were entitled to maintain the application under section 33 of the Arbitration Act. The Court observed that when an agreement is invalid, every part of it, including any arbitration clause, is also invalid, citing Leyman v. Darwins Ltd. [1942] A.C. 356, Union of India v. Kighorilal Gupta and Brothers [1960] 1 S.C.R. 493, and Tolaram v. Birla Jute Manufacturing Co. Ltd. [I.L.R. [1948] 2 Cal. 17]. The Court further held that the respondents were not estopped by their conduct from questioning the award’s validity, referring to Ex parte Wyld (1861) 30 Law J. Rep. (N.S.) 10. Finally, the Court concluded that a proper construction of the September 7 1955 contract, read together with the terms of the import licence granted to the appellant, showed that the parties had agreed that the contract would not be transferred. In construing a contract, surrounding circumstances may be taken into account, and the absence of an explicit non‑transfer clause was not decisive. This view was supported by Virjee Daya & Co. v. Ramakrishna Rice & Oil Mills [A.I.R. 1956 Mad. 110] and distinguished from British Waggon Co. v. Lea (1880) 5 Q.B.D. 149. Accordingly, the contract was not affected by the October 29 1953 notification.

The judgment was delivered in the Civil Appellate Jurisdiction of the Supreme Court in Civil Appeals Nos. 98 and 99 of 1960, arising from the Calcutta High Court orders dated 16 April 1958 and 11 April 1958, which set aside an arbitral award directing the respondents to pay the appellants Rs. 41,250 as compensation for breach of contract on the ground that the contract violated the 29 October 1953 government notification and was therefore illegal and void. The appellants owned a jute mill in Calcutta and were engaged in the manufacture and sale of jute. On 7 September 1955 they entered into a contract with the respondents, who dealt as jute dealers, for the purchase of 750 bales of raw jute from Pakistan at Rs. 80 per bale, to be delivered in October, November and December at a rate of 250 bales each month. Clause 14 of the agreement required that any dispute be referred to the arbitration of the Bengal Chamber of Commerce. After the respondents failed to deliver the goods as agreed, the appellants sought arbitration under clause 14. The arbitrators awarded the appellants Rs. 41,250 with interest, and the award was filed under section 14(2) of the Indian Arbitration Act in the High Court of Calcutta, where notice was given to the respondents. The respondents then filed an application, presumably under section 33 of the Arbitration Act, seeking a declaration that the 7 September 1955 contract was illegal because it contravened the 29 October 1953 notification. Counsel for the appellant consisted of the Additional Solicitor‑General of India and two other advocates, while counsel for the respondents were two practitioners appearing on their behalf. The judgment was pronounced on 4 May 1962 by Justice Venkatramana Aiyar.

In the matter before the Court, the appellants, who owned a jute mill in Calcutta, entered into a contract with the respondents on 7 September 1955 for the purchase of 750 bales of raw jute imported from Pakistan. The contract specified a price of Rs 80 per bale, each bale weighing four hundred pounds, and required delivery during the months of October, November and December, at a rate of two hundred and fifty bales each month. Clause 14 of the agreement stipulated that any dispute arising out of or relating to the contract should be referred to the arbitration of the Bengal Chamber of Commerce. The respondents failed to deliver the goods as agreed, prompting the appellants to invoke the arbitration clause and apply to the Bengal Chamber of Commerce for arbitration. The respondents appeared before the arbitrators and contested the claim on its merits. The arbitrators ultimately awarded the appellants Rs 41,250 together with interest. This award was filed under section 14(2) of the Indian Arbitration Act in the original side of the Calcutta High Court, and notice of the filing was served upon the respondents. Subsequently, the respondents filed an application, apparently under section 33 of the Arbitration Act, praying for a declaration that the contract dated 7 September 1955 was illegal because it contravened a Central Government notification of 29 October 1953, and that consequently the arbitration proceedings and the award were void. The learned judge on the original side dismissed the application and entered a decree in accordance with the award. The respondents appealed both the judgment and the order to a Division Bench of the High Court, filing Appeals Nos 154 and 173 of 1957, which were heard by Chief Justice Chakravartti and Justice Lahari. The Division Bench held that the contract fell within the prohibition contained in the aforesaid notification, declared it illegal, and consequently set aside the award. The appellants then sought, and were granted, a certificate under article 133(1) of the Constitution, bringing the appeals before the Supreme Court.

