Bombay High CourtGulabchand Rawatmal vs Sarangpur Cotton Manufacturing Co. ... on 7 November, 1957Equivalent citations: AIR1959BOM158, (1958)60BOMLR337, ILR1958BOM725, AIR 1959 BOMBAY 158, ILR (1958) BOM 725 60 BOM LR 337, 60 BOM LR 337JUDGMENT



 

Gokhale, J.1. This is an appeal from an order passed by the learned Joint Civil Judge (Senior Division), Ahmedabad, direction underSection 20of the Arbitration Act, that the dispute between the plaintiff and the defendant arising out of a contract, dated 29th May, 1953 may be referred to the Ahmedabad Mill-owners' Association, for their decision as arbitrator. The plaintiff-respondents are the Sarangpur Cotton Manufacturing Co. Ltd., who are Manufacturers of textile goods at Ahmedabad. The defendant-appellants are a firm carrying on business of cloth at Calcutta. It seems that the plaintiffs have a selling agent, namely, Messrs. Balchand Bhawsingka, at Calcutta, and the defendant placed an order for purchasing 15 bales of plaintiff's manufacture through the said selling agents, under an indent bearing No. 630. dated 29th May, 1953. The said indent was signed by the defendant and was accepted on behalf of the plaintiffs by their selling agents. It is the case of the plaintiff that the delivery of the goods was to be made ex-mill godown at Ahmedabad and payment was also to be made at Ahmedabad, the time fixe for the delivery being by the end of August, 1953. According to the plaintiff, the goods were ready for delivery before the due date and were invoiced on 17th August, 1953 and 27th August, 1953. But the defendant requested that they should be sent by rail to Calcutta and that was why the plaintiff applied for transport permits and after receipt of those permits goods were sent by rail on 29th August, 1953 and the 3rd, 5th and 10th of September, 1953. The relevant railway receipts as well as the invoices were forwarded with respective drafts aggregating to Rs. 42,202-8-0 to the defendants through the Imperial Bank of India, Calcutta, on the 2nd, 7th, 8th and 12th September, 1953. It is the case of the plaintiff that the market was going down at about this time and that is why the defendant made a complaint about the delay in delivery and also that the pieces in the bales wee of 10 yards and not of 20 yards. But the defendant was informed by the plaintiffs' agent at Calcutta that his grievances were unjustified. As the defendant filed and neglected retire the drafts, despite remainders, notices were given which were met with the excuse about delay in delivery and the goods being not according to the contract. The plaintiffs, there force, resold the goods at the defendants' risk and costs and according to the plaintiffs the resale resulted in a loss of Rs. 15,400. Under Clause (15) of the contract entered into between the plaintiff and the defendant it was agreed that in case any dispute in respect of or arising out of the contract was not amicably settle,d it will have to be referred to the Ahmedabad Mill-owners' Association for arbitration and the decision of the arbitrator was to be final and binding on both the parties. By virtue of this arbitration clause, the plaintiff applied to the lower Court underSection 20of the Arbitration Act for filing of the arbitration agreement and for necessary reliefs.2. This application was resisted by the present appellant on several grounds. It was contended that the Court at Ahmedabad had no jurisdiction to entertain the application as the offer and acceptance of the contract had taken place at Calcutta. It was further contended that the goods were delivered at Calcutta, the payments were to be made at Calcutta and the alleged refusal by the defendant to submit to arbitration had taken place at Calcutta. Therefore it was contended that the Ahmedabad Court would have no jurisdiction to pass a final decree after the arbitrators passed their award. It was also contended that the Court could not refer the matter to arbitration under Clause (15) of the contract between the parties as the arbitrator mentioned therein was incapable and incompetent, being interested in the plaintiff. It was also urged that the Ahmedabad Mill-owners' Association which was contemplated to be the arbitrator under Clause (15) was a fluctuating body and therefore incompetent to act as an arbitrator. It was finally contended that the arbitration agreement was no longer operative because the contract had been rescinded by operation of law inasmuch as the plaintiff has elected to exercise the option of reselling the goods and it was submitted thatSection 54(4)of the Sale of Goods Act would be a bar to the filing of the arbitration agreement under clause (15) of the contract.3. The trial Court held that the Court had jurisdiction to entertain the application and that the Ahmedabad Mill-owners' Association was a legal entity to act as an arbitrator. Though the plaintiffs were members of the Ahmedabad Mill-owners' Association according to the trial court, that did not prevent the Court from accepting the arbitration clause which mentioned that the Ahmedabad Mill-owners' Association was to be the arbitrator. The defendant's contention based on the provisions ofSection 54(4)of the Sale of Goods Act was also negatived on the ground that the resale effected by the plaintiff