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PETITIONER: SHIVA JUTE BALING LIMITED

       Vs.

RESPONDENT: HINDLEY AND COMPANY LIMITED

DATE OF JUDGMENT: 21/08/1959

BENCH: WANCHOO, K.N. BENCH: WANCHOO, K.N. SINHA, BHUVNESHWAR P. GAJENDRAGADKAR, P.B.

CITATION:  1959 AIR 1357            1960 SCR  (1) 569

ACT:        Arbitration-Contract-Award Passed Pending legal  proceedings        challenging the existence and validity of contract-Validity-        Breach   of  contract-Contract  providing  for  Penalty   as        liquidated  damages Award granting  maximum-Legality--Indian        Contract  Act,  1872  (9 of 1872),  ss.  73,  74-Arbitration        (Protocol  and  Convention Act, 1937 (6 of  1937)  s.  7(e)-        Arbitration Act, 1940 (10 of 1940), ss 33, 35.

HEADNOTE: The appellant company, incorporated in India, entered into a contract  on June 18, 1945, for the supply of  five  hundred bales  of  jute,  with  the  respondent  company  which  was incorporated in England and which had its registered  office in  London.  The contract, inter alia, provided that in  the event of default of tender or delivery, the seller shall pay to the buyer as and for liquidated damages 10s. per ton plus the  excess (if any) of the market value over  the  contract price, the market value being that of jute contracted for on the  day  following  the  date  of  default.   There  was  a provision for arbitration, under which any claim or  dispute whatever arising out of, or in relation to this contract  or its   construction  or  fulfilment  shall  be  referred   to arbitration in London in accordance with the bye-laws of the London  jute Association.  Disputes having arisen  regarding the performance of the contract the respondent referred  the matter  to the arbitration of the London  jute  Association, who  appointed two of its members as the  arbitrators.   The appellant  did  not  reply  to  the  notice  given  by   the arbitrators but filed an application on 570 August  10, 1949, under s. 33 Of the Arbitration Act,  1940, in  the Calcutta High Court, praying, inter alia, (a) for  a declaration  that the arbitration agreement was void on  the ground of uncertainty, and (b) for a declaration that  there was  in fact and in law no contract between the  parties  on account of mutual mistake of the parties.  Notice was  given by  the  appellant  to the respondent and  the  London  jute Association   that   further  steps   in   the   arbitration proceedings  should  not be taken pending  disposal  of  the application  under S. 33 Of the Arbitration Act, 1940.   The

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arbitrators,  however,  proceeded with the  arbitration  and gave their award on October 17, 1949.  On November 26, 195i, an  application was filed by the respondent in the  Calcutta High  Court  under  s. 5 of the  Arbitration  (Protocol  and Convention)  Act, 1937, praying that judgment be  pronounced in accordance with the award.  The appellant contended  that the  award was invalid on the grounds, inter alia, (i)  that the award was bad under s. 35 of the Arbitration Act,  1940, as it was made after the receipt of the notice of filing  of the  petition  dated  August 10, 1940, under s.  33  of  the Arbitration  Act, by the respondent and the arbitrators  and during  the pendency of the said application, and  (2)  that the liquidated damages provided under the award included not only  the  difference  between the contract  price  and  the market  price on the date of default but also a further  sum of  10s.  per  ton, that the extra amount  was  against  the provisions  Of  ss. 73 and 74 of the  Indian  Contract  Act, 1872, and that, therefore, the award was bad on the face  of it and could not be enforced in view of the provisions Of s. 7(e) of the Arbitration (Protocol and Convention) Act, 1937, which lays down that an award cannot be enforced in India if it is contrary to the Law of India. Held:     (i)   that   the  subject-matter  of   the   legal proceedings under s. 33 Of the Arbitration Act, 1940,  which relates  to  the existence and validity of  the  arbitration agreement,  are  not matters within the  competence  of  the arbitrators,  and  do not therefore cover any  part  of  the subject-matter of the reference.  Consequently, S. 35 of the Arbitration Act is inapplicable. (2)  The award does not violate the provisions of ss. 73 and 74 Of the Indian Contract Act, 1872, as the arbitrators have only awarded the maximum amount named in the contract.