The learned Additional Solicitor‑General appearing for the appellants put forward three principal contentions. First, he argued that the arbitration clause assigned the question of the contract’s legality to the arbitrator, and therefore the respondents could not raise the issue in the present proceedings under section 33 of the Arbitration Act. Second, he submitted that the respondents were estopped from challenging the validity of the award because they had voluntarily submitted themselves to the jurisdiction of the arbitrators. Third, he contended that the agreement dated 7 September 1955 was a non‑transferable specific delivery contract falling within section 2(f) of the Arbitration Act and consequently was not covered by the Central Government notification of 29 October 1953. The Court then proceeded to discuss these questions sequentially, beginning with the first contention. Clause 14 of the agreement, which provided for arbitration, read: “All the matters, questions, disputes, differences and/or claims arising out of and/or concerning and/or in connection with and/or in consequence …” (the quotation continued in the subsequent portion of the judgment). The appellants argued that the clause was broad enough to encompass a dispute concerning the very validity of the contract, thereby limiting the respondents’ right to raise the issue only before the arbitrators and, if dissatisfied, to seek modification of the award under section 15 of the Arbitration Act.

In the agreement, clause fourteen stipulated that all matters, questions, disputes, differences or claims arising out of, concerning, in connection with, in consequence of, or relating to the contract—including insurance and demurrage issues—shall be referred to the arbitration of the Bengal Chamber of Commerce and Industry under the then‑applicable Tribunal of Arbitration rules, and that any award issued by that tribunal would be final, binding and conclusive on the parties. The appellants argued that this clause was drafted in general terms, broad enough to encompass a dispute concerning the contract’s very validity, and therefore asserted that the respondents’ sole recourse was to present such a question before the arbitrators. According to the appellants, if the arbitrators rendered an award adverse to the respondents, the respondents could then approach the court to modify the award under section 15 of the Arbitration Act, remit the matter under section 16, or set aside the award under section 30 on the statutory grounds. Consequently, the appellants maintained that the present application seeking a declaration of illegality of the contract and asserting lack of jurisdiction of the arbitration proceedings was both incompetent and misconceived. It was uncontested that the expressions “arising out of”, “concerning”, “in connection with”, “in consequence of” and “relating to this contract” appearing in clause fourteen possessed sufficient breadth to embrace a dispute regarding the validity of the agreement dated 7 September 1955, as demonstrated in Ruby General Insurance Co. Ltd. v. Pearey Lal Kumar (1). However, the pivotal question was not the comprehensiveness of clause fourteen, but whether the clause could be enforced when the underlying agreement, of which it formed an integral part, was held to be illegal. Logically, it is difficult to imagine a scenario in which a contract declared void could still render any of its constituent provisions operative; when the whole contract perishes, its parts must also perish, encapsulated in the maxim “Ex nihilo nil fit”. Accordingly, the principle dictates that an agreement deemed invalid renders every part of it, including the arbitration clause, invalid as well. This principle has been affirmed in the authorities cited before the Court. The leading authority on this point is the House of Lords decision in Heyman v. Dacwins Ltd (1), where the issue was whether repudiation of a contract annulled the arbitration clause contained therein; the House held that repudiation did not annul the arbitration clause. In that context, the law concerning the circumstances under which an arbitration clause becomes unenforceable was examined in detail. Summarising the law, Viscount Simon, L.C., observed: “If the dispute is whether the contract which contains the clause has ever been entered into at all, that issue cannot go to arbitration under the clause, for the party who denies that he has ever entered into the contract is thereby denying that he has ever joined in the submission. Similarly, if one party to the alleged contract is contending that it is void ab initio because, for example, the making of such a contract is illegal, the arbitration clause cannot operate, for on this view the clause itself also is void.”

The Court explained that when a dispute concerns whether an arbitration clause was ever part of a contract, the arbitration provision cannot be invoked. If a party claims that he never entered into the contract, he is effectively denying that he ever agreed to submit any matter to arbitration. In the same way, if a party contends that the alleged contract is void ab initio—for example because its formation was illegal—the arbitration clause is regarded as void as well, because the clause itself would be part of a non‑existent agreement. However, the Court noted that where both parties agree that a binding contract exists, and the disagreement relates only to whether one side has breached the contract or whether certain circumstances have discharged one or both parties from further performance, those issues are to be seen as differences that have arisen “in respect of”, “with regard to” or “under” the contract. Consequently, an arbitration clause that uses such language, or similar expressions, must be interpreted to cover those disputes. The Court cited the authority in Heyman v. Dacwins Ltd (1) (1942) A.C. 356, and recorded Lord Macmillan’s observation, endorsed by Lord Russell, that a dispute about the very existence of a binding contract cannot be covered by an arbitration clause because without a contract there can be no agreement to arbitrate. Lord Macmillan further held that a claim to set aside a contract on grounds such as fraud, duress or essential error is likewise beyond the scope of an arbitration clause embedded in the contract that is sought to be set aside.

