Waverly Jute Mills Co. Ltd vs Raymon and Co. (India) Private Ltd.

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

Court: Supreme Court of India

Case Number: Civil Appeal Nos. 389 to 392 of 1960

Decision Date: 4 May 1964

Coram: N. Rajagopala Ayyangar, J.R. Mudholkar, T.L. Venkatarama Ayyar

In this case, the Supreme Court of India delivered its judgment on 4 May 1964 concerning the dispute between Waverly Jute Mills Co. Ltd as the petitioner and Raymon & Co. (India) Private Ltd. as the respondent, together with related appeals. The judgment was authored by a bench that included Justices N. Rajagopala Ayyangar, J.R. Mudholkar, T.L. Venkatarama Ayyar, Sinha, Bhuvneshwar P. (Chief Justice), Subbarao, K. Ayyangar, N. Rajagopala, Mudholkar and J.R. The citation for the decision appears as 1963 AIR 90 and 1962 SCR (3) 209, with subsequent citations recorded in various law reports.

The factual background set out in the headnote indicates that on 7 September 1955 the appellant company entered into a contract with the respondents for the purchase of certain bales of jute cuttings. The contract required the respondents to deliver the bale quantities in equal instalments during the months of October, November and December 1955. Clause 14 of the contract stipulated that any dispute arising out of or relating to the contract must be referred to arbitration conducted by the Bengal Chamber of Commerce. When the respondents failed to deliver the goods as agreed, the appellant invoked the arbitration clause and applied for arbitration under clause 14. The respondents appeared before the appointed arbitrators and contested the appellant’s claim, yet the arbitrators issued an award in favour of the appellant.

Following the arbitral award, the respondents filed an application before the High Court of Calcutta under section 33 of the Arbitration Act, challenging the validity of the award. Their challenge was premised on the allegation that the contract dated 7 September 1955 was illegal because it contravened a notification issued by the Central Government on 29 October 1953 under section 17 of the Forward Contracts (Regulation) Act, 1952. The notification expressly prohibited any person from entering into any forward contract other than a non‑transferable specific delivery contract for the sale or purchase of raw jute in any form. The respondents argued that the contract fell outside the permissible category and therefore was void.

The appellant raised several points in its defence. First, it contended that the Forward Contracts (Regulation) Act, 1952 was ultra vires because Parliament lacked the constitutional competence to enact the legislation and because its provisions were repugnant to Article 14 of the Constitution of India; consequently, the 29 October 1953 notification was asserted to be null and void. Second, the appellant submitted that, under the terms of the arbitration clause, the question of whether the contract of 7 September 1955 was illegal was a matter that must be decided by the arbitrators, and that the respondents were not entitled to raise the issue in a section 33 application under the Arbitration Act. Third, the appellant claimed that the respondents had submitted themselves to the jurisdiction of the arbitrators, which amounted to a fresh agreement to arbitrate, thereby rendering the award valid and binding upon them. Finally, the appellant argued that, in any event, the contract was a non‑transferable specific delivery contract and therefore was not prohibited by the 29 October 1953 notification.

The Court observed that the parties had submitted to the jurisdiction of the arbitrators, and that submission amounted to a new agreement to arbitrate, thereby rendering the award valid and binding upon them. The Court further held that, irrespective of any other consideration, the contract dated 7 September 1955 qualified as a non‑transferable specific delivery contract and consequently was not affected by the Central Government notification of 29 October 1953.

The Court set out its reasoning as follows. First, it noted that legislation concerning forward contracts is in reality legislation dealing with futures markets; therefore the Forward Contracts (Regulation) Act, 1952 fell within the exclusive legislative competence of Parliament under entry 28 of List I of Schedule 7 of the Constitution, and could not be challenged on the ground of legislative incompetence, following the precedent in Duni Chand Rateria v. Dhuwalka Brothers Ltd., [1955] 1 S.C.R. 1071. Second, the Court found that the Act did not violate article 14 of the Constitution, relying on the authority in M/s. Baghubar Dyal Jai Prakash v. The Union of India, [1962] 3 S.C.R. 547. Third, the Court held that when a contract is illegal and void, any arbitration clause that forms part of that contract must also cease to exist, and a dispute concerning the contract’s validity is a matter for the court, not the arbitrators, citing Khardah Company Ltd. v. Raymon & Co. (India) Private Ltd., [1963] 3 S.C.R. 183. Fourth, the Court concluded that the respondents were not barred by their prior appearance before the arbitrators from raising the issue of the contract’s validity in the present proceedings before the High Court, as discussed in Shiva Jute Baling Ltd. v. Hindley and Company Ltd., [1960] 1 S.C.R. 569 and East India Trading Co. v. Badat and Co., [I.L.R.] [1959] Bombay 1004. Fifth, the Court affirmed that the contract of 7 September 1955 satisfied the definition of a non‑transferable specific delivery contract under section 2(f) of the Act and therefore was not caught by the 29 October 1953 notification, again relying on Khardah Company Ltd. v. Raymon & Co. (India) Private Ltd., [1963] 3 S.C.R. 183.