JUDGMENT:        CIVIL APPELLATE JURISDICTION: Civil Appeal No. 262 of 1955.        Appeal by special leave from the, judgment and decree  dated        February  4,  1953, of the Calcutta -High Court,  in  Appeal        from  original  decree  No. 68 of 1952 arising  out  of  the        judgment  and  decree dated’ January 14, 1952, of  the  said        High Court, in Special Suit No. 2 of 1951.        571        N.   C.  Chatterjee, C. B. Agarwala and Sukumar  Ghose,  for        the appellants.        B.   Sen,  S. N. Mukherjee, S. N. Andley, J.  B.  Dadachanji        and Rameshwar Nath, for the respondents.        1959.   August 21.  The Judgment of the Court was  delivered        by        WANCHOO  J.-This is an appeal by special leave  against  the        judgment  of  the Calcutta High Court.  The appellant  is  a        company,  incorporated in India, with its registered  office        in Calcutta dealing in jute.  It entered into a contract  on        June  18,  1945,  with  the  respondent-company,  which   is        incorporated  in  England and has its registered  office  in        London.   The  contract was for the supply of  five  hundred        bales of jute of crop 1945-46 to be shipped from Calcutta or        Chittagong to Rio de Janeiro, when freight became available.        The contract provides that in the event of default of tender        or  delivery, the seller shall pay to the buyer as  and  for        liquidated damages 10s. per ton plus the excess (if any)  of        the  market value over the contract price, the market  value        being  that of jute contracted for on the day following  the        date, of default.  This date was to be the date in London on        declaration   of  default  by  telegram  or   without   such

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      declaration if default was eventually made by lapse of  time        on the 21st day after expiry of the extended period.   There        is  also a provision for arbitration, which lays  down  that        any claim or dispute whatever arising out of, or in relation        to this contract or its construction or fulfilment shall  be        referred  to  arbitration in London in accordance  with  the        bye-laws of the London Jute Association, and it was open  to        either  party to claim arbitration whenever and as often  as        disputes arose.  The contract also provides for an appeal by        any party dissenting from an arbitration award to the London        Jute Association in accordance with the regulations in force        for  the  time  being.   Lastly, it  is  provided  that  the        contract  would  be  construed according  to  the  laws  ,of        England  whatever  the  residence  and  nationality  of  the        parties  might  be  or  become and would  be  deemed  to  be        performed there.  The courts of England or        572        arbitrators,  as  the case might be,  would  have  exclusive        jurisdiction  over all disputes which might arise under  the        contract,  except  for  the  purpose  of  enforcing  in  the        Colonies  or  abroad any arbitration award made  under  this        contract,        On. June 23, 1947, thirty-nine bales of jute were  consigned        by  the appellant to Rio de Janeiro in part  performance  of        the  contract  and  information of this  was  given  to  the        respondent by letter on July 17, 1947.  It was said in  this        letter  that  difficulty  had arisen  because  of  the  non-        availability  of  quota and it was hoped  that  the  balance        remaining  under  the contract would be shipped as  soon  as        quota  was available.  The respondent sent a reply  to  this        letter  on July 25, 1947, and the appellant wrote a  further        letter  on  August 1, 1947, in which it was  said  that  the        remaining amount of jute under the contract would be shipped        as soon as the quota was available.        We  do  not know what happened thereafter till  we  come  to        August 1948.  It seems that the respondent received a  cable        on  August  12, 1948, from the appellant  stating  that  the        contract  stood cancelled long ago.  The respondent  by  its        letter  dated  August  12, 1948,  refused  to  %accept  this        position.   Thereafter there were disputes  and  differences        between  the parties and eventually the  respondent  claimed        default on or about June 1949 in terms of the contract.   On        or  about July 14, 1949, the respondent referred the  matter        to  the  arbitration of the London Jute  Association,  which        appointed two of its member as arbitrators.  The  respondent        filed its claim before the arbitrators on July 23, 1949.  On        July 27, 1949, the arbitrators gave notice to the  appellant        to  file  its  answer by August 19,  1949.   The  appellant,        however,  filed no answer before the arbitrators.  What  the        appellant  did in reply was to file an application under  s.        33  of the Indian Arbitration Act, 1940 (hereinafter  called        the  Arbitration Act), on the original side of the  Calcutta        High Court, in which it made three prayers, namely-        (a)  declaration  that  the arbitration agreement,  if  any,        between the parties was void ab initio on the        573        ground of uncertainty and was not binding on the appellant;        (b)  declaration  that  there  was in fact  and  in  law  no        contract between the parties on account of mutual mistake of        the parties; and        (c)  that  the court might be pleased to adjudicate  on  the        existence   and/or  validity  of  the  alleged   arbitration        agreement and the effect of the same.        This  application was moved on August 12, 1949.  It  appears        that  on August 13, 1949, the appellant sent a cable to  the