Turning to the observations of Lord Wright, which the appellants relied upon, the Court reported that Lord Wright stated: “Hence, if the question is whether the alleged contract was void for illegality or being voidable was avoided because induced by fraud or misrepresentation, or on the ground of mistake, it depends on the terms of the submission whether the dispute falls within the arbitrator’s jurisdiction.” The appellants argued that a general and unqualified arbitration clause should also encompass a question concerning the legality of the contract itself. The Court acknowledged that Lord Wright’s remark could be read as supporting the view that, if the contract expressly provides that a dispute about its legality may be referred to arbitration, such a provision would be valid. Nonetheless, the Court observed that reconciling this position with the earlier passages cited by Lord Macmillan and Lord Russell presents difficulties. It further noted that the noble Lord concluded his speech by affirming agreement with the general conclusions summarized by the Lord Chancellor in the closing paragraphs of his opinion. The appellants also cited Lord Porter, who observed: “If two parties purports to enter into a contract and a dispute arises whether they have done so or not, or whether the alleged …”

The Court observed that when parties question whether a contract is binding upon them, there is no reason why they should be precluded from submitting that dispute to arbitration. Likewise, the Court noted that if, at the time the parties intend to enter into a contract, they anticipate the possibility of a dispute regarding the contract’s existence or continued effect, they may, within the same contract, provide for the submission of such a dispute to arbitration. The Court recognised that achieving this result may require very clear contractual language, and it may be argued that a clause dealing with the arbitrability of a contract’s validity is merely collateral to the main agreement. Nevertheless, the Court saw no reason why such a clause should not be incorporated. The Court, however, cautioned that these observations must be read together with other statements made in the same speech. In those statements the Court explained that where a contract is repudiated in the sense that its original existence or binding force is challenged—such as when it is alleged that the parties never reached a meeting of minds, or that the contract is voidable ab initio because of fraud, misrepresentation, mistake, or similar grounds—the parties are not bound by any contractual obligations, including any arbitration clause, unless the arbitration clause is drafted broadly enough to encompass the question of jurisdiction over the validity dispute. According to Lord Porter, an agreement to refer a dispute concerning the validity of a contract to arbitration can exist, but when that agreement forms part of the contract that is itself alleged to be invalid, the arbitration agreement cannot exist independently and therefore cannot give rise to a valid reference. Conversely, if the agreement to arbitrate is distinct and separate from the contract whose validity is contested, a reference pursuant to that separate agreement will be valid, and it is possible for both the main contract and the arbitration agreement to be contained within a single document. The Court further referred to the summary of the law found in Halsbury’s Laws of England, Third Edition, Volume 2, page 24, paragraph 56, which states that the subject matter of the legal proceedings sought to be stayed must fall within the scope of the arbitration agreement. If, however, the dispute concerns whether the contract containing the arbitration clause was ever entered into, or whether it was void ab initio, illegal, or obtained by fraud, duress, or undue influence, the arbitration clause does not apply and a stay of proceedings will be refused.

The Court noted that reference could be made to section 33 of the Arbitration Act, which provides that any party to an arbitration agreement who wishes to challenge the existence or validity of that agreement must apply to the Court for determination of the question. This provision embodies the law as it was understood in England at the time the legislation was enacted and was later affirmed by the House of Lords in Heyman v. Darwins Ltd. (2). The applicability and scope of section 33 were examined by this Court in the matter of Shiva Jute Baling Ltd. v. Hindley & Co. Ltd. (5). In that case a petition was filed under section 33 seeking, among other relief, a declaration that the contract containing an arbitration clause was void ab initio on the ground of uncertainty and that, in fact, no contract existed due to mutual mistake. The Court held that such questions of existence and validity of the contract are matters for judicial determination and not for arbitrators. Accordingly, the Court expressed the view that the dispute concerning whether the contract dated 7 September 1955 is illegal and void does not fall within the competence of the arbitrators under clause 14, and therefore the respondents are entitled to maintain the present application under section 33 of the Arbitration Act.