was under the right created in his favour by virtue of Clause (17) of the contract and not in pursuance ofSection 54of the Sale of Goods, Act. The trial Court, therefore, passed an order in favour of the plaintiff filing the arbitration agreement underSection 20of the Arbitration Act.4. In this appeal, Mr. Kotwal, the learned advocate for the appellant, has raised the same contentions as were urged on behalf of the defendant before the trial Court. But the principal contention urged by him was that Section 54, Sub-section (4) of theSale of Goods Actled to a rescission of the entire contact between the plaintiff and the defendant and, therefore, the Court was incompetent to file the arbitration agreement underSection 20of the Arbitration Act.5. Before, however, I deal with that contention, I will refer to the other points which were urged by Mr. Kotwal challenging the correctness of the trial Court's order. Mr. Kotwal urged that there was some inconsistency between Clauses (15) and (19) of the contract between the parties. Under Clause (15) of the contract as I have already stated, the dispute in respect of the contract, if it was not amicably settled, was to be referred to the Ahmedabad Mill-owners Association for arbitration and the decision of the arbitrator was to be final and binding on both the parties. The provisions of Clause (19) are as follows:-"(19) It is expressly agreed that any legal proceedings, in respect of arising out of the contract overleaf, shall be instituted in the Court at manufacturer's place, even if the cause of action may be deemed to have arisen elsewhere."Mr. Kotwal contends that Clauses (15) and (19) are irreconcilable. Whereas under Clause (15) the dispute between the parties was to be referred to the arbitration of the Ahmedabad Mill-owners Association, Clause (19), says Mr. Kotwal, refers to the jurisdiction of the Court at the manufacturers' place, i.e. the Court at Ahmedabad, with regard to legal proceedings. In our opinion, there is no inconsistency in the two clauses. Despite the existence of Clause (15), any of the parties to the contract might have chosen to file a suit in a Court of law and according to the terms of the contract that suit had to be instituted in the Court of the manufacturers' place, i.e., the Court at Ahmedabad. It may be that the suit would have been resisted or bot stayed because of the provisions of Clause (15), but that could not prevent a party from instituting a suit and under the contract the parties agreed that the legal proceedings were to be instituted a suit and under the contract the parties agreed that the legal proceedings were to be instituted in a Court at Ahmedabad. Besides, even the filing of an application underSection 20of the Arbitration Act would be a legal proceeding and Clause. (19) provides that any legal proceedings have to be instituted in the Court at the manufacturers' place. In our opinion, therefore, there is no inconsistency in Clause. (15) and (19), as contended by Mr. Kotwal and, therefore, that could not affect the validity of the order of the trial Court.6. Then Mr. Kotwal contended that the Court at Ahmedabad would have no jurisdiction to entertain an application underSection 20of the Arbitration Act because the contract was entered into at Calcutta, the payment was to be made at Calcutta and the refusal to submit to arbitration took place at Calcutta. In our opinion, this argument is without any substance because the parties had specifically agreed under Clause (19) that any legal proceedings in respect of or arising out of the contract were to be instituted in a Court at Ahmedabad even though the cause of action may be deemed to have arisen elsewhere. Apart from that, it is common ground that the goods were manufactured at Ahmedabad. Clause (2) of the contract shows that the pieces of textile goods under the indent were for delivery at the mills At Ahmedabad and that is further confirmed by the provisions of Clause (4). Under Clause (7), the responsibility of the manufacturers was to cease as soon as the goods left the mill premises. In our opinion, therefore, it cannot be disputed that at least a part of the cause of action had arisen at Ahmedabad. In our opinion, therefore, the contention that the Court at Ahmedabad had no jurisdiction to entertain the present application cannot be accepted.7. Then Mr. Kotwal contended that the Court should not have accepted the arbitration agreement, underSection 20of the Arbitration Act, because the proposed arbitrator was an interested body. It is pointed out that the plaintiff-mills are a member of the Ahmedabad Mill-owners Association, and in disputedly one of the objects of that Association is protection of the interests of mill-owners. It is also submitted that Navnitalal Sakarlal, the managing agent of the plaintiff-mills, was the president of the Ahmedabad Mill-owners Association in 1953-54. These allegations are not disputed. But in spite of these circumstances, the defendants chose to enter into a contract with the plaintiff, in which, as I have already stated, they specifically agreed to refer all disputes arising between them to the arbitration of the Ahmedabad Mill-owners Association. In our opinion, therefore, there is no substance in the contention of Mr. Kotwal that the