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Ghelabhai Mahasukhram Roy Vs. Keshavdev Madanlal Nemani - Court Judgment

LegalCrystal Citation
SubjectArbitration
CourtMumbai
Decided On
Case NumberO.C.J. Appeal No. 48 of 1948 and Award No. 15 of 1948
Judge
Reported inAIR1949Bom343; (1949)51BOMLR499
AppellantGhelabhai Mahasukhram Roy
RespondentKeshavdev Madanlal Nemani
DispositionAppeal dismissed
Excerpt:
arbitration-arbitrator, jurisdiction of, to decide factum of secondary contract-share broker and constituent-disputes between-reference to arbitration-rule of association made a term of contract between contracting parties-such rule binding on parties, even if the rule be attacked as ultra vires-bombay native share and stock brokers' association rule 117(a).;where one of the parties to a reference to arbitration disputes the factum or existence of the contract in respect of which disputes arise and which disputes the arbitrator has got to determine, the arbitrator has no jurisdiction to decide the question whether in fact the contract was entered into or not. but, where there is an outstanding contract between a broker and his constituent as regards the purchase of shares in a joint stock..........was with regard to a sale of two lots of 1,000 bales of cotton and repurchase of the same 2,000 bales. the constituent disputed that he had given any instructions for these transactions at all. therefore the question that had to be determined by the arbitrator was whether there was a contract for sale and purchase of 2,000 bales, the very existence of which contract was denied by one of the parties. the arbitrator had clearly no jurisdiction to decide this question. it is also important to note that in this case mr. justice kania took the view that here was no submission in writing because all that had happened in this case was that a contract note had been sent to the other side and that contract note had been retained. the third decision is again a decision of mr. justice kania and.....
Judgment:

M.C. Chagla, C.J.

1. This is an appeal from a judgment of Mr. Justice Bhagwati dismissing a petition of the appellant to set aside an award. The award came to be made in these circumstances. The appellant engaged the respondent as his broker and the respondent put through many transactions under the rules and bye-laws of the Native Share and Stock Brokers' Association of which he is a member. On October 23, 1947, there was an outstanding transaction of purchases of 125 Tata Deferred shares. According to the broker, on November 5, 1947, the appellant gave him instructions to close this outstanding transaction by a sale of 125 Tata Deferred shares, and pursuant to these instructions the broker closed the outstanding transaction. As a result of this a certain amount became due and payable by the constituent to the broker. The broker made a demand, the constituent failed to make the payment, the matter was referred to arbitration under Rule 117(a) of the Native Share and Stock Brokers' Association, the arbitrator made his award, and it is this award which is being challenged by the petitioner in his petition.

2. Now, the first contention raised before us by Mr. Amin is that the arbitrator was not competent to enter upon a reference because what was disputed before him was the very factum of the contract. It is well established law that if one of the parties to a reference disputes the factum or existence of the contract in respect of which disputes arise and which disputes the arbitrator has got to determine, then the arbitrator has no jurisdiction to decide the question whether in fact the contract was entered into or not. Mr. Amin says that in this case the factum or existence of the contract was disputed by his client and therefore the arbitration was not competent. In order to understand this contention let us see what the' rival contentions of the parties were before the matter went to arbitration. The case of the broker was that on November 5 instructions were given by the constituent through his sub-broker to square up the outstanding transaction of the 125 Tata Deferred shares by entering into a cross contract. The contention of the constituent was that he had given standing instructions to his broker that the outstanding transactions should be badla, and that he went away to Delhi when the transaction was still outstanding. When he returned to Bombay and found that the contract for the transaction of November 5 had been sent to him, he protested and contended that according to his standing instructions the outstanding transaction should have been badla to the next settlement. On these disputes the arbitrator gave his decision holding in favour of the broker.