The appellants then contended that, even if clause 14 were to be deemed inoperative because the dispute relates to the validity of the contract, the respondents are estopped from now challenging the award on that ground because they had appeared before the arbitrators and participated in the proceedings. In support of this contention the decision in Ex p. Wyld (1) was relied upon. In that case a dispute between an assignee in bankruptcy and a creditor, Mr Wyld, was referred to arbitration on the basis of a written agreement. After an award was made against Mr Wyld, he challenged its validity on the ground that the assignee had not obtained the requisite leave of the Court before entering into arbitration. The Court rejected this objection, observing that the agreement was binding on Mr Wyld despite the lack of Court leave, and therefore he could not rely on the informality of the submission because he had himself acted upon it. The Court held that this decision did not assist the appellants, as there was a valid and subsisting submission giving the arbitrators full jurisdiction to hear the dispute, and the failure of the assignee to obtain the required leave was a matter between the assignee and the Court, not a factor that affected the arbitrators’ jurisdiction.

The Court observed that if the agreement dated 7 September 1955 were void, then no valid submission existed upon which the arbitrators could rely, and consequently the arbitral proceedings would have been completely without jurisdiction. The Court noted that only if there had been another arbitration agreement separate from clause 14 of the contract dated 7 September 1955 could the proceedings have possibly been sustained on the basis of that other agreement. However, the Court found that no such independent agreement had been shown or proven in the present case. The only allegation put forward was that the respondents had acquiesced in the arbitral proceedings. The Court explained that the source of jurisdiction for arbitrators to hear and determine a dispute is an arbitration agreement as defined in section 2(a) of the Arbitration Act, and where such an agreement is absent there is an initial lack of jurisdiction that cannot be remedied by the parties’ acquiescence. The Court also referred to the decision reported as Ex p Wyld (1), which has been interpreted to mean that when one party to a submission is under a disability, the other party cannot challenge the award on that ground if he was aware of the disability, citing Russell on Arbitration, 16th edition, page 320. Accordingly, the Court rejected Mr Sanyal’s contention that the respondents were estopped by their conduct from questioning the validity of the award. The Court then turned to the question of whether the contract dated 7 September 1955 was illegal under the prohibition issued by the Central Government in its notification of 29 October 1953. To address this issue the Court set out the relevant statutory provisions. Section 2(i) of the Forward Contracts (Regulation) Act, 1952 (Act 74 of 1952), hereinafter referred to as “the Act”, defined a “ready delivery contract” as a contract that provides for delivery of goods and payment of price either immediately or within a period not exceeding eleven days after the date of the contract. Section 2(c) defined a “forward contract” as a contract for delivery of goods at a future date that is not a ready delivery contract. Section 2(m) defined a “specific delivery contract” as a forward contract that provides for the actual delivery of specific qualities or types of goods during a specified future period at a price fixed thereby or to be fixed in the manner agreed, and in which the names of both buyer and seller are mentioned. Section 2(f) defined a “non‑transferable specific delivery contract” as a specific delivery contract whose rights or liabilities under any delivery order, railway receipt, bill of lading, warehouse receipt, or any other document of title relating thereto are not transferable. Finally, section 2(n) defined a “transferable specific delivery contract” as a specific delivery contract that is not a non‑transferable specific delivery contract.

