Nandkishore Jhajharia vs International Mercantile Corporation (India), Ltd.

Sarkar, J.—In this appeal the main question is whether a certain agreement to refer disputes to arbitration is bad as being opposed to public policy inasmuch as it was intended to stifle a pending criminal prosecution. The legal proposition that an agreement including an agreement to refer disputes to arbitration, is void if it was made to stifle a criminal prosecution is beyond dispute. Other points, however, were raised and these I have to decide in this judgment.

The first question naturally is was the agreement to refer to arbitration made to stifle the prosecution. It is hardly ever that the parties make it plain on the face of the agreement that they had that object in view. The entire circumstances have to be looked into to find out if the agreement was intended to stifle the prosecution. For that purpose it is necessary to go into the facts in some detail.

The Appellant before us is one Nandkishore Jhajharia. He and another person of the name of Jagannath Agarwalla carried on a partnership business under the name of Agarwalla Jhajharia and Company in which it is said one Ramkaran Parasrampuria also had a share.'' This partnership was interested in and controlled amongst others, a company called International Mercantile Corporation (India) Ltd. Nandkishore and Jagannath had various other business dealings between themselves. On June 21, 1951, Nandkishore delivered to International Mercantile Corporation (India, Ltd.) hereafter referred to as "the Corporation", 42,200 shares of Ryam Sugar Company Ltd. Of these 37,900 shares had already been registered in the name of the Corporation and the remaining 4,300 shares were delivered with the requisite blank transfer deeds duly signed by the registered holder without registration in the name of the Corporation. The case of the Corporation, which is a Respondent in this appeal, is that these shares were delivered in liquidation of the debt due by Nandkishore to the Corporation. It is said that Nandkishore owed the Corporation Rs. 19, 08, 195-0-3 and that it had been agreed that the Corporation would accept these shares in reduction of this debt to the extent of Rs. 11,39,400 being the sum calculated on these shares at Rs. 27 per share. Nandkishore''s case, however, is that he bought these shares with his own moneys and had some of them registered in the name of and all of them delivered to the Corporation as his benanndar for reasons of his own. It is not necessary for the purposes of this appeal to decide which of the two cases is true. Nandkishore was a director of the Corporation. It appears that out of the 37,900 shares registered in the name of the Corporation 24,000 shares were hypothecated with the National Bank of India in the name of the Corporation against an overdraft of Rs. 2,00,000. Thereafter, 18,200 further shares were hypothecated with the National City Rank of New York, Calcutta, for an overdraft of Rs. 1,30,000 of which Rs. 50,000 was later repaid leaving a sum of Rs. 80,000 due to the last named Bank. It is the Respondent Corporation''s case that Nandkishore wrongfully and surreptitiously got hold of and committed criminal misappropriation in respect of 30,200 of the said shares consisting of 18,200 shares originally hypothecated with the National City Bank of New York and 12,000 shares out of the 24,000 shares originally hypothecated with the National Bank of India and purported to transfer 26,100 shares out of the 30,200 shares to Mahadeolal Jhunjhunwalla and fraudulently got the said transfers registered in the transferee''s name in the books of the Ryam Sugar Mills Company Ltd. All this happened between January and October, 1950. It is also the Respondent Corporation''s case that on October 6, 1950, it paid a sum of Rs. 1,00,000 to the National Bank of India having borrowed the money from J. Agarwalla and Sons Ltd., a company apparently controlled by Jagannath Agarwalla and procured delivery of 12,000 shares out of those held by the Bank to J. Agarwalla and Sons Ltd., as security of the moneys lent by the latter to pay off the Corporation''s debt to the Bank.