3. Now, it seems to us that what the arbitrator was considering was how the outstanding transaction of the purchase of 125 Tata Deferred shares was performed. The dispute was with regard to the mode of performance of the outstanding purchase transaction of the 125 Tata Deferred shares. When a constituent buys shares, three ways are open to him for performing that contract. He may either take delivery on the due date, or he may enter into a cross transaction prior to the due date, or he may badli the transaction. In this particular case the broker's contention was that this contract of October 23, 1947, was performed under the instructions of his constituent by entering into a cross contract. The case of the constituent was that this contract was not to be performed in the manner suggested by the broker, but was to be performed by entering into a badla transaction. The contract, the performance of which was in dispute, was not challenged or disputed, and that contract was the contract of October 23, 1947. I entirely agree with Mr. Amin that if either the broker or the constituent had disputed the factum or existence of the contract of October 23, 1947, then it would not have been open to the arbitrator to go into that question. Mr. Amin says that the transaction of November 5 is an independent transaction though in practice it results in closing the outstanding transaction of October 23, 1947; in law these two transactions are independent transactions, and if his client disputes the transaction of November 5, 1947, he is disputing the factum or existence of the contract of November 5, 1947. In my opinion, it is a pure question of fact to be determined upon evidence in each case whether a particular transaction is an independent transaction or is a transaction entered into in relation to a prior transaction and for the purpose of working out the prior transaction. On the evidence here and on the contentions to which I have already drawn attention, it is clear in my opinion that the transaction of November 5, 1947, was not an independent transaction but was a transaction entered into for the purpose of working out and performing the outstanding contract of October 23, 1947.

4. Mr. Amin has drawn our attention to three decisions of this Court which are all of single Judges and who have considered this very question that we are considering. The first is a judgment of Mr. Justice B.J. Wadia reported in Mahomed v. Pirojshaw. (1931) 34 Bom. L.R. 697 In that case there was a sale by the petitioners of 700 bales of cotton of April-May 1931 delivery. The petitioners then alleged that they gave instructions to the respondents to sell a further 800 bales of cotton, but contrary to their instructions the respondents instead of selling 800 bales purchased 800 bales. The petitioners repudiated the purchase and, refused to sign the contract note, and after some correspondence the respondents closed the outstanding purchase of the remaining 100 bales, the other 700 bales having been set off against the first contract of 700 bales. On these facts Mr. Justice B.J. Wadia held that the dispute was with regard to the factum or existence of the contract which was denied and therefore the disputes did not arise out of or in relation to any subsisting contract. It is important to note that the case of the petitioners was that they had asked the brokers to enter into an independent transaction for the sale of 800 bales of cotton. It was not their case that the sale of 800 bales had anything whatever to do with the sale of 700 bales which was an outstanding contract. Nor does it appear that it was the case of the brokers that they had purchased 800 bales in relation to the outstanding contract of the sale of 700 bales. Therefore the dispute between the parties was with regard to the giving of instructions for entering into an independent contract, and as that independent contract was disputed, the arbitrator clearly had no jurisdiction to determine that dispute. Then we come to a judgment of Mr. Justice Kania reported in Shriram Hanutram v. Mohanlal & Co. : AIR1940Bom93 and that is a judgment to the same effect as the judgment of Mr. Justice B.J. Wadia, and Mr. Justice Kania holds that where the fact of the contract itself is in dispute, it was not open to the arbitrator to decide the point and the Court in normal course would refuse a stay, as what he had to consider was whether a suit should be stayed on a notice of motion having been taken out for stay. When we turn to the facts of this case it clearly appears again that the dispute was with regard to a sale of two lots of 1,000 bales of cotton and repurchase of the same 2,000 bales. The constituent disputed that he had given any instructions for these transactions at all. Therefore the question that had to be determined by the arbitrator was whether there was a contract for sale and purchase of 2,000 bales, the very existence of which contract was denied by one of the parties. The arbitrator had clearly no jurisdiction to decide this question. It is also important to note that in this case Mr. Justice Kania took the view that here was no submission in writing because all that had happened in this case was that a contract note had been sent to the other side and that contract note had been retained. The third decision is again a decision of Mr. Justice Kania and that is reported in Sukhanandan Ramdhin v. Manila Kanhialal. : AIR1941Bom82 In this case the brokers closed the outstanding transaction because on a demand being made for margin money the constituent failed to pay it, and when intimation of the closing transaction was given to the constituent, he repudiated the closing transaction. Mr. Justice Kania held that mere repudiation of the closing transaction by the constituent was not a dispute as to the factum or existence of the contract in respect of which the disputes had arisen. Mr. Amin has relied on a passage in the learned Judge's judgment at p. 1138 where he says: 'It is nobody's case that instructions were given for the closing of this transaction which were carried out and the dispute is in respect of such closing.' Mr. Amin contends that if instructions had been given for closing the transaction and there had been a dispute about those instructions, then according to the view of this learned Judge an arbitrator would have had no jurisdiction to go into that question. With very great respect to the learned Judge, that question did not arise before him for determination. All that he had to consider was whether, on a transaction being closed by the broker because the margin money had not been paid and the closing was without instructions and when that closing transaction was disputed, the arbitrator had jurisdiction to decide that dispute. What the position in law would be when a transaction is closed under instructions given by the constituent and when those instructions are disputed, is a matter that did not call for a decision at the hands of the learned Judge. The point was never argued and the learned Judge with respect never considered all aspects of that question. That question really now arises for our determination. Then we have the judgment of the learned Judge, from whose decision this appeal has been preferred, viz. Mr. Justice Bhagwati himself, and that is reported in Fernandez v. Jivatlal Partapshi. (1944) 48 Bom. L.R. 678. This case on facts is identical with the case I have last considered, the judgment of Mr. Justice Kania. Here also the broker closed the transaction as large amounts were due by the constituent to him and those amounts had not been paid. There is one further judgment to which Mr. Amin has referred, and that is again a judgment of a single Judge, Mr. Justice Crump, reported in Uderam v. Shivbhajan. : (1920)22BOMLR711 That case did not consider the question of jurisdiction of the arbitrator to decide disputes with regard to disputed contracts. But Mr. Amin relies on this judgment for the proposition that even though a cross contract may be entered into in order to perform an outstanding contract, the cross contract is an independent contract and has nothing whatever to do with the earlier outstanding contract. In the case before Mr. Justice Crump the question was whether a certain surety had been discharged. He had guaranteed the performance of a particular contract and that contract was a contract of purchase of 100 bales of Broach cotton. The plaintiffs, who were suing the surety in respect of this contract, on hearing reports as to the financial soundness of the seller, agreed to sell to him 100 bales of Broach cotton for the same delivery, and the plaintiffs sued the surety to recover the difference between the rates of the two contracts, and the contention of the surety was that he was discharged from his suretyship by reason of the second contract. Mr. Justice Crump held that the surety was not discharged because each of the contracts was capable of performance on the due date and there was no rescission of the original contract by a new agreement. It is significant to note that there is no suggestion in this case that the second contract, viz. the sale of 100 bales of cotton, was entered into pursuant to any instructions which were given for the purpose of carrying out the original contract of purchase of 100 bales, and it was on these facts that Mr. Justice Crump held that the second transaction was an independent transaction and the surety was not discharged.