proposed arbitrator was incapable and incompetent because he would be an interested person. Mr. Kotwal tried to suggest that nothing prevented the Ahmedabad Mill-owners Association from appointing the managing agent of the plaintiff-mills as one of the arbitrators. In our opinion, in such a case Mr. Kotwal's client would not be without a remedy, as under Section 5 of the Arbitration Act it would be open to him to approach the Court for revoking the authority of the arbitrator who may come to be appointed by the Ahmedabad Mill-owners Association and the Court will be competent then to deal with such an application and take suitable action under Section 5, it thought fit to do so.8. Then we come to the main contention urged by Mr. Kotwal challenging the legality of the trial Court's order. As I have already stated, it is the defendant's contention that as the plaintiff has exercised his right of reselling the goods, the contract itself would be rescinded by virtue of the provisions of Sub-section (4) ofSection 54of the Sale of Goods Act, and if the entire contract of sale is rescinded then the arbitration clause will also fall along with it. Under Clause (17) of the contract entered into between the parties, the plaintiff was given the right to resell the goods under certain circumstances. Clause (17) runs as follows:-"(17) Failure by the indentors to pay for the drafts on or before the due date or refusal to accept the same will entitle the suppliers, their representatives and/or agents either to sell the documents relating thereto or the relative goods by private sale or public auction on the account and at the risk of the indentors who, beside forfeiting the deposits, if any, shall be liable for losses and expenses caused to the manufacturers thereby."The plaintiffs have resold the bales in pursuance of the right given to them under Clause (17). But, according to Mr. Kotwal, as soon as they did so, Sub-section (4) of Section 54 of the Sale of Gods Act would come into operation and the entire contract would be rescinded with the result that the arbitration clause itself would cease to have any effect. In order to examine this argument of Mr. Kotwal, some of the provisions of theSale of Goods Actwill have to be looked into.Chapter V of the Sale of Goods Actdeals with the rights of an unpaid seller against the goods.Section 45defines an "unpaid seller", andSection 46(1)gives him, notwithstanding that the property in the goods may have passed to the buyer, right of a lien on the goods for the price while he is in possession on them; secondly, in case of the insolvency of the buyer, a right of stopping the goods in transit after he has parted with the possession of them; and, thirdly, a right of re-sale as limited by the Act. Section 54(1) provides that a contract of sale is not rescinded by the mere exercise by an unpaid seller of his right of lien or stoppage in transit. Sub-section (2) inter alia provides that where the goods are of a perishable nature, or where the unpaid seller who has exercised his right of lien or stoppage in transit gives notice to the buyer of his intention to re-sell, the unpaid seller may, if the buyer does not within a reasonable time pay or tender the price, re-sell the goods within a reasonable time and recover from the original buyer damages for any loss occasioned by his breach of contract, but the buyer shall not be entitled to any profit which may occur on the re-sale. Under Sub-section (3), where an unpaid seller who has exercised his right of lien or stoppage in transit re-sells the goods, the buyer acquires a good title thereto as against the original buyer. Then comes Sub-section (4) which provides as follows:-"(4) Where the seller expressly reserves a right of resale in case the buyer should make default, and, on the buyer making default, resells the goods, the original contract of sale is thereby rescinded, but without prejudice to any claim which the seller may have for damages."Mr. Kotwal, therefor, contends that under Sub-section (4) where the seller has exercised his right of re-sale on account of the default committed by the buyer, the original contract is rescinded and all that the seller is entitled to is the right to enforce his claim which he may have for damages. Mr. Kotwal further contends that in such a case the original contract becomes non-existent and, therefore, the arbitration agreement also falls along with it. We are not prepared to accept this argument. Sub-section (4) itself provides that though the original contract of sale is rescinded, that is without prejudice to the seller's claim to recover damages. it does not mean, therefore, that the contract in its entirety becomes non-existent or in-operative. The seller's right to recover damages is expressly saved by virtue of Sub-section (4) of Section 54, and, in our judgment, that must necessarily save the machinery which may be provided by the contract to settle the disputes, if any, regarding damages and for their being ascertained and assessed. As I have already stated, in the present case the plaintiff acted in pursuance of the right conferred on him by Clause (17) of the suit contract, and Clause (15) provides that all disputes in respect of the contract have to be referred to the arbitration of the Ahmedabad