These dealings with the shares led to various disputes. On January 10, 1951, the Corporation filed a complaint against the Respondents Nandkishore and Mahadeolal in the court of the Additional Chief Presidency Magistrate, Calcutta, under Sections 120B/406/411/414 of the Indian Penal Code in respect of the aforesaid alleged criminal misappropriation. Thereafter on February 5, 1951, Nandkishore filed a suit in this Court being Suit No. 825 of 1951 against the Corporation and J. Agarwalla and Sons Ltd. Nandkishore''s case in this suit was that he had agreed to purchase 42,300 shares in Byam Sugar Mills Company Ltd., from another company of the name of Gaya Sugar Mills Ltd., and he decided to hold the shares in the benami name of the Corporation. He stated that with this object he had 37,900 shares out of the 42,200 shares registered in the name of the Corporation and utilised the name of the Corporation for borrowing moneys for his own purpose from Banks in Calcutta on the security of these shares. He further stated in the plaint that he had redeemed 30,200 shares and that 12,000 shares remained pledged with the National Bank of India in the name of the Corporation as his benamidar. Nandkishore alleged that he discovered that on October 6, 1950, the Corporation and J. Agarwalla and Sons Ltd., in conspiracy and collusion with each other, redeemed and took delivery of the said 12,000 shares from the National Bank of India though they had no right to do so as the shares belonged to him. On these facts Nandkishore asked for a declaration that the said 12,000 shares belonged to him and for possession of those shares and other incidental reliefs. On the same day, that is February 5, 1951, Nandkishore filed another suit in this Court, being Suit No. 767 of 1951 for dissolution of the partnership of Agarwalla Jhajharia and Company On May 9, 1951, Jagannath filed a suit in this Court, being Suit No. 2020 of 1951 against Nandkishore Jhajharia claiming a sum of Rs. 2,44,000 on Khata Peta dealings alleged to have taken place between them. Thereafter on May 16, 1951, the Corporation filed a suit in this Court being suit No. 2307 of 1951 against Nandkishore and Gobardhanbhai Ambalal for a decree for the sum of Rs. 1,86,575. The case made in the plaint was that Nandkishore had caused to be paid out of the assets of the Corporation by way of advance to Gobardhanbhai a sum of Rs. 1,70,000 bearing interest at a certain rate but upon the Corporation demanding repayment from Gobardhanbhai Ambalal he wrongfully set up the case that the money had been received by him from Nandkishore and not from the Corporation. On these allegations the claim was made against Gobardhanbhai as a debtor of the Corporation or if that failed then in the alternative against Nandkishore for having in breach of his fiduciary, position as a Director of the Corporation used for his own purpose the moneys of the Corporation. Then there was also an application by Nandkishore for winding up of the Corporation.

Pending all the proceedings mentioned above negotiations for settlement of all the disputes therein took place between Nandkishore and Jagannath in which his son Kamala Prosad also took part. On or about July 16, 1951, a conference took place at the house of the Advocate-General of West Bengal in connection with the settlement and the Advocate-General''s advice was that the settlement should be so made as not to amount to a compromise of the pending criminal prosecution. I might here say that the offences in respect of which the prosecution had been launched were non-decompoundable. It appears that on July 24, 1951, certain terms of settlement were written out and signed by Jagannath Agarwalla, Nandkishore, the Corporation through its Director P.N. Chatterji and P.N. Chatterji in his personal capacity. These terms of settlement are set out below:

The criminal proceedings shall be dropped in a way advised by lawyers of both sides. Mr. Jhajharia will give such undertaking as may be required that he will not take any step for malicious prosecution or for damage by reason of the criminal proceedings.

The winding up petition and the appeal will be withdrawn, each party paying its own costs.

In the declaratory suit filed by Mr. Jhajharia against International Mercantile Corporation (India) Ltd., and Anr. a declaration will be made that 42,200 shares in the Ryam Sugar Company Ltd., are the property of Mr. Jhajharia, but Mr. Sohanlal Murarka will be appointed Receiver and will hold the said shares pending adjustment of accounts in the matter which would be referred to the arbitration of Mr. Sohanlal Mxirarka. The Receiver will hand over the shares to Mr. Jhajharia in the event of it being found after accounting that Mr. Jhajharia is not liable to pay anything to the International Mercantile Corporation (India) Ltd., or Jagannath Agarwalla and in the event of any money being found due from Mr. Jhajharia, upon Mr. Jhajharia paying the same. In default the Receiver will be entitled to sell the shares and out of sale proceeds pay the amount so found due and payable to the parties and the balance, if any, to Mr. Jhajharia.

The other suits filed in the High Court by the respective parties including the suit for accounts of Agarwalla Jhajharia and Company shall be referred to the arbitration of Mr. Sohanlal Murarka.

All other disputes and accounts and interests of N.K. Jhajharia and Jagannath Agarwalla and International Mercantile Corporation (India) Ltd., and in respect of any other concern or of any nature whatsoever shall be referred to the arbitration of Mr. Sohanlal Murarka.

In case of any difficulty in settling the drafts incorporating the above arrangement, the same will be referred to Mr. Advocate-General whose decision shall be accepted by the parties.

Dated this 24th of July, 1951.

J. Agarwalla.

N.K. Jhajharia.

International Mercantile Corporation (India) Ltd.

