National Oil Mills Ltd. vs Rambilash Nandalal

G.K. Mitter, J.—This is an application for setting aside an award made by the Bengal Chamber of Commerce on two grounds. First, that the contract was illegal and void as being in contravention of the Forward Contracts (Regulation) Act of 1952 and secondly that in any event the arbitrators having proceeded with the hearing ex parte without giving the applicant notice of their intention to do so. misconducted themselves in the proceedings with the result that the award cannot stand.

The contract entered into on November 13, 1955 was one for sale of 18 tons of pure Linseed Oil by National Oil Mills to Rambilash Nandalal, the time for delivery being April/May 1956. The following is the arbitration clause:

Any dispute regarding this contract is to be settled by the Bengal Chamber of Commerce and Industries in Calcutta.

The Forward Contracts (Regulation) Act provides by Section 17:

(1) The Central Government may, by notification in the Official Gazette, declare that no person shall, save with the permission of the Central Government, enter into any forward contract for the sale or purchase of any goods or class of goods specified in the notification and to which the provisions of Section 15 have not been made applicable, except to the extent and in the manner, if any, as may be specified in the notification.

(2) All forward contracts in contravention of the provisions of Sub-section (1) entered into after the date of publication of the notification thereunder shall be illegal.

(3) Where a notification has been issued under Sub-section (1), the provisions of Section 16 shall, in the absence of anything to the contrary in the notification, apply to all forward contracts for the sale or purchase of any goods specified in the notification entered into before the date of the notification and remaining to be performed after the said date as they apply to all forward contracts for the sale or purchase of any goods specified in the notification u/s 15.

The relevant portion of the notification issued in pursuance of the said section is quoted below:

In exercise of the powers conferred by Section 17 of the Forward Contracts (Regulation) Act, 1952, the Central Government, hereby declares that no person, shall save with the permission of the Central Government, enter into any forward contracts in any place in India for the sale or purchase of any of the goods specified below in the schedule.

The second item in the schedule is Linseed Oil.

The applicant''s case is and always has been that the contract was illegal inasmuch as no permission of the Central Government was ever obtained for entering into it and the Respondent herein has not been able to show that such permission was ever obtained. Alter the buyer had referred the dispute to the Bengal Chamber of Commerce for adjudication the seller, the present applicant, made an application to this Count for determination of the existence and/or validity of the said arbitration agreement. The matter was heard in January 1957 by P.B. Mukharji, J. who dismissed the application but directed that the order was to be without prejudice to the applicant''s right to question the legality of the award, should one be eventually made against them, and without prejudice to the Respondent''s right to contend that the contract was not affected by the Forward Contracts (Regulation) Act. The net result is that the existence or validity of the arbitration agreement was left for determination in subsequent proceedings.

Although fairly lengthy affidavits have been used in this case, there has been no attempt to show that any permission for entering into the contract mentioned above was obtained from the Central Government. Prima facie therefore the contract is void. But it was argued by counsel for the Respondent that as the point had been raised before the arbitrators without success the award cannot be questioned on that ground. Reference was made to the counter statement of facts filed by the applicant before the Bengal Chamber of Commerce to show that the point had been, agitated. It was further argued that there had been a submission to the arbitrators of this dispute and hence their decision is binding on the parties. It will be necessary to refer to the statement of facts contained in paragraphs 1 and 2 and to the counter statement of facts in paragraphs 1, 2, 3, 4 and 5 for appreciating the contentions of the respective parties before the arbitrators. Paragraphs 1 and 2 of the state of facts filed by the buyer are as follows:

By a contract entered into between the claimants and the Respondents through brokers G.C. Sharma and Co., on the 13th November 1955 the Respondents sold and the claimants purchased 18 tons of pure Linseed oil, I.S.D. specification delivery during April or May 1956 at sellers'' mill at the rate of Rs. 42/7/3 per Bengal Maund net loose. The brokers exchanged Bought and Sold Notes in respect of the said contract dated 13th November 1956. A copy of the Original Bought Note is annexed hereto and marked with the letter A.

The said Bought Note contained an arbitration clause by which it was provided that in the event of a dispute arising out of the said contract the same should be referred to the arbitration of the Bengal Chamber of Commerce.