Mill-owners' Association, and, in our opinion, this machinery which is provided under the contract would to fall by virtue of Sub-section (4) ofSection 54of the Sale of Goods Act in so far as the dispute as to damages claimed by the plaintiff from the defendant is concerned.9. In support of his argument Mr. Kotwal relied on a decision of the Lahore High Court in Firm Chandu Lal Parma Nand v. Grahams Trading Co. (India) Ltd., ILR (1942) 23 Lah 788 : (AIR 1941 Lah 427). In that case the Court held that the right of re-sale having been exercised by the seller, the contract was annulled completely under Sub-section (4) of Section 54 of the Indian Sale of Goods Act, except with regard to the seller's claim for damages which could be enforced under the ordinary law, and the arbitration clause, being an integral part of the contract, must be taken as abrogated along with the contract which was rescinded by operation of law. In that case, the Court took the view that the rescission of the contract underSection 54(4)meant its complete destruction and the parties under the circumstances would be restored to the relative positions which they would have occupied if no such contract had ever been made. The Lahore High Court followed in that case a decision of the Privy Council in Hirji Mulji v. Cheong Yue Steamship Co. Ltd., 1926 AC 497. But that was a case of frustration of a contract. The plaintiffs in the Privy Council case had agreed to place their steamship at the disposed of the defendants on a certain date for a specified period. The charter party contained a clause by which all disputes arising out of it were to be submitted to arbitration at Hong Kong. Before the date of performance, however, the ship was requisitioned by government and was not released until after the expiry of the period mentioned in the charter party. After the release the plaintiffs offered delivery of the ship but the defendants refused to accept it. Thereupon the plaintiffs referred the matter to arbitration in pursuance of the clause in the charter party. The arbitrator awarded the plaintiffs damages for breach of contract and the plaintiffs brought an action upon the award. It was on these facts that the Privy Council held that there had been a frustration of the charter party, which forthwith brought and end to the whole contract, including the submission to arbitration and, consequently, the arbitrator had no jurisdiction. The Division Bench of the Lahore High Curt followed this case and held that under Sub-section (4) ofSection 54as a result of rescission the contract would be completely destroyed and along with it the arbitration clause. As Tek Chand J. put it, adapting the picturesque phrases of Lord Summer in the Privy Council case, the "phoenix" of the arbitration clause could not be raised again from the "dead ashes" of the contract. With respect, in our opinion, the Privy Council decision which was relied upon by the Lahore High Court is clearly distinguishable, because in that case long before the date of performance of the contract, the ship having been requisitioned by Government the contract itself was frustrated. As Lord Sumner has observed in Hirji Mulji's case, whatever the consequences of the frustrations may be upon the conduct of the parties, its legal effect does not depend on their intention of their opinions or even knowledge, as to the event, which has brought this about, but on its occurrence in such circumstances as show it to be inconsistent with further prosecution of the adventure. Then he proceeded to point out the distinction between rescission and frustration and his observations on this point are worth quoting in view of Mr. Kotwal's argument that the rescission of the contract in the present case would have the same effect as frustration. Lord Sumner observes at pp. 509-510 in Hirji Mulji's case, 1926 AC 497:-" Language is occasionally used in the cases which seem to show that frustration is assimilated in the speaker's mind to repudiation or rescission of contracts. The analogy is a false one. Rescission (except by mutual consent or by a competent Court) is the right of one party, arising upon conduct by the other, by which he intimates his intention to abide by the contact no longer. It is a right to treat the contract as at an end if he chooses, and to claim damages for its total breach, but it is a right in his option and does not depend in theory on any implied term providing for its exercise, but is given by the law in vindication of a breach. Frustration,, on the other hand, is explained in theory as a condition or term of the contract, implied by the law ab initio, in order to supply what the parties would have inserted had the matter occurred to them, on the basis of what is fair and reasonable, having regard to the mutual interests concerned and of the main objects of the contract: See per Lord Watson in Dahl v. Nelson Donkin and Co., (1881) 6 App. Cas 38 at p. 59. It is irrespective of the individuals concerned, their temperaments and failings, their interest and circumstances. it is really a device, by which the rules as to absolute contracts are reconciled with a special exception which justice demands.There is, however, this point of contact between the two case. Though a party may exercise his right