The matter before the Court comprised civil appeals numbered 389 to 392 of 1960, filed by special leave against judgments and orders dated 15 and 16 July 1958 of the Calcutta High Court, which had set aside arbitral awards directing the respondents to pay compensation for breach of contract on the ground that the contracts contravened the Central Government notification of 29 October 1953 and were thus illegal and void. Counsel for the appellants in appeals 389 and 390 were represented by two senior practitioners, while counsel for the appellants in appeals 391 and 392 were represented by a different team of advocates. The respondents were represented by counsel consisting of two senior lawyers. The Attorney‑General of India intervened, with representation by the Solicitor‑General of India and two additional senior counsel. The judgment was delivered on 4 May 1962 by Justice Venkatarama Aiyar.

These appeals were heard together with Civil Appeals Nos. 98 and 99 of 1960 because they presented the same questions of law that required a common resolution. In Civil Appeals Nos. 389 and 390 of 1960 the factual background was as follows: on 7 September 1955 the appellants, a company that owned a jute mill in Calcutta, executed a contract with the respondents, a company that dealt in jute, for the purchase of 2,250 bales of jute cuttings. The price was fixed at Rs 80 per bale, each bale weighing 400 pounds, and the contract required delivery of 750 bales in each of the months October, November and December 1955. Clause 14 of that agreement stipulated that any dispute arising out of or relating to the contract should be submitted to arbitration before the Bengal Chamber of Commerce. The respondents complied with part of the contract by delivering a total of 2,000 bales but failed to deliver the remaining 250 bales. Consequently the appellants invoked Clause 14 and applied to the Bengal Chamber of Commerce for arbitration. The respondents appeared before the arbitrators and contested the claim on its merits. The arbitral tribunal rendered an award in favour of the appellants in the amount of Rs 10,525. That award was filed under section 14(2) of the Indian Arbitration Act in the High Court of Calcutta as an original proceeding and notice of the filing was served on the respondents. The respondents then filed an application, apparently under section 33 of the Arbitration Act, seeking a declaration that the contract dated 7 September 1955 was illegal because it contravened a Central Government notification dated 29 October 1953, and that the award therefore was a nullity. The trial judge who heard the application dismissed it and subsequently entered a decree in accordance with the award. The respondents challenged both the judgment and the order by filing appeals (Nos. 148 and 141 of 1957) before a Division Bench of the High Court, which was presided over by Chief Justice Chakravartti and Justice Lahiri. That bench held that the contract of 7 September 1955 was illegal, having fallen within the prohibition contained in the 29 October 1953 notification, and consequently set aside the arbitral award. The appellants then sought a certificate under article 133(3) of the Constitution, but the request was refused. They subsequently applied to this Court for special leave to appeal under article 136 of the Constitution, and that leave was granted. The present appeals are therefore before this Court.

In Civil Appeals Nos. 391 and 392 of 1960 the factual situation was analogous. The appellants, a company engaged in the manufacture of jute, entered into a contract with the respondents on 17 October 1955 for the purchase of 500 bales of jute cuttings. The agreed price was Rs 87‑8‑0 per bale, each bale weighing 400 pounds, with delivery to be made in two equal instalments of 250 bales each in November and December 1955. As in the earlier case, Clause 14 of the agreement required that any differences arising out of or concerning the contract be referred to the Bengal Chamber of Commerce for arbitration. The respondents failed to deliver the goods as agreed, prompting the appellants to invoke Clause 14 and move the Chamber of Commerce for arbitration. The respondents appeared before the arbitrators and contested the claim on its merits. The arbitrators subsequently awarded the appellants a sum of Rs 17,500, and that award was filed on its original side in the High Court of Calcutta under section 14(2) of the Arbitration Act, with notice served on the respondents. The respondents then filed an application, presumably under section 33 of the Arbitration Act, seeking a declaration that the contract dated 17 October 1955 breached the Central Government notification of 29 October 1953, rendering the contract illegal and the arbitral proceedings and award void. The single judge on the original side dismissed that application. The subsequent procedural history of this second set of appeals follows the same pattern as described for the first set and is now before this Court for determination.