In this part of the judgment, the Court examined the meaning of a “non‑transferable specific delivery contract” and the powers granted to the Central Government by Chapter IV of the Forward Contracts (Regulation) Act, 1952 to prohibit certain categories of forward contracts. Section 15(1) of the Act provides that the Central Government may, by notification in the Official Gazette, declare that the section applies to particular goods or classes of goods and to specified areas. Once such a notification is issued, and subject to the provisions of section 18, every forward contract for the sale or purchase of the goods named in the notification that is entered into in the designated area, except where the parties are members of a recognised association or are dealing through such a member, shall be illegal. The Act further states in section 16 that where a notification under section 15(1) has been made, all forward contracts falling within the scope of that notification shall be treated as closed out, and the seller shall not be bound to deliver the goods and the buyer shall not be bound to take delivery. Section 17 then expands the Government’s authority, providing that the Central Government may, by notification in the Official Gazette, declare that no person shall, except with the Government’s permission, enter into any forward contract for the sale or purchase of any goods or class of goods specified in the notification to which the provisions of section 15 have not been applied, unless the notification itself stipulates a different extent or manner. Sub‑section (2) of section 17 makes any forward contract entered into after the notification’s publication in contravention of sub‑section (1) illegal. Sub‑section (3) provides that, unless the notification says otherwise, the provisions of section 16 shall apply to all forward contracts for the goods specified in the notification that were entered into on or before the date of the notification and that remain to be performed after that date, in the same way as they apply to contracts covered by section 15. Section 18(1) carves out an exemption, stating that the foregoing provisions shall not apply to non‑transferable specific delivery contracts for the sale or purchase of any goods. The Court explained that the Act therefore classifies contracts for the sale of goods into two broad groups: ready‑delivery contracts and forward contracts. Forward contracts are further divided into specific delivery contracts and non‑specific forward contracts. Specific delivery contracts are then divided into transferable specific delivery contracts and non‑transferable specific delivery contracts. Because section 18(1) exempts non‑transferable specific delivery contracts, the practical effect of the statutory scheme is that every forward contract other than a non‑transferable specific delivery contract may be declared illegal by a notification issued under the Act. The Court noted that such a notification had indeed been issued by the Central Government in the exercise of the powers conferred by the Act.

The Central Government issued a notification on 29 October 1953 exercising the authority granted by section 17 of the Forward Contracts (Regulation) Act, 1952. The notification, identified as No 2(24) Jute/53, declared that no person was permitted to enter into any forward contract for the sale or purchase of raw jute except a non‑transferable specific delivery contract. The declaration further specified that (i) any forward contract, other than a non‑transferable specific delivery contract, which had been entered into before the date of the notification but was to be performed after that date would be deemed to have been closed out at the prevailing rate at the moment the forward market closed on the date of the notification; and (ii) any differences arising from such deemed‑closed contracts would be payable according to the rate specified in clause (i), and the seller would not be obligated to deliver the raw jute and the buyer would not be obligated to accept delivery. This notification remained in force at the time the contract that is the subject of these appeals was executed.

The contract in question was entered into on 7 September 1955, that is, while the foregoing notification was operative, and therefore it would be subject to the notification unless it qualified as a non‑transferable specific delivery contract. Both parties agreed that the contract was a specific delivery contract because it identified the buyers and sellers, described the goods, fixed the price, and stipulated the time for actual delivery. The dispute centered on whether the contract was transferable or non‑transferable. The Court noted that extensive argument had been presented concerning the assignability of contracts. It restated the settled legal principle that an assignment may involve the transfer of either rights or obligations under a contract, but a clear distinction exists between the two. Generally, obligations cannot be assigned without the consent of the promisee; when consent is obtained, the transaction amounts to a novation that substitutes the original parties’ liabilities. Conversely, rights are assignable unless the contract is of a personal nature that renders the rights inassignable either by law or by agreement of the parties. Applying these principles, the Court examined whether the contract dated 7 September 1955 was transferable. Since only the benefit under the contract could be assigned, the analysis focused on two questions: whether the buyers were entitled to assign their right to receive the goods upon payment of the price, and whether the sellers were entitled to assign their right to receive payment for the goods.

The Court observed that the question of whether the buyers could assign their right to receive the goods was free from doubt because the licence authorising the appellants to import the goods from East Pakistan expressly forbade any such assignment. The Court noted that, due to foreign‑exchange exigencies, the Government had imposed restrictions on imports at all relevant times. The nature of those restrictions and the policy underlying them had been examined recently by this Court in Daya v. Joint Controller of Imports and Exports, and it was unnecessary to repeat that discussion. For the present purpose it was sufficient to state that import licences were granted only to persons who had been engaged in the import trade during a prescribed period, and that the licences also imposed quantitative limits on the volume of imports. The Court pointed out that the manufacture of jute was a premier industry in West Bengal, and that the raw jute required for such manufacturing was largely imported from East Pakistan. Consequently, import licences were periodically issued to jute manufacturers. At the time of the contract in dispute, the appellants possessed two licences issued by the Government of India, namely licence numbers A 062290/52 and A 063733/52. The Court reproduced the material terms of licence No. A 062290/52, which read as follows: “Import Trade Control. Office of the Joint Chief Controller of Imports, Calcutta. Licence No. A 062290/52/A.U./C.C.I/C. For exchange‑control purposes only. Class of importer: actual user or contract. Valid at any Indian port. Not transferable except under a letter of authority from the authority who issued the licences or from any Import Trade Controller. Messrs. Khardah Co. Ltd., 7 Wellington Place, Calcutta, are hereby authorised to import the goods whose particulars are given below: (1) Country from which consigned – Pakistan; (2) Country of origin – Pakistan; (3) Description of goods – Raw jute; (4) Serial No. and part of the I.T.C. schedule – 174‑IV; (5) Quantity – 50,000 Mds (fifty thousand mandays only). This licence is issued subject to the condition that the goods will be utilised only for consumption as raw material or accessories in the licence‑holder’s factory and that no portion thereof will be held to any other party.” The Court emphasized that the licence was expressly non‑transferable and that it further required the imported raw jute to be used only in the licence‑holder’s own manufacturing process, prohibiting any sale or transfer to another party. Accordingly, the Court concluded that, in view of the licence terms, the buyers could not assign the contract, a point that was not contested. The Court then turned to the question of whether the sellers could assign their right to the price on delivery of the goods.