P. N. Chatterjee,

Director.

P.N. Chatterjee.

On July 31, 1951, a suit being Suit No. 3229A of 1951 was filed by the Corporation against Nandkishore and Mahadeolal claiming a declaration that the Corporation was the owner of the 42,000 shares in Ryam Sugar Mills Company Ltd., for possession of the shares and for a decree for Rs. 10,94,672-3-3 against Nandkishore being the balance together with interest thereon due to the Corporation from Nandkishore in respect of the debt of Rs. 19,08,195-0-3 earlier mentioned. Next day, that is August 1, 1951, terms of settlement were put in all the several suits and proceedings earlier mentioned and they all came to end. The settlement provided for reference to arbitration. Of these, in this appeal we are concerned only with Suits Nos. 825 and 3220A of 1951. On that date these two suits were by an order made by consent, consolidated and a decree was passed in the following terms:

It is declared with the consent of the parties in both suits by the respective signatures at foot of the said terms that the said terms should be carried out and the same are ordered and decreed accordingly.

The terms were as follows:

Both the above suits are consolidated.

It is declared that all the 42,000 shares-cum-all benefits and rights (including the unrealised dividend on 12,000 shares) in the Ryam Sugar Company Ltd. being the subject matter of the above suit belong to and are the property of Nandkishore Jhajharia. The International Mercantile Corporation (India) Ltd. has no right title or interest in the said shares or any one of them.

That Mr. Sohanlal Murarka, son of Mr. Hiralal Murarka of No. 4E, Dalhousie Square, Calcutta, is appointed without remuneration and without security the Receiver of the said 42,000 shares in the Ryam Sugar Company Ltd. and the unrealised dividend on 12,000 of the said shares.

That Nandkishore Jhajharia undertakes to Court to hand over 30,200 shares in the said Ryam Sugar Company, Ltd., together with the relative blank transfer deeds duly signed by the registered holders of the said shares to the receiver free from encumbrances. He will make over the said shares as aforesaid within 10 days from the date of delivery thereof by the Chief Presidency Magistrate, Calcutta.

Similarly, the International Mercantile Corporation (India) Ltd. undertakes to court to hand over within 10 days from the date of the order to be made herein the 12,000 shares in the said Ryam Sugar Company, Ltd., together with the relative blank transfer deeds duly signed by the registered holder of the said shares to the receiver free from encumbrances.

The said shares referred to in the preceding two paragraphs will be a security for discharge of liability if any found as mentioned in paragraph 7 thereof.

Without prejudice to other party''s contention as to respective liabilities it is provided that if on taking of accounts in respect of all the matters referred to the arbitration of the said Mr. Sohanlal Murarka in the several suits including these suits and under the agreement of even date, any sum is held to be due and payable by Nandkishore Jhajharia either to the International Mercantile Corporation (India) Ltd. or to Jagannath Agarwalla. Nandkishore Jhajharia will within one month of the final judgment on award pay the net amount that may be due from him, after setting off any amount that may be due to him from Jagannath Agarwalla or from International Mercantile Corporation (India) Ltd. under the awards. In default of payment the Receiver will be entitled to sell the said shares or such portion thereof as may be necessary and out of the sale proceeds pay the amounts so due to the parties and hand over the rest of the shares and the balance of the sale-proceeds, if any, to the said Nandkishore Jhajharia. If, however, Nandkishore Jhajharia pays off the amount that may be found due before the sale of the shares or if no sum is found due and payable as aforesaid by Nandkishore Jhajharia or if money is found due to Nandkishore Jhajharia the said Receiver shall hand over to Nandkishore Jhajharia all the said 42,200 shares in the Ryam Sugar Company, Ltd., together with the relative transfer deeds and the unrealised dividend in respect of the 12,000 shares, in respect whereof he has been appointed Receiver.

That all parties will be entitled to enforce the above terms by execution of the decree herein or otherwise by proceeding in these suits without the necessity of filing any fresh suit for the purpose.

That the suit as against J. Agarwalla and Sons Ltd. and M.L. Jhunjhunwalla is withdrawn.

That each party will bear and pay its own costs.

K.L. Mittra, Master. 18-12-51.

On July 31, 1951, an order was made in the criminal case by the consent of the parties discharging the accused u/s 258 of the Code of Criminal Procedure and directing that the case be not further proceeded with. On August 1, 1951, on a petition by the parties which was made ready on the previous day after the criminal case had been dropped the following order of reference to arbitration was made in the two consolidated suits:

It is ordered that except as provided in the terms of settlement annexed to the decree made herein this suit and other matters in dispute between the parties in both the above mentioned suits that have been consolidated including the question of costs of the said suits and of the reference hereby directed be referred to the arbitration of Sohanlal Murarka.