The agreement dated 17 October 1955 contained a clause, identified as clause 14, which required that any dispute arising out of or concerning the contract be referred to the Bengal Chamber of Commerce for arbitration. The respondent failed to deliver the goods as agreed, and consequently the appellants invoked the arbitration provision and presented their claim before the Chamber of Commerce. The respondents attended the arbitration hearing and contested the claim on its merits. The arbitrators rendered an award in favour of the appellants for the sum of Rs 17,500. The award was then filed in the High Court of Calcutta on the original side, and a notice pursuant to section 14(2) of the Arbitration Act was served on the respondents. Thereafter the respondents filed an application in the High Court of Calcutta, apparently invoking section 33 of the Arbitration Act, seeking a declaration that the contract dated 17 October 1955 contravened the Central Government notification of 29 October 1953, that the contract was thus illegal, and that the arbitration proceedings and the award consequently were void. The learned single judge hearing the application rejected it and entered a decree in accordance with the award. The respondents appealed that judgment and order to a Division Bench of the High Court (Appeals Nos. 142 and 143), which was heard by Chief Justice Chakravarti and Justice Lahiri. The Division Bench held that the contract of 17 October 1955 was illegal because it fell within the prohibition contained in the 29 October 1953 notification, and consequently set aside the awards. The appellant then applied under article 133(1)(c) of the Constitution for a certificate, was refused, and subsequently obtained leave to appeal from this Court under article 136 of the Constitution; these appeals are now before the Court. The matters for determination in all of the appeals are identical, and the present judgment will govern each of them. The appellants have urged several contentions: first, that the Forward Contracts (Regulation) Act, 1952, is beyond the legislative competence and therefore the 29 October 1953 notification issued under it is void; second, that under the arbitration clause the question of whether the contracts dated 7 September 1955 and 17 October 1955 are illegal is a matter for the arbitrators, and the respondents could not raise the issue in applications under section 33 of the Arbitration Act; third, that the respondents’ submission to the jurisdiction of the arbitrators amounts to a fresh agreement for arbitration, rendering the award valid and binding; and fourth, that the contracts of 7 September 1955 and 17 October 1955 are non‑transferable specific‑delivery contracts and therefore are not covered by the 29 October 1953 notification. The first question concerns the legislative competence of the Forward Contracts (Regulation) Act, 1952 (Act 74 of 1952), which was enacted by Parliament and received the President’s assent on 26 December 1952.

In this case the validity of the Forward Contracts (Regulation) Act, 1952 was challenged on two separate grounds. First, the petitioners contended that Parliament lacked the constitutional authority to enact the statute. Second, they argued that several provisions of the Act were inconsistent with Article 14 and Article 19(1)(g) of the Constitution, rendering those provisions void. The petitioners further submitted that, if either of those contentions were to be sustained, the notification dated 29 October 1953—issued by the Central Government under the authority conferred by section 17 of the Act—would itself be rendered null and void.

To address the first ground concerning parliamentary competence, the Court set out the relevant entries from the Legislative Lists contained in the Seventh Schedule of the Constitution. Under List I, entry 48 deals with “Stock Exchanges and Futures Markets.” Under List II, entry 26 concerns “Trade and commerce within the State,” subject to the provisions of entry 33 of List III, while entry 27 covers “Production, supply and distribution of goods,” also subject to entry 33 of List III. Finally, List III, entry 7 enumerates “Contracts, including partnership, agency, contracts of carriage, and other special forms of contracts, but not including contracts relating to agricultural land.”

The petitioners argued that the subject‑matter of the impugned legislation fell within the domains of trade and commerce or the production, supply and distribution of goods, as described in entries 26 or 27 of List II. Consequently, they maintained that the legislation should be within the exclusive legislative competence of the State Legislature. By contrast, the respondents, together with the Union of India who had intervened, contended that the Act was legislation dealing with “Futures Markets,” which falls squarely under entry 48 of List I and therefore lies within the exclusive authority of Parliament. As an alternative argument, they submitted that the Act regulated contracts, a matter covered by entry 7 of List III, and thus was intra vires for Parliament to enact.