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      respondent  and the London Jute Association  informing  them        that an application had been made in the Calcutta High Court        challenging  the submissions contained in the  contract  and        that  the  arbitrators had become  functus  officio  pending        disposal of the application, which was fixed for August  29.        The appellant received a reply to its cable in which it  was        asserted that no such application as the appellant bad  made        to the Calcutta High Court could be made there and that  the        arbitrators would proceed with the adjudication on August 27        as already fixed.  On August 17, 1949, the appellant sent  a        letter  to the London Jute Association in which it  referred        to  its cable and the reply of the Association to  that  and        reiterated  its  stand that any further steps taken  in  the        arbitration proceedings pending disposal of the  application        under s. 33 would be invalid under the Arbitration Act.  The        arbitrators,  however,  proceeded with the  arbitration  and        gave their award on October 17, 1949.        No  proceedings  thereafter were taken by the  appellant  in        London,  nor does it appear that any steps were taken by  it        to have its application under s. 33 decided, till we come to        November  26, 1951.  On that date, an application was  filed        by  the respondent in the Calcutta High Court under s. 5  of        the   Arbitration  (Protocol  and  Convention)  Act,   1937,        (hereinafter  called  the Protocol Act).   Along  with  this        application  it filed the award dated October 17, 1949,  and        prayed  that judgment be pronounced in accordance  with  the        award and decree be passed accordingly.  Notice of this  was        issued  to the appellant, which filed its reply  on  January        14,        73        574        1952, We do not think it necessary to set’ out the  petition        of  the  respondent under s. 5 of the Protocol Act  and  the        appellant’s reply thereto in detail, because when the matter        came  to  be heard in court only two points  were  urged  on        behalf  of the appellant, namely         (1)  that the award was made after the notice of filing  of        the  petition  dated  August 10, 1949, under s.  33  of  the        Arbitration  Act  had been given to the respondent  and  the        arbitrators,  and  consequently  the award  made  after  the        receipt  of the said notice and during the pendency  of  the        said application was bad under s. 35 of the Arbitration Act;        and        (2)  that the award was bad on the face of it and could  not        therefore be enforced in view of the provisions   of s. 7(e)        of the Protocol Act, which lays down that an award cannot be        enforced in India if it is contrary to the law of India.  It        was  contended  that the award was contrary to  the  law  of        India  and this appeared on the face of it inasmuch  as  the        arbitrators had purported to award such damages as could not        be  done  under the provisions of the Indian  Contract  Act,        1872.        Both these contentions were negatived by the learned  Single        Judge  and  he ordered the award to be filed, in  court  and        passed a decree in terms thereof.        The  appellant then went up in appeal, which was heard by  a        Division  Bench of the Calcutta High Court.  The grounds  of        appeal  show  that  the same two points,  which  were  urged        before  the learned Single Judge’ were  reiterated  therein.        When the matter came to be heard before the Division  Bench,        the  same two points were raised on behalf of the  appellant        there   also.    The  Division  Bench  negatived   the   two        contentions raised before it on behalf of the appellant  and        confirmed  the judgment of the learned Single Judge.  It  is        curious,   however’   to  notice  that  though   all   these