Paragraphs 1 to 5 of the counter state of facts of the sellers are as follows:

With reference to the allegations in paragraphs 1 and 2 of the statement filed on behalf of the claimant Rambilash Nandalal the Respondent states that on the 13th. November 1955 Forward Contract (Regulation) Act (LXXIV) of 1952 was in force. The said contract was prohibited under the said Act and by the notification issued thereunder the same was illegal and invalid in law.

The Central Government by Notification dated 25th January 1955 issued under the said Forward Contract Regulation Act declared that no person shall, save with the permission of the Government, enter into any forward contract in any place in India for the sale or purchase of any of the goods specified in the schedule to the said notification.

The said schedule specified inter alia Linseed Oil as one of the goods. The Respondent states that the said contract was entered into without the permission of the Central Government and the same was a forward contract within the meaning of the said Act and, therefore, the said contract was and still is an illegal contract.

The Respondent was not aware of and did not know of the said notification at the time of entering into the said contract and at no stage the request for permission from the Central Government was asked for. At the time when the contract was entered into the prohibition was in operation and force and the contract was void, inoperative and illegal. The said contract is hit by the provisions of the said Act and the Notification issued thereunder as stated above. The Respondent therefore states that it has no obligation under the said contract whatsoever.

Without prejudice to the said contentions the Respondent files this statement under protest and the allegations made in the said statement are dealt with as follows:

In answer to the allegations in paragraphs 1 and 2 of the statement filed on behalf of the claimant the Respondent reiterates the statement contained hereinbefore and denies that there was any valid or binding contract or arbitration clause or that by virtue of such alleged arbitration clause the matter can be decided by the Tribunal of Arbitration of the Bengal Chamber of Commerce and Industry or that the said Tribunal has any jurisdiction in the matter.

Clearly, in my opinion the applicant put the illegality of the contract m the forefront of its case before the arbitrators whose jurisdiction it sought to impugn on the ground that the contract was void. It was expressly stated in paragraph 4 of the counter-statement of facts that it was being filed under protest and in my view the protest related to the jurisdiction of the arbitrators. I have no hesitation in coming to the conclusion that the applicant is not precluded from re-agitating the question in the present application but Mr. Deb, learned Counsel for the Respondent, referred to the judgment of P.B. Mukharji J. in the case of Bhudarmull Bazaz Vs. Uma Shankar Purushottamdas and Co., and contended that by urging the point as to the illegality of the contract before the arbitrators the applicant had made a submission on this particular question to the arbitrators and must be held bound by their decision. In Bhudarmulls case the contract was one for sale and purchase of jute in one of the standard forms of the Indian Jute Mills Association containing the wide arbitration clause, e.g., "All matters, questions, disputes, differences and/or claims arising out of and/or concerning and/or in connection with and/or in consequence of or relating to this contract whether or not the obligation of either or both parties under this contract be subsisting at the time of such dispute and whether or not this contract has been terminated or purported to be terminated or completed, shall be referred to the arbitration of the Bengal Chamber of Commerce under the rules of its tribunal of arbitration for the time being in force and according to such rules the arbitration shall be conducted". The contract in that case had been entered into when the West Bengal Jute Goods Act of 1950 was in operation and by virtue of a notification in the official gazette, the State Government had prohibited the making of contracts relating to jute goods. It was contended before Mukharjee J. that by reason of the said provisions in the statute the contract had become void and unenforceable and that the arbitration clause which formed a part of the contract had likewise become void and unenforceable. The Petitioner''s attorney Mr. B. M. Bagaria had written a letter on September 8, 1951 to the Registrar of the Tribunal of Arbitration that the contract between the parties was illegal, void and inoperative-plea which was taken in the petition before His Lordship for setting aside the award. The text of Mr. Bagaria''s letter quoted in the judgment of P.B. Mukharji, J. is as follows:

The chamber has no jurisdiction in the matter. The contract referred to between the parties is illegal and void and inoperative and no suck contract could be entered into in view of the provisions of the law. Consequently the arbitration cannot be proceeded with.

If in spite of the above the Chamber want to proceed further in the matter, I shall thank you to please let me know. On hearing from you my clients will move the High Court at Calcutta.