The Court observed that resolving this dispute required an examination of the true nature, scope and “pith and substance” of the legislation. The preamble to the Act declares its purpose to be “to provide for the regulation of certain matters relating to forward contracts, the prohibition of options in goods and for the matters connected therewith.” The statute proceeds to distinguish between “ready delivery contracts” and “forward contracts.” A contract that provides for the delivery of goods and the payment of price either immediately or within a period not exceeding eleven days is classified as a ready delivery contract. All contracts that do not meet this short‑term criterion are categorized as forward contracts.

Further, the Act subdivides forward contracts into two categories: “specific delivery contracts” and “non‑transferable specific delivery contracts.” Specific delivery contracts are forward contracts that provide for the actual delivery of identified goods at a price fixed for a specified future period. Non‑transferable specific delivery contracts are a subset of specific delivery contracts whose rights or liabilities cannot be transferred to another party. Section 15 of the Act empowers the Government to issue notifications declaring certain forward contracts illegal, referencing particular goods or classes of goods and specifying the geographical areas concerned. Section 17 authorises the Government to prohibit, by notification, any forward contract falling within the ambit defined by the statute.

The Court noted that the statute applies to the sale or purchase of any goods or class of goods to which the provisions of section fifteen have not been made applicable, and that section eighteen expressly exempts non‑transferable specific delivery contracts from the operation of those provisions. Consequently, the legislation is plainly a law that regulates forward contracts. Having identified the scope of the enactment, the Court turned to the question that was before it: whether the statute should be classified as a law relating to trade and commerce or to the production, supply and distribution of goods within entries twenty‑six or twenty‑seven of List II, or alternatively as a law concerning futures markets within entry forty‑eight of List I. The Court observed that entries twenty‑six and twenty‑seven of List II are both subject to entry thirty‑three of List III. At the time of consideration, entry thirty‑three reads: “Trade and commerce in, and the production, supply and distribution of … (e) raw jute.” The impugned Act, insofar as it deals with raw jute – the subject matter of these appeals – would clearly be intra vires if it fell under that entry. However, the Court pointed out that clause (e) in entry thirty‑three was inserted by the Constitution (Third Amendment) Act, 1954, and because the challenged Act was enacted in 1952, its validity must be assessed according to the constitutional provisions that existed before the 1954 amendment; therefore entry thirty‑three of List III must be excluded from the analysis. Shifting to the issue of whether the impugned Act is legislation on futures markets or on trade and commerce, the appellants contended that a law dealing with forward contracts is not a law concerning futures markets, because the ordinary and accepted meaning of “market” denotes a place where business in the sale and purchase of goods is carried out. To support this contention, the Court was referred to the dictionary definition of “market” and to decisions of the Madras High Court in Public Prosecutor v. Cheru Kutti and Commissioner, Coimbatore Municipality v. Chettimar Vinayagar Temple Committee. According to the Concise Oxford Dictionary, the word “market” means a gathering of people for the purchase and sale of provisions, livestock, etc., an open space or covered building in which cattle and similar goods are exposed for sale. In Public Prosecutor v. Cheru Kutti, the accused had been charged under section 170 of the Madras Local Boards Act, 1920 for operating a new private market without a licence; his defence that the place of sale was not truly a market was accepted. The Court, while discussing the meaning of “market,” observed that it signifies “a place set apart for the meeting of the general public of buyers and sellers, freely open to any such to assemble together, where any seller may expose his goods for sale and any buyer may purchase.” In Commissioner, Coimbatore Municipality v. Chettimar Vinayagar Temple Committee, the Court further examined the ordinary meaning of market as a venue where the public may convene at specified times for buying and selling.

In the case of Commissioner, Coimbatore Municipality v. Chettimar Vinayagar Temple Committee (1), the Court examined a provision of the Madras District Municipalities Act, 1920 which required that any place used as an open market under the Act be licensed. The Court interpreted the ordinary meaning of the term “market” to be a location where members of the public could gather at specified times for the purpose of buying and selling. Applying that meaning to the facts, the Court concluded that the place in question satisfied the description of a market and therefore fell within the licensing requirement.