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      proceedings  were being taken on the application under s.  5        of  the Protocol Act the appellant apparently took no  steps        to have its application under s. 33 of the Arbitration  Act,        which  seems to have been adjourned sine die, decided  along        with the respondent’s application under s. 5 of the Protocol        Act,        575        This  was  followed by an application for a  certificate  to        appeal to this Court, which was refused.  Then the appellant        applied to this Court for special leave to appeal, which was        granted.   In the special leave petition also the  appellant        raised  the same to points, namely, (i) the construction  of        ss. 33 and 35 of the Arbitration Act and the application  of        these  provisions  to the facts of this case, and  (ii)  the        construction  of  s. 7 of the Protocol Act  and  the  Indian        Contract  Act  with respect to the damages  awarded  by  the        award.        In the statement of case also after narrating the facts  and        circumstances,  the  same two points were mentioned  as  the        principal  questions  which arose for determination  in  the        appeal,  namely,  (i)  the effect of ss. 33 and  35  of  the        Arbitration Act on the facts and circumstances of this case,        and  (ii) the interpretation of s. 7 of the Protocol Act  in        the  light of ss. 73 and 74 of the Indian Contract  Act  and        their bearing on the damages awarded by the arbitrators  and        its effect on the validity of the award.        Learned  counsel  for appellant, however,  wanted  to  raise        before  us other points arising out of s. 7 of the  Protocol        Act.  We do not think that the appellant should be permitted        to raise at this late stage any new point in addition to the        two points which were urged before the learned Single  Judge        and  which only have all along been raised in the appeal  to        the  High  Court and in the appeal before  this  Court.   We        shall  therefore confine the appellant to these  two  points        only and proceed on the assumption in the same manner as has        been  done  by the High Court, namely, that  an  application        under  s.  33  of  the Arbitration  Act  would  lie  in  the        circumstances  of this case and therefore the provisions  of        s. 35 of the Arbitration Act would be attracted.        Re. (1).        The  part of s. 33 of the Arbitration Act, relevant for  our        purpose,  lays  down  that  any  party  to  an   arbitration        agreement desiring to challenge the existence or validity of        an  arbitration agreement or to have its  effect  determined        shall  apply  to the court and the court  shall  decide  the        question.  It will thus be clear that        576        s.33 contemplates an application for three purposes, namely,        (i)  when  it is desired to challenge the  existence  of  an        arbitration agreement, (ii) when it is desired to  challenge        its  validity,  and  (iii) when it is desired  to  have  its        effect  determined.  An arbitration agreement may come  into        existence in one of two ways; it may either arise out of  an        agreement   which   contains  nothing   else   besides   the        arbitration  agreement,  or  it  may arise  out  of  a  term        contained  in  a  contract which deals  with  various  other        matters relating to the contract, which is the present case.        Where  one is dealing with an arbitration agreement  of  the        second kind, s. 33 is concerned only with the term  relating        to arbitration in the contract and not with the other  terms        of  the contract which do not arise for consideration on  an        application under that section.        Then  we  come to s. 35.  It provides that no  reference  or        award  shall  be  rendered invalid by  reason  only  of  the        commencement of legal proceedings upon the subject-matter of

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      the reference, but when legal proceedings upon the whole  of        the  subject-matter  of  the reference  has  been  commenced        between  all  the  parties to the  reference  and  a  notice        thereof  has  been given to the arbitrators or  umpire,  all        further  proceedings in a pending reference shall, unless  a        stay of proceedings is granted under s. 34, be invalid.   It        will  be  seen,  therefore, ’that s.  35  makes  proceedings        before  the arbitrators invalid in the absence of  an  order        under  s. 34 staying the legal proceedings, where  whole  of        the subject-matter of the reference is covered by any  legal        proceedings  taken with respect to it.  In other  words,  an        arbitrator can continue the proceedings and proceed to  make        the award on the reference, unless the whole of the subject-        matter of the reference is covered by the legal  proceedings        which  have been instituted.  Assuming that the  proceedings        taken under s. 33 are " legal proceedings ", mentioned in s.        35,  the question which immediately arises on the  facts  of        the present case is whether the whole of the  subject-matter        of the reference in this case was covered by the legal  pro-        ceedings taken by the appellant by its application under  s.        33 of the Arbitration Act.        577        In dealing with this aspect of the case, learned counsel for        the  appellant  raised the question of  frustration  of  the        contract  and the powers of the court and the arbitrator  in        that  behalf.   It is true that the words "  frustration  of        contract " have been used in paragraph 8 of the application.        But  the prayers do not show that any relief was claimed  on        that  ground,  relief (c) being merely a repetition  of  the        words  of  s. 33 of the Arbitration  Act.   Learned  counsel        relied on Heymen v. Darwins Ltd. (1) in this connection.  We        do  not think we should permit the appellant to  raise  this        contention at this late stage and would content ourselves by        pointing  out  incidentally  that  even  if  the  dictum  in        Heymen’s  case  (1)  is  accepted,  it  will  not  help  the        appellant,  for on that dictum the question  of  frustration        would  be for the arbitrators to decide on the basis of  the        terms  used  in  this  contract  which  are  of  the  widest        amplitude and would not be a matter for consideration of the        court.  On this basis there would be no identity of subject-        matter between what can be raised in an application under s.        33 on the facts of this case and what can be decided by  the        arbitrators.   However,  we do not propose  to  pursue  this        matter any further and to decide it.        Then  we turn to prayers (a) and (b) of paragraph 9  of  the        application  based  on paragraphs 6 and  7  thereof.   These        prayers   undoubtedly  cannot  be  the   subject-matter   of        arbitration,  for they go to the very root of  the  contract        and imply that there was no contract between the parties  at        all  and therefore no arbitration agreement.  These  prayers        can certainly form the basis of an application under s.  33,        for  they  relate  to  the existence  and  validity  of  the        arbitration  agreement  contained in the contract;  but  not        being  matters  within the competence  of  the  arbitrators,        there  can  be  no  identity  of  the  subject-matter  under        reference  to  the  arbitrators and  the  subject-matter  of        prayers  (a)  and (b).  The conclusion, therefore,  is  that        prayers  (a)  and  (b)  can  be  the  subject-matter  of  an        application  under  s. 33 but they cannot  be  the  subject-        matter of the reference to the arbitrators.  Therefore,        (1)  [19421 2 A.C. 356.        578        the  subject-matter of the legal proceedings under s. 33  in        this case cannot and does not cover any part of the subject-        matter of the reference.  Section 35 in consequence can have