The Petitioner however did not move the High Court and by a further letter of December 6, 1951 asked for time to appear before the arbitrators and to produce before them the necessary documents. Mr. Bagaria wrote to the arbitrators requesting them to hold their meeting at any date after December 20, 1951 as otherwise his client would be seriously prejudiced. The matter thereafter proceeded before the arbitrators and an award was made on the February 13, 1952. Mukharji J. took the view that the letters of September 8, 1951 and December 7, 1951 as well as the submission (obviously referring to the arbitration agreement) together constituted a lawful submission even on the points of fact which were being urged before his lordship as a ground for invalidating the contract. I have great difficulty in appreciating this observation, which has already been the subject of comment by the Learned Chief Justice in another matter. Mukharji, J. took the view that the decision of the arbitrators on the question as to whether a person habitually dealt in the sale and purchase of jute goods involving actual delivery of possession or whether he possessed or controlled a godown and other means and equipment necessary for storage and supply of jute goods was a decision on a disputed question of fact and could not be attacked again in proceedings before the Court. I find myself unable to accept this proposition in a case where the arbitrator''s jurisdiction to adjudicate rests upon such decision. This point came up for discussion in a recent English case reported in [1953] 3 W.R. 689. I quote from the judgment of Devlin, J. at p. 693:

It is clear that at the beginning of any arbitration one side or the other may challenge the jurisdiction of the arbitrator. It is not the law that arbitrators, if their jurisdiction is challenged or questioned, are bound immediately to refuse to act until their jurisdiction has been determined by some Court which has power to determine it finally. Nor is it the law that they are bound to go on without investigating the merits of the challenge and to determine the matter in dispute, leaving the question of their jurisdiction to be held over until it is determined by some court which has power to determine it. They are entitled, in short, to make their own enquiries in order to determine their own course of action, and the result of that enquiry has no effect whatsoever upon the rights of the parties.

His Lordship referred to the case of Rex v. Fulham, Hammersmith and Kensington Rent Tribunal ex parte Zarek [1951] 2 K.B. 1 and the judgment of House of Lords in Falkingham v. Victorian Railway Commissioner [1900] A.C. 452 for the purpose of showing that that was the correct statement of law. A discussion of this question will be found in Russell on Arbitration (14th Edn.) p. 316:

If a party to a reference objects that the arbitrators are entering upon the consideration of a matter not referred to them and protests against it, and the arbitrators nevertheless go into the question and receive evidence on it, and the party still under protest, continues to attend before the arbitrators and cross-examines the witnesses on the point objected to, he does not thereby waive his objection, nor is he estopped from saying that the arbitrators have exceeded their authority by awarding on the matter (Davies v. Price) (1864) 34 L.J. Q.B. 8.... In Hamlyn v. Betteley (1880) 6 Q.B.D. 63, 65 where Lord Selbourne L.C., said ''In arbitrations, where a protest is made against jurisdiction, the party protesting is not bound to retire; he may go through the whole case subject to the protest he has made.

The point arose in the case of Pannalal Sagoremull v. Fateh Chand Murulidhar (1951) 88 C.L.J. 34, where Bachawat, J. observed as follows:

The arbitrator need not proceed upon the assumption that there is a valid and binding contract. The jurisdiction of the arbitrator depends upon the existence of the contract. The arbitrator has power to enquire into this collateral fact. If there is no contract he may decline to exercise his jurisdiction. It is proper for him to make the enquiry in order to satisfy himself that prima facie he has jurisdiction.

The decision of the arbitrator on the collateral fact is not binding upon the parties. The arbitrator cannot by a wrong decision with regard to the collateral fact give himself jurisdiction which he did not possess. The parties can always come to the Court which alone can determine if there was, in fact,. a contract which conferred jurisdiction upon the arbitrator. If there is no contract at all there is nothing to arbitrate and the award is a nullity.

With respect, I agree with all that was said there. Reference may also be made to the judgment of Chatterji J. in the case of Bajrang Lal Laduram Vs. Agarwal Brothers, .

I do not think it necessary to embark upon a discussion as to whether an arbitration clause can be sufficiently widely worded so as to embrace disputes as to its existence or validity or to go into the relative merits of the two views expressed in Heymam v. Darwins Ltd. [1942] A.C. 342. It is agreed on all hands that even if the arbitrators enter into the question and decide that the contract was a valid one, the point is still open for consideration by the Court and the arbitrators'' decision will always be subject to the decision of a court of law on that point.