The respondents rely on the foregoing decisions to argue that the statute now under challenge does not concern a building or a location where business is carried out, and consequently it is not a law that deals with markets. The Court could not accept that submission. While it is true that “market” traditionally denoted a place where commercial transactions occurred, that meaning was appropriate at a time when trade was limited to designated physical sites. As commerce has evolved, transactions are increasingly concluded by correspondence, and the concept of a market has broadened accordingly. In contemporary usage the word “market” can denote both the enterprise of buying and selling and the physical venue where such activity takes place. For example, the expression “labour market” refers to the conditions and dynamics of labour as a business, not to a physical location where labourers are recruited. Because the term can convey either sense, the Court must determine its meaning in any statute by examining the statutory context. In the earlier cases of Public Prosecutor v. Cheru Kutti (1) and Commissioner, Coimbatore Municipality v. Chettimar Vinayagar Temple Committee (2), the issue arose in the setting of local licensing authority powers, and the term was rightly understood to mean a place.

Turning to the present question, the Court must consider the meaning of “market” in entry 48 of List I, which refers to “Futures Markets.” The term “futures” is defined in the Encyclopaedia Britannica as contracts that involve a promise to deliver a specified quality of a commodity at a designated future date, with the obligation pertaining to a single quantity for a particular month. Such futures contracts are treated as securities, comparable to bonds or promissory notes. Within this definition, the notion of a market pertains solely to the business of trading such contracts and does not imply a physical location. Accordingly, the Court is of the opinion that legislation dealing with forward contracts constitutes legislation on futures markets.

The appellants further contend that even if a law on forward contracts may be classified as law on futures markets, it should properly be placed under entry 26 of List II rather than entry 48 of List I. Their argument rests on the view that forward contracts represent a substantial component of modern trade and form its core; excluding them from entry 26 would deprive that entry of much of its subject matter. The appellants supported this position by citing the principle that entries in the constitutional lists are to be interpreted broadly and by referring to the decision in Bhuwalka Brothers Ltd. v. Dunichand Rateria (3), which was affirmed by this Court in Duni Chand Rateria v. Bhuwalka Brothers Ltd. (4). The Court notes that the established rule of construction requires a liberal, not pedantic, approach to the entries, and that trade and commerce, in their ordinary sense, do include forward contracts. Consequently, the question of whether forward‑contract legislation falls within the trade and commerce entry is resolved in the affirmative.

The Court noted that the appellants relied on the principle of liberal construction of the entries in the constitutional Lists and on the authority in Bhuwalka Brothers Ltd. v. Duni Chand Rateria, a decision that was subsequently affirmed by this Court in Duni Chand Rateria v. Bhuwalka Brothers Ltd. The Court explained that the rule of construction is well settled, as reflected in the authorities (1) A.I.R. 1925 Mad. 1095, (2) [1956] 2 M.L.J. 563, (3) A.I.R. 1952 Cal. 740 and (4) [1955] 1 S.C.R. 1071, which require the entries in the Lists to be interpreted broadly rather than in a narrow or pedantic manner. However, the Court observed that it was unnecessary for the appellants to invoke this rule because, in the ordinary and accepted meaning, the term “trade and commerce” already embraces forward contracts. This understanding had been adopted in the Bhuwalka Brothers Ltd. case (1) and had been endorsed by this Court in Duni Chand Rateria’s case (2). Consequently, if the issue were merely whether legislation dealing with forward contracts fell within the ambit of trade and commerce, the answer would be straightforwardly affirmative. The real question before the Court, however, concerned the scope of the entry “trade and commerce” when read alongside entry 48 of List I, since the two entries relate to powers that are mutually exclusive between two different legislatures. The Court reiterated the established rule that the entries in the Lists must be construed so as to give effect to each entry, and any construction that would render an entry futile or otiose must be avoided. From this principle, the Court derived that when two entries exist, one being general and the other specific, the general entry must be construed as excluding the specific one, an application of the maxim “generalia specialibus non derogant.” The Court found that if entry 26 were to be interpreted as covering forward contracts, the provision concerning “futures markets” in entry 48 would become redundant.

Accordingly, the Court held that legislation regulating forward contracts must be placed within the exclusive competence of the Union under entry 48 of List I. The Court then turned to the authorities cited by the appellants to support their claim that such legislation is, in truth, a matter of trade and commerce falling under entry 26. The Court referred again to the decisions (1) A.I.R. 1952 Cal. 740 and (2) [1955] 1 S.C.R. 1071. In the Bhuwalka Brothers Ltd. case (1), the issue related to the validity of the West Bengal Jute Goods Futures Ordinance, 1949, which had been promulgated by the Governor without obtaining the consent of the Governor‑General. The contention raised was that the ordinance fell within entry 7, “contracts,” in List III and, because the Governor‑General’s consent had not been secured, the ordinance was invalid. The Court proceeded to examine this contention in the context of the present dispute.