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      no  application and the award cannot be assailed as  invalid        on the ground that it violates s. 35 of the Arbitration Act.        The first contention, therefore, must fail.        Re. (2).        The argument under this head is that the liquidated  damages        provided  under cl. (1 2) of the contract include  not  only        the  difference  between the contract price and  the  market        price on the date of default but also a further sum of  10s.        per ton.  Reference in this connection is made to ss. 73 and        74 of the Indian Contract Act, and it is said that the extra        amount  of  10s. per ton included in the sum  of  liquidated        damages  is  against the provision of  these,  sections  and        therefore the award being against the law of India is bad on        the face of it and should not be enforced in India.  Section        73  provides for compensation for loss or damage  caused  by        breach  of contract.  It lays down that when a contract  has        been  broken,  the  party  who suffers  by  such  breach  is        entitled  to  receive  from the party  who  has  broken  the        contract  compensation for any loss or damage caused to  him        thereby, which naturally arose in the usual course of things        from such breach, or which the parties knew, when they  made        the contract, to be likely to result from the breach of  it.        Section 74, provides for breach of contract where penalty is        stipulated  for or a sum is named and lays down that when  a        contract has been broken, if a sum is named in the  contract        as  the amount to be paid in case of such breach, or if  the        contract  contains any other stipulation by way of  penalty,        the party complaining of the breach is entitled, whether  or        not  actual  damage or loss is proved to  have  been  caused        thereby,  to  receive  from the party  who  has  broken  the        contract reasonable compensation not exceeding the amount so        named  or, as the case may be, the penalty  stipulated  for.        What  cl. (12) of the contract provides in this case is  the        measure of liquidated damages and that consists of        579        two things, namely, (i) the difference between the  contract        price and the market price on the date of default, and  (ii)        an addition of 10s. per ton above that.  There is nothing in        s. 73 or s. 74 of the Contract Act, which makes the award of        such liquidated damages illegal.  Assuming that the case  is        covered  by  s. 74, it is provided therein  that  reasonable        compensation  may be awarded for breach of contract  subject        to  the  maximum  amount named in the  contract.   What  the        arbitrators  have done is to award the maximum amount  named        in  the contract.  If the appellant wanted to challenge  the        reasonableness of that provision in cl. (12) it should  have        appeared  before the arbitrators and represented  its  case.        It  cannot now be heard to say that simply because cl.  (12)        provided  for a further sum of 10s. per ton over  and  above        the  difference  between the contract price and  the  market        price  on  the  date  of  the  default,  this  was  per   se        unreasonable  and was therefore bad according to the law  of        India  as laid down in ss. 73 and 74, of the  Contract  Act.        Both these sections provide for reasonable compensation  and        s. 74 contemplates that the maximum reasonable  compensation        may  be the amount which may be named in the  contract.   In        this case the arbitrators have awarded the maximum amount so        named  and nothing more.  Their award in  the  circumstances        cannot  be said to be bad on the face of it, nor can  it  be        said  to be against the law of India as contained  in  these        sections  of the Contract Act.  The second  contention  must        also fail.        We,  therefore,  dismiss  the  appeal  with  costs  to   the        respondent.                           Appeal dismissed.

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