As I have already remarked no attempt was made either before the arbitrators or in the application before me to show that the contract which undoubtedly was a forward contract within the meaning of the Forward Contracts (Regulation) Act 1952, Section 17 and covered by the notification quoted above, was entered into under any sanction obtained from the Central Government. As such the contract undoubtedly was illegal and void and the arbitration clause fell along with the contract and the award must be set aside on that ground.

This decision is sufficient for the disposal of this application, but in deference to the arguments of learned Counsel, I shall however indicate my views on the second point, viz., whether the arbitrators were entitled to proceed ex parte without giving the applicant notice of their intention to do so and whether on the facts of this case it can be held that the arbitrators were justified in proceeding as they did. To appreciate this point it is necessary to refer to some of the events which happened in the proceedings. On August 11, 1956 the buyer filed its state of facts before the arbitrators. Thereafter the seller moved this Court for determination of the existence or validity of the arbitration agreement. After the order made by Mukherji, J. in January 1957, the seller filed its counter state of facts before the arbitrators on February 20, 1957. The claimant before the arbitrators filed a reply to this on March 8, 1957. On April 22, 1957 the Registrar of the Bengal Chamber of Commerce gave the parties notice of a meeting to be held on April 29, 1957 in the following words:

I am directed to inform you that the arbitration will be held at the Chamber on Monday the 29th April 1957 at 3-45 p.m. when the Court will hear evidence of the parties and their witnesses. Please note that neither of the parties is to be represented before the Court by Counsel, Attorney or other legal adviser. You are requested to be present at the hearing with all relevant evidence you have in support of your case. You may bring with you any books and/or documents which you may wish to submit for inspection of the Court and you may also produce any person or persons whose evidence you may wish to tender.

There is a post script to the notice which reads-"Please send all letters including enclosures in duplicate." The seller did not attend the meeting on April 29. On May 6, 1957 the Registrar of the Tribunal of Arbitration, Bengal Chamber of Commerce wrote a letter to the seller which runs as follows:

I am directed to send you herewith for information copy of a letter dated the 30th April 1957 received from Messrs. Rambila.sh Nandalal and to inform you that the enclosures referred to will be available for your inspection here by 12 noon on the 8th May 1957.

The enclosures, as will appear from the letter of April 30, 1957 were merely two postal receipts, one dated 14-6-56 and the other, dated 13-6-56. The seller did not turn up on May 8, 1957 for inspection of the documents offered to them.

The excuse put forward in this application on the question of the failure to attend the meeting of April 29, or to take inspection of the documents offered on May 8, is that the partner of National Oil Mills, who was conversant with the facts of this case, was tying ill and could not attend to his duties. This hardly appears to be bona fide, because there must have been other partners or persons who could have attended the meeting or could at least have informed the arbitrators that the person whose presence was essential was lying ill and asked for an adjournment. No such step was taken and even if the plea of sickness, which I am inclined to doubt, be true there was unjustifiable negligence oh the part of the seller. From the documents before me it does not appear (that any further meeting was held by the arbitrators after April 29. and the award in favour of the buyer was made and published on May, 14, 1957.

It is not disputed that ordinarily the arbitrators should not, proceed e.x parte and that they should give the defaulting party clear intimation that if they did not appear the case might be heard and decided in their absence. This question was gone into at length in Jugilal Kamlapat v. General Fibre Dealers Ltd. (1954) 59 C.W.N. 146. In that case one of the parties failed to turn up at the meeting which was fixed for 11-40 a.m. on a particular day but he appeared before the arbitrators at 11.55 a.m. when the arbitrators said that they had already closed the case and could not do anything further. Chakravartti, C.J. examined the authorities cited and observed at p. 154:

Broadly stated, the principles which govern the matter are the following. If a party to an arbitration agreement fails to appear at one sitting the arbitrator cannot or, at least, ought not to, proceed ex parte against him at that sitting. Where in such a case it does not appear that the non-appearance was anything but accidental or casual, the arbitrator ought ordinarily to proceed in the ordinary way, fixing another date of hearing and awaiting the future behaviour of the defaulting party. If, on the other hand, it appears that the defaulting party had absented himself with a view to preventing justice or defeating the object of the reference, the arbitrator should issue a notice that he intends at a specified time and place to proceed with the reference and that if the party concerned does not attend, he will proceed in his absence.