In this case the contention was advanced that the West Bengal Jute Goods Futures Ordinance, 1949, related to trade and commerce and therefore fell within List II, making the Governor‑General’s consent unnecessary; the Court, accepting this view, observed that the legislation was essentially about trade and commerce rather than contracts and consequently lay within the provincial legislature’s power. An appeal against that decision was taken to this Court, where the correctness of the view was affirmed in Duni Chand Rateria’s case(2). The present petitioners argued that, based on that authority, the legislation should be classified as dealing with trade and commerce under entry 26; the Court, however, could not accept this argument. It held that the validity of the West Bengal Jute Goods Futures Ordinance must be examined according to the Government of India Act, 1935, which was the constitutional framework at the time, and noted that the Act of 1935 contained no specific entry for “Futures Markets,” a provision that was introduced only in the 1952 Constitution as entry 48 in List I. Consequently, the dispute in Bhuwalka Brothers Ltd. case(1) involved a clash between a general entry on trade and commerce in List II and the entry on contracts in List III, not between a general trade entry and a specific futures‑market entry as now presented. The Court reasoned that, absent the specific entry now found in entry 48, the earlier decision in Bhuwalka Brothers Ltd. case(1) would have been correct, but that precedent no longer applied because of the constitutional amendment. The petitioners also raised the issue of whether the impugned legislation fell under entry 7 of List III; while the respondents primarily asserted that it fell under entry 48 in List I, they were prepared to rely on entry 7 as a secondary defence if necessary. The Court observed that entry 7 is a broad provision that cannot override a specific entry such as entry 48 in List I or entry 26 in List II, and it agreed with the ruling in Bhuwalka Brothers Ltd. case(1) on this point. Accordingly, the Court concluded that the challenge to the Act on the basis of legislative incompetence must fail. The second ground of challenge, alleging that the Act contravened Article 14 and Article 19(1)(g) of the Constitution, was also addressed. Regarding Article 14, the Court noted that its earlier decision in M/s. Raghubar Dayal Jai Prakash v. The Union of India (2) had held that the Act did not violate Article 14 and was therefore valid, rendering the question settled and noting that the petitioners had presented no further arguments on this matter.

Regarding the challenge founded on article 19 (1) (g), the Court observed that although the appellants had included this allegation in their written pleadings, they had not advanced it before the learned judges of the trial court. The reason for this omission was that a decision of the Calcutta High Court bench had already resolved the issue to the detriment of the appellants. Nevertheless, the appellants raised the same ground in the memorandum of points of law before this Court, referring to the authorities (1) A.I.R. 1952 Cal. 740 and (2) [1962] 3 S.C.R. 547, and they sought to press the matter anew before the Supreme Court. The respondents objected, correctly in the view of the Court, that introducing such a point at this advanced stage would be inappropriate because any decision would inevitably require an examination of factual matters that had not been investigated. The respondents further contended that a strong presumption exists in favour of the constitutionality of legislation, and that the appellants had failed to produce any material that could rebut this presumption. In response, the appellants argued that, on its face, the impugned Act violated the fundamental right guaranteed by article 19 (1) (g). They maintained that the burden of demonstration lay with the respondents to show that the Act was saved by article 19 (6), which permits reasonable restrictions made in the public interest, and that the appellants should not be required to prove a negative. The appellants relied upon the observations of this Court in Saghir Ahmed v. State of Uttar Pradesh & Others (1) to support their position. The Court, however, held that those observations could not be interpreted as negating the presumption of constitutionality that attaches to a statute. Moreover, the Court noted that the appellants had abandoned this contention after some argument was heard. Consequently, the Court concluded that the allegation based on article 19 (1) (g) must be rejected and that the appellants failed on that ground.

