CASE ANALYSIS

Appellants: Khardah Company Ltd.

v.
Respondents: Raymon and Co. (India) Private Ltd.
FACTS:
Appellants, who carry on the business of manufacture and sale of June at Calcutta, entered into a
forward contract with the Respondents for the purchase of jute to be delivered in the subsequent
months in specified quantity. Arbitration clause was laid down under clause 14.
Respondents failed to deliver the jute within the specified time and the dispute was referred to
arbitration. The award was made in favour of the appellants.
Respondent filed an application in the High Court contending that the contract was illegal, as it
was in contravention to a notification by the Central Government and thus pleading the award to
be void. However, the application was dismissed.
Respondents filed appeal against the dismissal before the division bench of the Court. The
division bench set aside the award and held that the contract fell within the prohibition of the
notification.
Appellants preferred the present appeal before the Supreme Court challenging the above decision
of the division bench.

ISSUES:
i. Whether the issue relating to illegality of the contract thus invalidating the arbitration
clause could be raised before the Court under S. 33 of the Arbitration Act, 1940?
ii. Whether respondents are estopped for questioning the validity of the award on the
ground that they acquiesced on the matter before the arbitrator?
iii. Whether the contract is non-transferrable specific delivery contract and is hence
exempted from the notification?
LAW POINTS INVOLVED:
Section 33, Arbitration Act, 1940:
Any party to an arbitration agreement or any person claiming under him
desiring to challenge the existence or validity of an arbitration agreement or an
award or to have the effect of either determined shall apply to the Court and the
Court shall decide that question on affidavits:
Provided that where the Court deems it just and expedient, it may set down the
application for hearing on other evidence also, and it may pass such orders for
discovery and particulars as it may do in a suit.
The matters pertaining to the legality of the contract containing the arbitration clause is within
the scope of the courts to decide and cannot be adjudicated by the arbitrators.
Halsburys Laws of England, 3
rd
Edition, Vol. 2, p.24, Para 56:
The matter in question in the legal proceedings which it is sought to stay must be within the
scope of the arbitration agreementif, however, the point in dispute is whether the contract
containing the clause was entered into at all, or was void ab initio, illegal, or obtained by
fraudthe clause does not apply and a stay will be refused.
Section 2(c), Forward contract, Forward Contract (Regulation) Act, 1952:
A contract for the delivery of goods at a future date and which is note a ready
delivery contract.
Section 2(m), Specific delivery contract, Forward Contract (Regulation) Act, 1952:
a forward contract which provides for the actual delivery of specific qualities or
types of goods during a specified future period at a price fixed thereby or be fixed
in the manner thereby agreed and in which the names of both the buyer and the
seller are mentioned.
Section 2(f), non transferable specific delivery contract Forward Contract (Regulation)
Act, 1952:
a specific delivery contract the rights or liabilities under which or under any
delivery order, railway receipt, bill of lading, warehouse receipt or any other
document of title relating thereto are not transferable.
Section 15(1), Forward Contract (Regulation) Act, 1952:
The Central Government may, by notification in the Official Gazette, declare
this section to apply to such goods or class of goods and in such areas as may be
specified in the notification, and thereupon, subject to the provisions contained in
Section 18, every forward contract for the sale or purchase of any goods specified
in the notification which is entered into in the area specified therein otherwise
than [between members of a recognised association or through or with any such
member] shall be illegal.
Section 18(1), Forward Contract (Regulation) Act, 1952:
Nothing contained in Chapter III or Chapter IV shall apply to non-transferable
specific delivery contracts for the sale or purchase of any goods
JUDGEMENT:
Issue 1:
The Court while dealing with the first issue observed the following observation made by Lord
Porter:
Where the contract itself is repudiated in the sense that the original existence or
its binding force is challengedthe parties are not bound by any contract and
[may] escape the obligation to perform any of its terms including the arbitration
clause unless the provisions of that clause are wide enough to include the
question of jurisdiction
The Apex Court after having the perusal of S. 33, Halsburys Law of England, observation made
by Lord Porter held that the dispute relating to the legality of the contract was not the one which
the arbitrators are competent to decide and thus application under S. 33 is maintainable before
the Court.

Issue 2:
The court observed the contention of the appellant which only alleged that the respondents had
acquiesced in the proceedings and held that the arbitration agreement confers jurisdiction on the
arbitrators and in case of no such valid agreement between the parties, there is an initial want of
jurisdiction which cannot be cured by acquiescence.

Issue 3:
The Apex Court observed that all forward contracts except those which are non transferable
specific delivery contracts can be declared illegal by notification issued under the Act. The Court
thus came to the conclusion that the issue at hand in such case was that contract entered into
between the parties was a transferable or a non-transferable contract.
The Court in this regard noted that rights under a contract are assignable unless the contract is
personal in its nature. The court thus went on to see whether the rights which both parties had
under the contract could be transferred by them.
The Court after observing the import license of the appellant and the clause 3 of the contract,
which imposed an additional burden on the respondent before getting the payments, concluded
that both parties had an intention that the rights under the contract could not be transferred to the
third party.
The Court thus held that the contract was a non-transferable specific delivery contract and was
thus exempted under the said notification by the Central Government.

RATIO DECIDENDI:
In cases where the contract containing the arbitration clause has been proved to be void ab initio,
the arbitrators are not competent to decide any question under such contract.
In cases where the contract has been proved to be void ab initio, a party would not be estopped to
move the Court for the reason of mere acquiescence in the arbitral proceedings.