Supreme Court Upholds Enforceability of Cotton Import Contract and Arbitration Clause; Rejects Illegality, Uncertainty, and Jurisdiction Challenges. Contract with 'Usual Force Majeure' Clause Not Void, FERA Saved by Section 21, and Section 20 Arbitration Application Maintainable Despite Statutory Bye-laws.

Civil appeal against a Bombay High Court judgment that reversed a trial court dismissal and held a petition under s.20 of the Indian Arbitration Act maintainable for filing an arbitration agreement and referring a cotton import dispute to arbitration.

The buyers (appellants) sought to have the arbitration application dismissed, arguing that the contract was void and illegal, and that the arbitration clause was therefore unenforceable.

The sellers (respondents) invoked arbitration after the buyers failed to perform the cotton purchase contract; the sellers resold the goods and claimed a deficit of Rs. 34,103.15 nP., which the buyers refused to pay.

The original side trial judge dismissed the s.20 application, but the Divisional Bench of the Bombay High Court reversed and held the application maintainable. The buyers then appealed to the Supreme Court with certificate.

Whether the contract was void for uncertainty because of the phrase 'subject to the usual Force Majeure Clause'. Whether clauses 6 and 7 of the contract involved a breach of s.5 of the Foreign Exchange Regulation Act, making the contract illegal. Whether the application under s.20 of the Indian Arbitration Act was maintainable given that bye-law 38A empowered the Chairman of the East India Cotton Association to select arbitrators, arguably leaving the court functus officio. Whether the proper law of the contract was Indian law or the law of British East Africa.

The buyers argued that clauses 6 and 7 contemplated acquisition of property or exchange in Africa and thus violated s.5 of the Foreign Exchange Regulation Act, absent exemption from the Reserve Bank. The buyers argued that the expression 'subject to the usual Force Majeure clause' was vague and uncertain, rendering the agreement void for lack of consensus ad idem. The buyers argued that the application of bye-law 48A et seq left no powers in the court under ss.20(1) and (4) of the Arbitration Act, making the section inapplicable. The buyers argued that the law applicable was the law of British East Africa, not Indian law. The sellers contended that the contract was valid and enforceable, that s.21 of FERA saved it, that the force majeure clause was not vague, that the court retained s.20 powers, and that Indian law applied.

The reference to 'usual Force Majeure clause' was not void for uncertainty because judicial decisions establish that force majeure saves a party from consequences beyond control, and the word 'usual' permits the clause to be made certain by evidence under s.29 Contract Act. Sections 21(2) and (3) of FERA were interpreted to save contracts within s.5 by engrafting a condition that decreeholders must obtain Reserve Bank permission before enforcement. Section 20(4) Arbitration Act grants the court power to consider filing and reference, and the court is not rendered functus officio by bye-laws delegating arbitrator selection; statutory bye-laws prevail under s.46 but do not oust the court's s.20 powers. The proper law of contract is determined by the declared intention of the parties; here, agreement to Bombay High Court jurisdiction and Indian arbitration indicated Indian law applied.

The provisions of sub-ss. (2) and (3) of s. 21 of the Foreign Exchange Regulation Act, properly construed, left no manner of doubt that they contemplated matters which were within the prohibition of S. 5 of the Act and had the effect of engrafting on the agreement of parties a term that it would be for the decreeholder before he could enforce the decree or order of the court to obtain the permission of the Reserve Bank. It was clear from judicial decisions that a reference to 'force majeure' means the saving of the performing party from the consequence of factors beyond his control. Although by s. 46 of the Arbitration Act, the Bye-laws, if inconsistent with the provisions of the Act, must prevail, it was not correct to say that their application made the Court functus officio under s. 20 of the Act. Since the parties agreed that in case of dispute the Bombay High Court would have jurisdiction and the arbitration clause indicated arbitration in India, there could be no doubt that the Indian law was to apply.

The sellers invoked the arbitration clause and bye-law 38A and filed a petition under s.20 of the Indian Arbitration Act in the Bombay High Court Original Side seeking filing of the agreement and reference to arbitration. The buyers resisted by affidavits raising illegality and uncertainty. The trial judge dismissed the s.20 application. On appeal, the Divisional Bench of the Bombay High Court reversed and held the application maintainable. The buyers appealed to the Supreme Court with certificate, which dismissed the appeal and affirmed the High Court.

• Indian Arbitration Act, 1940: 20, 46
• Foreign Exchange Regulation Act, 1947: 5, 21
• Indian Contract Act, 1872: 29
• Bye-laws of East India Cotton Association Ltd., Bombay: 35, 38A, 48A