Case Note & Summary
The dispute concerned forward contracts for jute goods between a member and a non-member of a recognised association under the Forward Contracts (Regulation) Act, 1952. The appellant, a member of the East India Jute and Hessian Exchange Limited, entered into two contracts with the respondent, a non-member, for the purchase and sale of jute carpet backing cloth. The first contract dated December 21, 1962 was effected by a letter from the respondent to the appellant specifying quantity, rate, delivery schedule, and stating that all other terms and conditions of the East India and Hessian Exchange standard contract would apply. A second contract dated December 9, 1963 was entered into for buyback/resale of balance quantities. Disputes arose regarding the balance of 1500 rolls and the difference in price payable by the respondent. The appellant referred its claim to the arbitration of the Bengal Chamber of Commerce and Industry, relying on the arbitration clause in the standard contract and bye-laws. The respondent filed a petition under Section 33 of the Indian Arbitration Act, 1940 before the Calcutta High Court seeking a declaration that there was no valid arbitration agreement. The High Court, by A. N. Sen J., allowed the petition, holding that the contracts were illegal and void for non-compliance with bye-law 1(b) and bye-law 15 of Chapter V of the Working Manual, read with bye-law 17 and Section 15(3A) of the Forward Contracts (Regulation) Act, 1952. The High Court particularly noted the absence of condition No.2 in the prescribed form in Appendix II, which required buyers to give a specified number of clear working days notice to place goods alongside. The appellant appealed by special leave, contending that the contracts substantially complied with the prescribed form and that condition No.2 was inconsequential. The Supreme Court examined the relevant provisions of the Act and the bye-laws. It held that bye-law 1(b) requiring transferable specific delivery contracts to be in writing in the prescribed forms was mandatory when read with bye-laws 15 and 17. Under bye-law 15 no member could enter into such contracts otherwise than on terms and conditions prescribed, and bye-law 17 rendered contravention illegal under Section 15(3A). The Court found that condition No.2 regarding clear working days notice was essential and had to be specified; its omission meant the contracts were not in the prescribed form. Consequently, the contracts were illegal and void, and the arbitration clause could not be enforced. The Court referred to Radhakisson Gopikisson v. Balmukand Ramchandra, 60 I.A. 63. The appeals were dismissed, affirming the High Court's decision that there was no valid arbitration agreement.
Headnote
A) Forward Contracts - Prescribed Form and Mandatory Bye-laws - Non-compliance with bye-law 1(b) read with bye-laws 15 and 17 renders contract illegal and void under Section 15(3A) - Forward Contracts (Regulation) Act, 1952 Sections 11(3)(aa), 15(3A); East India Jute and Hessian Exchange Ltd. Bye-laws Chapter V Bye-laws 1(b), 15, 17 - The dispute arose from contracts for jute goods which were not in the prescribed form under Appendix II, specifically lacking clause 2 requiring specification of clear working days notice to buyers. The High Court held that violation of bye-laws 1(b) and 15 rendered the contracts illegal under bye-law 17 read with Section 15(3A). The Supreme Court affirmed, holding that bye-law 1(b) is mandatory when read with bye-laws 15 and 17, and that condition No.2 requiring specification of clear working days notice was not inconsequential. Held that the contracts were illegal and void, and the arbitration clause could not be enforced (Paras 1-6). B) Arbitration - Arbitration Agreement in Illegal Contract - If contract is void for non-compliance with statutory bye-laws, arbitration clause therein is unenforceable - Indian Arbitration Act, 1940 Section 33; Forward Contracts (Regulation) Act, 1952 - The appellant referred disputes to arbitration under the Bengal Chamber of Commerce and Industry, but the respondent sought a declaration of no valid arbitration agreement. The High Court held there was no valid arbitration agreement because the contract was illegal. The Supreme Court dismissed the appeal, upholding that the arbitration clause could not be invoked where the underlying contract was illegal and void. Held that arbitration cannot be invoked where the underlying contract is illegal and void (Paras 1-6).
Issue of Consideration
Whether the contracts dated December 21, 1962 and December 9, 1963 between the parties complied with bye-law 1(b) read with bye-laws 15 and 17 of Chapter V of the Working Manual and were in the prescribed form; and if not, whether their contravention rendered the contracts illegal and void under Section 15(3A) of the Forward Contracts (Regulation) Act, 1952, thereby invalidating the arbitration agreement.
Final Decision
Appeals dismissed. The Supreme Court upheld the High Court's decision that the contracts were not in the prescribed form, violated bye-laws 1(b) and 15, and were illegal and void under Section 15(3A); consequently no valid arbitration agreement existed.
Law Points
- Bye-law 1(b) read with bye-laws 15 and 17 of Chapter V Working Manual is mandatory
- non-compliance with prescribed form including failure to specify clear working days notice renders contract illegal and void under Section 15(3A) of Forward Contracts (Regulation) Act
- 1952
- illegal contract cannot give rise to valid arbitration agreement
- condition No.2 requiring clear working days notice is not inconsequential.