to treat the contract as at an end, as regards obligations de futuro, it remains alive for the purpose of vindicating rights already acquired under it on either side. So with frustration. Though the contract comes to an end on the happening of the event, rights and wrongs, which have already come into existence, remain, and the contract remains too, for the purpose of giving effect to them."10. No question of the contract remaining for the purpose of vindicating rights already acquired arose in the Privy Council case, because ,as Lord Sumner pointed out, the contract was wholly executory and the ship was requisitioned before she was placed at the charter's disposal, and frustration had been brought about even before any dispute arose with regard to frustration or its cause or consequences.11. It must also be mentioned that in the House of Lords Case, Heyman v. Darwins, Ltd., (1942) 1 All ER 337, Viscount Simon expressed the view that the judgment in Hirji Mulji's case so far as the effect of frustration of contract on an arbitration clause was concerned, must not be taken as having established a general rule. It was held in that case that where there has been a total breach of a contract by one party so as to relieve the other of his obligations under it, an arbitration clause, if its terms are wide enough, still remains effective. This is so even where the injured party has accepted the repudiation, and, in such circumstances, either party may rely on the clause.12. Then Mr. Kotwal referred to another decision of the Lahore High Court in Radha Kishen v. Bombbay Co. Ltd., AIR 1943 Lah 295. In that case, Abdur Rahman J. followed the earlier decision of the Division Bench of the Lahore High Court to which I have already referred above.13. The view of the Lahore High Court laid down in its earlier decisions has been overruled by ta Full Bench of that Court in Karam Narain Daulat Ram v. Volkart Brother, ILR (1946) 27 Lah 692: (AIR 1946 Lah 116) (FB), which held that where a contract of sale of goods contains an arbitration clause and the seller expressly reserve a right of sale in case the buyer should make default the arbitration clause is not wiped out on the rescission of the contract by the seller by the exercise of his right of re-sale under the contact, and a reference to arbitration can be made in pursuance of the arbitration clause. The Full Bench held that the rescission contemplated in Section 54(1) of the Indian Sale of Gods Act is something less than a complete annulment or destruction of the contract. As a claim for damages by the seller is saved, the contract must be regarded as existing at least for that purpose, otherwise such claim could never be enforced. If the contract must be regarded as still existing for the purpose of claiming damages, there is no reason why it should not be regarded as existing for providing the means for claiming such damages.14. Mr. Kotwal contends that we should not accept the ratio of the Full Bench case of the Lahore High Court in view of the difference in the wording ofSection 54(2),Section 54(4)andSection 60of the Sale of Goods Act. The argument of Mr. Kotwal is that both underSection 54(2)as well as underSection 60of the Act, what are contemplated are damages for the breach of contract, whereas there is reference to damages but not in respect of breach of contract under Sub-section (4) ofSection 54. Mr. Kotwal seems to contend that whereas damages would be assessable by the Court underSections 54(2)and60on the usual basis of the difference between the contract price and the market price as on the date of the breach, underSection 54(4)the seller could claim before the arbitrator damages on the of the difference between the contract price and the price as on the date of the re-sale, and that is why the Legislature contemplated the complete annulment of the contract including the arbitration clause. In our opinion, this argument cannot be accepted as valid for the purpose of finding out the effect of rescission on an arbitration clause under Sub-section (4) ofSection 54. It has been pointed out by Harries, C.J., in the Full Bench case of the Lahore High Court, that there is no real distinction between rescission as contemplated under Sub-section (4) ofSection 54andSection 60of the Sale of Goods Act. UnderSection 60, which deals with anticipatory breach of the contract, one party may accept the other's repudiation and thereby relieve himself from all obligations under the contract. Therefore, underSection 60that party, in effect, by his option rescinds the contract. Under Sub-section (4) ofSection 54it is not incumbent on the seller to re-sell the goods, but if he elects to do so he rescinds the contract or treats it as rescinded., Therefore, the rescission is as much at the option of the party not in default underSection 54, Sub-section (4), as it is underSection 60. But that does not entitle the parties to put an end to the arbitration clause as well. In our judgment, therefore, Mr. Kotwal's argument that by virtue of Sub-section (4) ofSection 54of the Sale of Goods Act the entire contract becomes inoperative, including the arbitration clause, cannot be accepted.15. In that view of the matter, this appeal must fail and the same will be dismissed with costs.16. Appeal dismissed.