Pursuant to the reference to arbitration the arbitration was held and an award was duly made. The Corporation applied for setting aside the award on the ground that the agreement to refer to arbitration was bad inasmuch as it stifled the criminal case. The application was allowed by Bachawat, J. and from his order this appeal has been preferred. I should also say that on July 31, 1951, the arbitration agreements in all other matters were executed.

On these facts the first question is whether the agreement to refer the disputes had for its object the stifling of the prosecution. In my view it did have that effect. I have not come to this conclusion because the terms of settlement were written out on one piece of paper on July 24, 1951 and these terms set out in one clause an agreement to drop the criminal case and in another that there would be a reference to arbitration to Sohanlal Murarka. The entire facts lead me to the conclusion that the parties intended to settle all their disputes together, that it was not their intention to settle one dispute independently of the other or others. Verbal evidence was led but I do not think that is of much assistance. During the course of the negotiations the criminal case was adjourned and the order-sheet of this case shows that the following order was made on July 25, 1951:

The complainant prays for time to settle and it is said that the terms are already settled. Obviously the terms mentioned in this order are the terms which were arrived at on July 24, 1951. No other terms have been provided before us. That would show that the parties were thinking of settling all their disputes together. It follows that the settlement of each dispute was linked up with the settlement of all other disputes. In other words, the settlement of the criminal case was part of the consideration for the settlement of the other disputes. It is interesting to note that on July 31, 1951, the order for discharge of the accused was made on a petition by the complainant stating that he did not want to proceed further with the case and that the accused also joined in the petition and in fact the accused himself signed his consent on the petition. It was said that the terms of settlement annexed to the decree of August 1, 1951, declared that the shares in respect of which the criminal case was pending were the property of Nandkishore and, therefore, having agreed to this declaration there was no way out for the Corporation but to dorp the criminal case. It was said that having admitted that the shares were the property of Nandkishore the Corporation was bound to fail in the criminal prosecution and, therefore, the settlement of the criminal case was quite independent of the settlement of the other disputes.

I am unable to take this view of the matter. By agreeing that the shares belonged to Nandkishore the Corporation had in fact abandoned the criminal case and as that agreement as to the ownership of the shares was part of the settlement of the several disputes the abandonment of the criminal case was likewise so. The facts earlier related would show the disputes between the parties had arisen out of their mutual dealings and one of such dealings led to the criminal case being filed and the substance of the settlement was to settle all the disputes in respect of the mutual dealings and, therefore, it was a settlement of all matters including the criminal case. It is impossible to dissociate one from the others. Though in the terms annexed to the decree of August 1, 1951, a statement had been made that the shares belonged to Nandkishore still para. 7 of the terms would show that the Corporation retained its rights should the occasion arise, to be paid out its dues if any were found by the arbitrator to exist out of the shares and to that extent the shares remained partially the property of the Corporation. The suits Nos. 825 of 195l and 3220A of 1951 and the criminal proceedings were all concerned with the conflicting claims of the parties to the shares in the Ryam Sugar Company, Ltd. A settlement of the suits was bound to affect the criminal case. Therefore the settlement of the suits become inevitably connected with the settlement of the criminal case. When, therefore, they were settled at one time the conclusion becomes inescapable that they were settled together and settlement of each was consideration for the settlement of the others. For these reasons in my view the agreement for reference which resulted in the award sought to be set aside in this case was made in consideration of the abandonment of the criminal case and it is therefore void.

Mr. Sanyal. appearing for the Appellant, argued that even so it was not open to the Corporation to challenge the agreement. He first relied on In the Goods of Tarun Kumar Ghosh, deceased (1934) 62 Cal. 114. That decision proceeded on the principle which was thus enunciated by Jessel, M.R. In Re: Hallett''s Estate, Knatchhull v. Hallett (1880) 13 Ch.D. 696, 722, "Nothing can be better settled, either "in our law, or, I suppose, the law of all civilised countries, "than this that where a man does an act which may be rightfully "performed, he cannot say that that act was intentional and in "fact done wrongly." Bewan, L.J., put the same thing in almost similar words in Overseers of Putney v. London and South Western Railway Company (1891) 1 Q.B. 440, 443. He said, "The rule is that no "one is allowed in a court of justice, in order to escape from "liability, to put forward a plea that that which he is doing is "illegal". In my view this principle cannot lead me to hold in this case that it is not open to the Corporation to contend that the agreement to refer to arbitration was void. If that were so it would be impossible to have any agreement which had been made in consideration of stifling a criminal case declared void. It is only one of the parties to such an agreement who can ask for such a declaration and if the principles earlier mentioned applied he would have been prevented from doing so. That obviously is not the position. Apart from this aspect of the matter, In the goods of Tarun Kumar Ghosh Supra is of no assistance to us. That I think is enough to dispose of the argument based on that case.