The next contention raised by the appellants concerned the question of whether the validity of the contracts entered into by the parties was a matter that should be decided by the arbitrators, and therefore whether the respondents were entitled to invoke section 33 of the Arbitration Act in a separate application. The appellants argued that the arbitrators alone should determine the issue of contract validity. The Court referred to its earlier decision in Khardah Company Ltd. v. Raymon & Company (India) (P) Ltd. (2), which was decided in the same set of appeals. In that decision the Court had held that when a contract is illegal and void, any arbitration clause that forms part of that contract must also be deemed void and perishes together with the contract. The Court further explained that a dispute concerning the validity of a contract falls within the jurisdiction of the court and not within that of the arbitrators. Applying that precedent, the Court found it necessary to overrule the appellants’ argument that the arbitrators could decide the matter. The Court therefore held that the respondents were correctly within their rights to raise the issue under section 33 of the Arbitration Act, and that the appellants’ second contention could not succeed. The Court then turned to a third contention raised by the appellants, which concerned the possible effect of the respondents’ subsequent appearance before the arbitrators if the original arbitration clause were held to be inoperative; however, the discussion of that point continued beyond the present excerpt.

The respondents submitted written statements to support their defence before the arbitrators and contended that those statements should not be treated as creating a fresh agreement to arbitrate. They argued that the arbitrators’ authority must be determined solely by reference to clause fourteen of the original contract and that participation in the arbitration process does not, by itself, establish a new arbitration agreement. The Court identified the central issue as the true effect of the respondents’ actions before the arbitrators on the arbitrators’ jurisdiction to hear the dispute. The Court noted that the legal principles governing this question are well settled. It is recognised that a dispute concerning the validity of a contract may be the subject of an arbitration agreement in the same way that a dispute concerning a claim under the contract may be. However, such an arbitration agreement is only effective when it is separate from and independent of the contract that is alleged to be illegal. When the arbitration clause is itself a term of the contract whose validity is in doubt, the Court has previously held, in Khardah Co. Ltd. v. Raymon & Company (India) Ltd., that the arbitration clause has no existence apart from the contested contract and therefore must perish together with the contract.

The Court then examined earlier decisions that draw a distinction between these two categories of agreements. In Shiva Jute Balings Ltd. v. Hindley and Company Ltd., the Court observed this distinction, albeit in a different factual context. A decision that directly addresses the distinction is East India Trading Company v. Badat and Co. In that case the parties had entered into a general agreement that prescribed arbitration for all disputes arising out of any subsequent contracts between them. After a series of contracts were executed, a dispute arose concerning one of those later contracts, and one party denied the existence of that particular contract. The question before the Court was whether an arbitral award concerning the disputed contract could be rendered without jurisdiction. The Court held that the arbitrators possessed jurisdiction because the original general agreement, which pre‑dated the disputed contract, provided an independent basis for arbitration. The Court explained that when a party challenges the arbitration agreement itself, the very foundation for the arbitrator’s authority is attacked, and consequently courts have held that the arbitrator lacks jurisdiction to decide his own jurisdiction in such circumstances. The Court further stated that if the arbitration agreement is an integral part of the contract whose validity is being contested, then by denying the contract the party also denies the submission clause and, consequently, the arbitrators’ jurisdiction. In the present case, however, the Court indicated that the situation differs because there is no evidence of an independent arbitration agreement separate from clause fourteen; the only act alleged is the filing of defence statements before the arbitrators, which the respondents argue does not amount to a new arbitration contract.