The Court below had held that the sellers were entitled to assign the right to receive delivery of the goods because the contract contained no personal element and its terms did not prohibit the assignment of a benefit that a party possessed at law. The appellants challenged that determination. They argued that the contract must be read in the context of the surrounding circumstances, particularly the conditions imposed by the import licence, and that doing so would lead to the proper conclusion that the agreement could not be transferred. The Court therefore set out to examine that submission. The appellants initially relied on clauses twelve and fourteen of the agreement, contending that those provisions demonstrated that the contract was of a personal nature and consequently could not be assigned.

The agreement in question is a contract for the sale of goods. In a sale of goods contract there is ordinarily no personal character; the identity of the party who performs delivery is immaterial to the purchaser, whose primary concern is that the goods delivered conform to the specifications. Nevertheless, the appellants asserted that the status of the parties was a decisive factor in forming the contract, a point they attempted to infer from clause twelve. Clause twelve provides that if either or both parties are members of the Indian Jute Mills Association and if any such party appears on the Association’s disapproved list, then the contract shall be deemed broken by that party. The appellants submitted that this clause indicated that the contract was entered into on the basis of the parties’ membership status in the Association. The Court observed, however, that the wording of the clause does not require the parties to be members of the Association; consequently, the parties’ status does not form an essential element of the contract.

Clause fourteen, which contains an arbitration provision, was also cited by the appellants as evidence that the contract was personal and therefore incapable of assignment. The Court noted that settled law holds that an arbitration clause does not remove a party’s right to assign the contract where such a right otherwise exists. Authority was cited to this effect, namely the case of Shayler v. Woolf and the commentary in Russel on Arbitration, sixteenth edition, page sixty‑five. The appellants further argued that the rights granted to the sellers under clause eight were not assignable at law, and that this indicated the agreement was non‑transferable. Clause eight indeed confers on the sellers certain rights against the buyers, such as the right to resell, where the buyers refuse to accept the shipping documents. The appellants maintained that these rights could not be assigned because they are essentially claims arising from breach of contract by the buyers. The Court acknowledged that this characterization is correct, but emphasized that it does not resolve the issue of assignability. The law draws a clear distinction between the assignment of a contractual benefit by a party who has performed his obligations and the assignment of a claim for damages arising from a breach. Therefore, the fact that the rights under clause eight are non‑assignable does not preclude the respondents from assigning their right to receive the goods after having fulfilled their obligations under the contract.

In this case the Court explained that the law distinguishes clearly between two different kinds of assignments. The first type is the assignment of rights that arise under a contract when the assignor has already performed his own obligations under that contract. The second type is the assignment of a claim for monetary compensation that one party holds against the other because of a breach of contract. The Court noted that a letter seeking damages represents merely a claim for compensation, and such a claim cannot be assigned under the law. By contrast, a benefit that stems from an agreement and that is capable of being transferred is a different matter; such a benefit may be assigned. Accordingly, the Court held that the fact that the rights created by clause 8 of the agreement are legally incapable of assignment does not prevent the respondents from assigning their right to receive the ice once they have fulfilled their contractual duties, as illustrated by the authority Pr (1) [1946] 2 All. E. R. 54.