Mr. Deb contended that under the Rules of the Bengal Chamber of Commerce the notice of April 22, was a sufficient notice on the part of the arbitrators that they might or would proceed ex parte and he drew my attention to the rules of the said Chamber for this purpose. The relevant Rules are Rules XV, XVI and XX:

Rule XV-The dispute will normally be decided by the Court on the written statements of the parties and oral evidence will not be taken nor will the parties be entitled to appear, or any formal hearing be held. The Court shall have power, however, if it thinks fit to appoint a time and place for the hearing of the reference and to hear oral evidence.

Rule XVI-In any case of a formal hearing no party shall, without the permission of the Court, be entitled to appear by counsel, attorney, advocate or other lawyer or adviser, but the Court in its discretion may require the parties with or without witness to attend before it to be examined.

Rule XX-The Court may proceed with the reference notwithstanding any failure to file a written statement within due time and may also proceed with the reference in the absence of any or both of the parties who, being entitled to. appear before the Court, after due notice, refuse or neglect to attend.

On construction of the above, it appears to me that the notice of April 22, was a notice in terms of Rule XV and not one contemplated by Rule XX. Rule XV says that normally the dispute is to be decided by the Court on the written statement of the parties and oral evidence cannot be adduced nor can the parties appear before the Court or ask for a formal hearing but it would be for the Court to determine what course it will adopt and whether it will go into oral evidence or have a formal hearing. When the Court makes up its mind to adopt the latter course, it will notify the parties of the date of hearing and ask them to be ready with their witnesses or other evidence which they might wish to tender. Rule XX only comes into play after the parties have been notified under Rule XV that there will be a hearing before the Court when evidence may be tendered. Before the Court can proceed with the reference in the absence of one of the parties it must give clear intimation of its intention to do so, otherwise the expression "after due notice" in Rule XX can have no meaning. The rule in that case should have read "The Court may proceed with the reference notwithstanding any failure to file a written statement within due time and may also proceed with the reference in the absence of any or both of the parties who, being entitled to appear before the Court, refuse or neglect to attend." As I have said before, a party entitled to appear before the Court must have a notice of the meeting from the Court and must be given the right by the Court to appear at the meeting. It is only when such a notice has been given that the Court is empowered to give another notice under Rule XX informing the parties that if anybody refuses or neglect to attend the Court may proceed with the reference in his absence.

The question came up for discussion in the case of Gangadhar Gourisankar v. Bisseswarlal Kanaihalal Unreported judgment of Chakrabartty, C.J. and Lahiri dated 7th January 1958 in Appeal No. 90 of 1956 where an award made by the Indian Chamber of Commerce was attacked on the ground that the arbitrators had not given the parties notice of their intention to proceed in their absence. Rule XVI of the Rules of the Indian Chamber of Commerce is practically identical with Rule XX of the Rules of the Bengal Chamber of Commerce and construing the said Rule XVI Chakravaritti, C.J. came to the conclusion that it was not open to the arbitrators to proceed ex parte without giving notice of their intention to do so. He further observed that Rule XX of the Rules of the Bengal Chamber of Commerce had not been brought to the notice of the Court in the case of Jugilal Kamlapat v. General Fibre Dealers Lid. (supra) but even if that Rule had been cited the result would have been the same.

In my view the award is also bad on the ground that the arbitrators proceeded ex parte without giving the parties notice of their intention to do so.

Mr. Deb argued finally that the arbitrators were justified in proceeding ex parte in view of the conduct of the sellers before them. No doubt the sellers were negligent in this matter but their negligence, if any, was in failing to attend the meeting fixed for April 29. I do not see how their failure to inspect the documents offered to them by the notice dated May 6, 1957 could have made any difference or could have persuaded the arbitrators to change their mind if they had already formed an opinion adverse to the sellers. I do not say that there may not be cases in which repeated failures on the part of one of the parties to attend the meetings fixed or the obstructive attitude on their part may lead to an inference that they never wanted to appear before the arbitrators and may give the arbitrators sufficient ground for proceeding with the hearing ex parte. But the facts of this case, in my view, did not warrant the arbitrators in taking the line of conduct they adopted.

The award must, therefore, be set aside with a declaration that the arbitration agreement is null and void and not binding on the parties. The applicant will have the costs of this application.