An arbitration agreement does not apply to a dispute arising out of a contract that is void.

Headnote:
ARBITRATION - Validity of arbitration agreement - Disputes arising out of contracts - Contracts not in accordance with bye-laws - Whether arbitration agreement applies - Bombay Cotton Contracts Act (IV of 1932), Sec. 8 - Indian Arbitration Act (X of 1940), Secs. 33, 36.
Fact of the Case:

The petitioner, a member of the East India Cotton Association, applied for a declaration that there existed no valid and enforceable arbitration agreement between him and the respondents, and the persons who were appointed as arbitrators had no authority, and that the alleged transactions in respect of which the disputes had arisen between the parties were outside the scope of Article 96 of the articles of association and bye-law 38-A of the East India Cotton Association, Ltd. In the alternative, the petitioner prayed for revoking the authority of the arbitrators.
Finding of the Court:

The Court held that the arbitration agreement did not apply to the particular difference which was submitted to the arbitrators. Therefore, there was no question of ordering that the arbitration agreement shall cease to have effects and the Court passed no such order. The Court further held that it was not competent for it to pass the order that the condition precedent which is incorporated in Article 36 of the articles of association of the East India Cotton Association should be suspended.
Issues: 1. Whether the arbitration agreement applied to the particular difference which was submitted to the arbitrators? 2. Whether the Court could pass an order that the condition precedent which is incorporated in Article 36 of the articles of association of the East India Cotton Association should be suspended?
Ratio Decidendi: 1. The arbitration agreement did not apply to the particular difference which was submitted to the arbitrators because the contracts were not in accordance with the bye-laws of the East India Cotton Association, Limited, and were therefore void. 2. The Court could not pass an order that the condition precedent which is incorporated in Article 36 of the articles of association of the East India Cotton Association should be suspended because it had not passed any order that the arbitration agreement shall cease to have effect.
Final Decision: The Court declared that the arbitrators had no authority to decide under Article 96 of the articles of association or bye-law 38-A of the East India Cotton Association, Limited, the dispute as to the legality of the contract. The Court further declared that the contracts were void inasmuch as they were not in the official form prescribed. The Court also rejected the submission made by the respondents that the Court should pass an order superseding the arbitration or to relieve the respondents under 3. 36 of the Indian Arbitration Act X of 1940 from the necessity of fulfilling the condition of going to arbitration and obtaining an award under Article 96 before filing a suit on the contracts.

Judgment

(1) This is an application for obtaining a declaration that there exists no valid and enforceable arbitration agreement between the petitioner and the respondents, and the persons who are appointed as arbitrators have no authority, and that the alleged transactions in respect of which the disputes had arisen between the parties were outside the scope of Article 96 of the articles of association and bye-law 38-A of the East India Cotton Association, Ltd. In the alternative the petitioner has prayed for revoking the authority of the arbitrators.

(2) The petition is filed under Sections 33 and 5 of the Indian Arbitration Act X of 1940. The material allegations and submissions made by the petitioner in his petition are these.

(3) The petitioner and the respondents are members of the East India Cotton Association, Limited, and do business in cotton. One Ramanlal Nagindas was in the employ of the petitioner for about four years prior to 1948. Towards the end of April 1948 the petitioner received letters from several merchants calling upon the petitioner to give them delivery of cotton in respect of several delivery contracts. The petitioner made enquiries and found that without any authority the said Ramanlal on his own behalf but wrongfully in the name of the petitioner sold about 20,000 bales and purchased about 16,000 bales of Broach Vijay and Navsari Bardoli (cotton), and that the said transactions had resulted in a loss to the extent) of about Rs. 15 lakhs. Ramanlal had no authority to enter into the transactions and had no authority to sign contract-notes in respect of those transactions. The petitioner denied the factum and legality of the contracts alleged to have been effected by him on behalf of the petitioner. Without prejudice to his rights and contentions, however, the petitioner paid Rs. 16,00,000 to more than about 50 parties who produced contract-notes in official form purporting to be signed by Ramanlal, and satisfied the petitioner that the party had accepted the contract in good faith in the normal course of business. The petitioner, however, suspected that the respondents had colluded with Ramanlal and made claims against the petitioner on the basis of certain transactions which were not genuine. He accordingly denied his liability in respect of those transactions.

Disputes having arisen, the respondents appointed an arbitrator, and called upon the petitioner to appoint his arbitrator. The petitioner appointed his arbitrator under protest. There were in all three arbitration proceedings which were numbered 115/48, 118/48 and 59/49. It was submitted that in fact there was no arbitration agreement, that the arbitration agreement was not valid in law, and that in any case the disputes were beyond the scope of Article 96 of the articles of association of the East India Cotton Association, and hence the effect of the arbitration agreement had to be determined. It was also submitted that in view of the provisions of the Indian Cotton (Control) Order, 1945, and the notified orders issued thereunder the contracts alleged to have been entered into with the respondents were void, and that they were also void because no delivery contracts were rendered as required by the bye-laws of the Association, and the arbitrators had no jurisdiction to decide on the validity of the arbitration agreement. The board of directors of the East India Cotton Association had permitted practices in the Association in connection with cotton business, such as failure to insist upon the compliance with the clearing house bye-laws and periodical settlements in the case of delivery contracts, and consequently the board of directors, who were constituted the forum of appeal accord- ing to the bye-laws, were not an impartial and independent body, and the authority of the arbitrators should therefore be revoked.

(4) The respondents have filed a detailed affidavit controverting the allegations and submissions. They denied the allegation of coll

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Judicial Analysis