Turning to clause 3, which the appellants primarily relied upon, the Court observed that this clause provides that the sellers become entitled to receive the purchase price only after they have delivered to the buyers the complete set of shipping documents. The appellants argued that because the delivery of documents and the payment of cash are to occur simultaneously, the clause creates a situation where a benefit under the contract is coupled with a liability, and that such a coupled benefit is, according to them, non‑assignable under the law. The learned Judges of the lower court rejected this contention. They held that nothing in clause 3 prohibits the seller from transferring the shipping documents to a third party who is authorised to deliver those documents to the buyers, and that the seller may subsequently receive the purchase price from the buyers. The lower court further explained, quoting the judgment verbatim, “Although in presenting the shipping documents the transferee from the seller may act as his agent, he will not be an agent in receiving payment from the buyer, because the right to receive the payment has been transferred to him and has become his own right.” The respondents supported this view by referring to the statements of law found in Halsbury’s Laws of England and to the decision in British Waggon Co. v. Lea (1). In Halsbury’s Laws of England, 3rd Edn., Vol. 8, p. 258, para. 451, the law is set out as follows: “There is, however, no objection to the substituted performance by a third person of the duties of a party to the contract where the duties are disconnected from the skill, character, or other personal qualifications of the party to the contract. In such a circumstance, however, the liability of the original contracting party is not discharged, and the only effect is that the other party may be able to look to the third party for the performance of the contractual obligations in addition to the original contracting party.” The Court also recounted the facts of British Waggon Co. v. Lea (1) (1880) 5 Q.B.D. 149, 154, where the Parkgate Waggon Company had hired wagons to the defendant on terms that required the defendant to pay rent and the company to carry out repairs. The company assigned its contractual rights to the British Company, which performed the repairs, and subsequently sought rent from the defendant. The Court in that case held that because the performance required no personal skill, the assignment was permissible, illustrating the principle that a benefit burdened with an obligation can still be validly assigned.

The assignee performed the repairs in accordance with the agreement that required such performance. After the repairs were completed, Parkgate Waggon Co. demanded the rent that was due from the defendant. The defendant opposed the demand, arguing that the company had effectively removed itself from the ability to perform the contract because the contract had been assigned without the defendant’s consent. The Court rejected this argument and held that, since the work required under the contract did not depend on any special skill or personal confidence of the original party, the performance could be carried out by any substitute, and such substitution was sufficient to satisfy the contractual obligation. The Court noted that this principle would be applicable, for example, if the respondents had arranged to deliver the jute to the appellants through an intermediary and then claimed the price, a claim that might subsequently be contested. However, the Court clarified that the earlier decision did not serve as authority for the present question, which is whether an assignment of a contractual benefit that is coupled with an obligation is itself valid. The Court observed in passing that, since the enactment of the Judicature Acts, a debt arising under a contract may be assigned both at law and in equity, and that this proposition could not be disputed in light of the decision in Brice v. Bannister. Nevertheless, the Court pointed out that both companies in that case were plaintiffs, and therefore the observation could not be read as an endorsement that an assignment of a benefit burdened with an obligation is permissible. The respondents contended that they could have first obtained the necessary certificate from the bank in East Pakistan, then delivered the jute to the appellants, and finally assigned their right to receive the purchase price. The Court held, however, that the issue was not a hypothetical exercise of what a seller might do in a forward contract in general, but rather what the parties actually intended under clause 3 of the present contract. Clause 3 required that the shipping documents in Pakistan be made out in the name of the buyer, that the sellers deliver the goods to the buyer and receive the price, and that the goods be delivered at the buyer’s mills. These provisions strongly indicated that the parties intended that neither side would assign the contract. While some uncertainty might remain concerning the precise meaning of clause 3, the Court accepted the interpretation advanced by the learned judges of the lower court, especially when the clause was read in conjunction with the import licence granted to the appellants. That licence authorises the appellants to import raw jute from East Pakistan, is expressly non‑transferable, and stipulates that the imported goods are to be used solely in the appellants’ mills. The respondents argued that, because they are not parties to that licence, their general legal right to assign benefits under the contract remains unaffected. The Court considered that view to be too narrow, given the close relationship between the respondents and the licence as demonstrated by the surrounding evidence.