In this case, the Court observed that the situation differed because the parties had executed an independent agreement expressly providing that any disputes would be referred to arbitration. Under that agreement the parties subsequently entered into several contracts, and when the plaintiff instituted a claim against the defendant, the defendant responded by denying liability. The Court cited earlier authorities, namely (1) [1960] 1 S.C.R. 569 and (2) [1959] I.L.R. Bom. 1004 1018,1019, to explain that the denial concerned not the jurisdiction of the arbitrators nor the submission clause, but rather the business performed pursuant to the submission clause and to which that clause applied. The Court affirmed that this description accurately reflected the correct legal position. The Court then turned to the principal issue for determination, namely whether, apart from clause fourteen of the contract dated 7 September 1955, there existed a separate agreement to refer disputes to arbitration. The appellants did not argue that an express arbitration agreement covering the September 1955 contract existed. Their sole contention was that the respondent had filed statements before the arbitrators setting out a substantive defence on the merits, and that such filing ought to be construed as an independent arbitration agreement. The parties relied upon the decisions in National Fire and General Insurance Co. Ltd. v. Union of India (1) and Pratabmull Rameswar v. K. C. Sethia Ltd. (2) as authority for that view. The Court explained that an arbitration agreement forms the foundation of arbitrators’ jurisdiction, and that absent such an agreement at the moment the arbitrators assumed their duties, the proceedings must be considered wholly without jurisdiction. The Court further held that the defect could not be remedied merely by the parties’ participation in the proceedings, even if unchallenged, because established law held that consent alone could not confer jurisdiction. Nonetheless, the Court observed that the parties were free to execute a fresh arbitration agreement while the original arbitration was pending, and that any subsequent proceedings could then be sustained on the basis of that new agreement, rendering the award immune from attacks on jurisdiction. The Court contrasted two possible outcomes. If the parties had a valid arbitration agreement as defined in section 2(a) of the Arbitration Act, the award would be valid; if, however, the parties had only taken procedural steps that were assumed or believed to be valid, the award would be void. Turning to the facts, the Court examined the statements filed by the respondents before the arbitrators and found no language indicating the creation of a new arbitration agreement. The respondents merely contested the plaintiff’s claim on its merits and appended the remark, “The sellers submit that this reference is improper, unwarranted, frivolous and vexatious and should be dismissed with cost.” The Court concluded that such a statement could not be read as an agreement to refer the dispute to arbitration.

It could not be read that the statement made by the respondents signified an agreement to refer the dispute to arbitration. The authorities cited by the appellants, namely the decisions in the National Fire and General Insurance Co. Ltd case (1) and the Pratabmull Rameswar case (2), were not appropriate for the present situation. In both of those decisions the parties had made a valid submission on which the arbitrators were entitled to act. Prior to the commencement of the arbitral proceedings each party filed statements that contained a claim which lay outside the matters originally covered by the reference, and each party invited the arbitrators to adjudicate that additional claim. The party against whom the award was made afterwards argued that the arbitrators had acted without jurisdiction in deciding the claim that was beyond the original reference. The higher court, however, dismissed that contention and held that the parties were permitted to broaden the scope of the reference by introducing a fresh dispute. The court further held that the filing of statements containing claims not covered by the original agreement amounted to a submission satisfying the requirements of section 2(a) of the Arbitration Act, and that the arbitrators were therefore competent to decide the enlarged dispute. The court observed that in those earlier cases there was no lack of initial jurisdiction; rather, the existing jurisdiction was expanded by the parties’ willingness to include additional matters within the reference. The statutory scheme confirms that such an enlargement does not raise a question of jurisdiction. If an award addresses a matter not originally covered by the arbitration agreement, the award may be altered under section 15(a) or sent back for consideration under section 16(1)(a). When the parties themselves invite the arbitrators to consider the additional matter in their statements, there is no difficulty in concluding that the arbitrators remain within their jurisdiction.

In the present matter, the court found that the arbitrators did not possess jurisdiction at the time they assumed their duties, and it was not shown that any subsequent agreement existed which could be treated as a submission of the issue concerning the validity of the contracts. Consequently, the court was of the opinion that the respondents were not barred by their earlier conduct before the arbitrators from raising the question of the contracts’ validity in the current proceedings. The appellants’ final contention was that the contracts dated 7 September 1955 and 17 October 1955 were non‑transferable specific delivery contracts as defined in section 2(f) of the Act, and that, under section 18, they were exempt from the operation of section 17 and therefore not affected by the notification dated 29 October 1953. The factual scenario was similar to that considered by this Court in the Khardah Company Ltd. case (1). Applying the reasoning set out in the judgments delivered today in those appeals, the court accepted the appellants’ argument and held that the contracts in question were not subject to the notification of 29 October 1953.

In the reported decision of this Court, recorded at volume three of the Supreme Court Reporter on page one hundred eighty‑three, the judges concluded that the petitions filed by the appellants should be granted. Accordingly, the Court ordered that the appeals be allowed and that the costs of the proceedings be awarded in favour of the appellants for the entire litigation. The order specifically referred to two distinct groups of appeals. The first group consisted of the civil appeals identified as numbers three hundred eighty‑nine and three hundred ninety of the year one thousand nine hundred and sixty. The second group comprised the appeals designated as numbers three hundred ninety‑one and three hundred ninety‑two of the same year, 1960. In addition to the costs awarded throughout the litigation, the Court also imposed a liability on the opposing parties to pay a single hearing fee. By these terms, the Court affirmed that the appeal was successful and that the relief sought by the appellants was granted in full.