The other case on which Mr. Sanyal relied was Kondi Bin Raoji Fadtare v. Chunilal Rupchand Marwadi (1928) 53 Bom. 75. What had happened there was that while an account suit was pending in the court at Saswad there was a reference of the matters in difference in it to arbitration and in that reference an award was made on February 24, 1923. On March 8, 1923, an application was made purporting to be by the Plaintiff to the court at Poona to file the award and to have a decree passed in its terms. Upon that a decree was eventually passed by the court at Poona in terms of the award on April 20, 1923. Meanwhile an application was made to the court at Saswad by the Plaintiff''s pleader on behalf of the Plaintiff that the award had been made and that the suit should be allowed to be withdrawn and an order was made permitting the withdrawal of the suit on April 17, 1923. In June, 1924, the Plaintiff filed a suit for a declaration that the decree on the award passed by the court at Poona was unauthorised as the decree could only have been passed by the court at Saswad. F''awcett, Ag. C.J., observed "Plaintiff "represented to the court of the first class Subordinate Judge, "Poona, that it had jurisdiction. He obtained a decree upon "that representation and now he wants to go back upon it and "urges the contrary, viz., that the court had no jurisdiction. "Therefore upon general grounds of equity, I think this is "clearly a case in which we should not interfere with the lower "court''s decree". Murphy, J., who agreed with Fawcett, Ag. C.J., said: "For one thing, if fraud there was, in the form of "inducing the first class court to pass an irregular decree, Plaintiff "himself was responsible for it, for in his application to file the award, the fact that a suit including the subject-matter of this "dispute was pending in the Saswad court, was suppressed. He "cannot, J think, now come and plead it as a ground for "relieving him of the result of his own disingenuous action in "misleading the court". Mr. Sanyal said that for the same reasons the present application should fail because here there had been petitions to court to which both parties had consented asking for orders extending the arbitrator''s time to make the award and orders had been obtained from the court extending that time on those petitions. Therefore, it was said that the Court had been induced to act on the representation of the Respondent Corporation that there was a valid agreement to refer disputes to arbitration and it was no longer open to that Respondent to contend that the agreement was not valid. It seems to me, however, that there is a great deal of difference between Kondi''s case and the case before me. Kondi''s case was concerned only with a question of jurisdiction. A party having induced the Court to act on the basis that it had jurisdiction was not permitted to go back on that representation. In this case we are concerned with an agreement the validity of which is challenged on the ground of public policy. The Petitioner wants that an agreement which the law prohibits should be avoided. I conceive it is the duty of the Court itself when it is made aware of it to prevent an agreement which the law prohibits from having any effect. A party may be prevented for equitable reasons from contending that a Court had no jurisdiction where it had earlier induced the Court to act on its representation that the Court had jurisdiction. But a party who wishes to contend that an agreement is prohibited by law is in a different position. Even if he had once represented to the Court that the agreement was not one prohibited by law he might later contend that it was so. If this argument on behalf of the Appellant Nandkishore was right then it might have on the same reason been said that as soon as the order for reference was made in the suit on the petition of both the parties the Court had been induced by them to act on the belief that there was a void agreement to refer and it would therefore be impossible to challenge that agreement. It would not be necessary to rely on a subsequent representation as to the validity of the agreement. That however cannot be and the argument was not carried as far as that. The principle on which the Court proceeded in Kondi''s case was based on fraud perpetrated upon the Court. Murphy, J. expressly referred to it. Here there is no such thing. There is nothing to show that at any time previous to the present petition out of which this appeal arises the Corporation had known the position in law and had thereafter deliberately practised a fraud upon the Court. For these reasons in my view the principle in Kondi''s case cannot be applied to the case before us.

In the result the appeal is dismissed with costs. Certified as a fit case for employment of two counsel.

Chakravaktti, C.J.

I agree.