In this case, the Court observed that the contention that the contract remained unaffected by the licence represented an unduly narrow view of the actual situation. The Court noted that far from being strangers to the licence, the evidence plainly showed that the respondents were intimately connected with it. The record indicated that on 26 September 1955, acting under licence number A 062290/52, the appellants wrote to the Joint Chief Controller of Imports and Exports, Government of India, requesting that a letter of authority be issued in favour of the sellers, Messrs Raymon & Company (India) Ltd., for the import of 2,500 maunds of jute cuttings from Narayanganj in East Pakistan against the said licence. The letter of authority was received by the appellants on 29 September 1956, and they forwarded it to the respondents together with a covering note that read, “Dear Sirs, Contract No 2306. We are sending herewith the Exchange Control copy of Letter of Authority for 1,250 maunds of jute cuttings against the above.” The contract referred to as No 2306 was the agreement dated 7 September 1955 that formed the subject of the present dispute. Relying on the letter of authority, the respondents opened a letter of credit with a bank in East Pakistan, and the jute was subsequently imported. The Court acknowledged that, although the contract was dated 7 September 1955, the licence bore the date 22 September 1955 and the letter of authority was issued later, which might appear an anachronism if read strictly into the contract. However, the Court explained that licences in the jute trade were standard‑form documents that were routinely renewed, except for details concerning the specific imports, and that the commercial practice in the jute market consistently conformed to the conditions set out in the licences. The agreement itself provided that shipping documents in Pakistan were to be made out in the name of the buyers, that the sellers were to open a letter of credit, and that the goods were to be delivered at the buyer’s mill side. The Court held that these provisions had been inserted to give effect to the conditions attached to the licences and that both sellers and buyers understood that the contractual rights were not intended to be transferred. The respondents, however, argued that in the absence of an expressly worded clause prohibiting transfer, the appellants could not rely on a non‑transferability argument, and that extrinsic evidence was inadmissible. They relied upon authorities such as Seetharamaswami v. Bhagwathi Oil Company, Hanumanthiah v. Thimanthiah, and Hussain Kasam Dada v. Vijayanagaram Comm. Assn. The Court agreed that when a contract is reduced to writing, the written document is the primary source for determining the parties’ agreement, but it rejected the proposition that this principle precluded consideration of other relevant factors.

In this matter the Court explained that a contract term does not have to be stated in exactly those words to be part of the agreement. If, after reading the whole document, the wording used permits a fair deduction that the parties intended a particular term, the law allows that term to be recognised. Thus expressed terms may be supplemented by terms that are implied from what is expressed, and the ultimate task is the construction of the contract. The Court further noted that proper construction may legitimately consider the surrounding circumstances of the agreement. Accordingly, the lack of an explicit clause forbidding transfer does not alone settle the question of whether the parties intended the contract to be non‑transferable. What must be examined is whether, on a reasonable interpretation of the contract, taking into account permissible surrounding considerations, the parties understood that the contract was not to be transferred. Once such an understanding is established, nothing in law prevents the Court from giving effect to it. The Court relied on the authorities in Virjee Daya & Co. v. Ramakrishna Rice & Oil Mills, namely (1) [1951] 1 M.L.J. 147, (2) A.I.R. 1954 Mod. 87 and (3) A.I.R. 1958 Mad. 528, 531, and affirmed that this approach was correct.

The discussion then turned to the interpretation of section 2(f) of the Act, which defines a “non‑transferable specific delivery contract” as a specific delivery contract whose rights or liabilities are not transferable. The appellants contended that, because the liabilities under the contract were unquestionably non‑transferable, the contract satisfied the definition in section 2(f). The respondents countered that, under that construction, the notification would have no effect because liabilities alone cannot be transferred, and therefore the word “or” in the provision should be read as “and”, meaning that both rights and liabilities must be non‑transferable for the contract to fall within the definition. The appellants argued that if “or” were read as “and”, virtually no contract would qualify as non‑transferable, since rights under a contract are generally transferable unless the contract is of a personal nature, rendering the provision practically useless. The Court observed that the legislative intent behind the section was vague and uncertain. However, having concluded that the contract, when properly construed, is non‑transferable, the Court found it unnecessary to resolve the competing interpretations of the statutory language.

In this case, the Court noted the significance of section 2(f) and, after considering its application, determined that the appeals should be allowed. Accordingly, the Court ordered that costs be awarded to the successful party, specifying that a single, comprehensive set of costs should be awarded throughout the proceedings and that an additional hearing fee should also be awarded. The final order therefore granted the appeals, and the judgment was recorded in the law reports as A.I.R. 1956 Mod. 110.