5. We fail to see, in principle, what difference there can be between a case where a broker closes an outstanding transaction because no margin has been paid to him and the rules permit him to perform the outstanding contract by entering into a cross contract and closing the outstanding contract, and a case where the broker enters into a cross contract pursuant to instructions given by the constituent. The only principle which can be deduced from these cases is that the second contract must be in performance of the first contract and must arise out of the first contract in order that the arbitrator could have jurisdiction to consider any dispute that might arise as to whether instructions were given or not with regard to the second contract. Rule 117(a) is a submission clause in respect of any trasactions and contracts made subject to the rules or the Association or with reference to anything arising out of or incidental thereto or anything to be done in pursuance thereof. Therefore, if instructions are given in pursuance of an outstanding contract or in relation to an outstanding contract and those instructions are to close an outstanding contract, we fail to see why the contract entered into in pursuance of those instructions cannot be the subject-matter of the reference even though the instructions may be disputed by the constituent. In our opinion, therefore, the learned Judge was right when he came to the conclusion that on the facts of this case the existence or the factum of the contract was not in dispute.

6. The second point urged by Mr. Amin that Rule 117(a) is ultra vires of the Association because it deals with forward contracts, and under Section 5 of Bombay Act VII of 1925 any rule which deals with the regulation and control of transactions in securities other than ready delivery contracts has to be made subject to the sanction of the Governor General in Council, and it is not disputed that Rule 117(a) has not been made with such sanction. We are prepared to assume that Rule 117(a) is ultra vires of the Native Share and Stock Brokers' Association. But this particular rule has been made a term of the contract between the broker and the constituent. What we have now to consider is not whether the rule is ultra vires; that is entirely an irrelevant consideration. What we have to consider is whether, this particular rule having been made a term of the contract, such a term of the contract is binding upon the parties or not, and Mr. Amin has not suggested any reason why such a term of the contract should not be binding upon the parties. It is not suggested that such a term is against public policy or is illegal or immoral, and therefore we are of the opinion that that being made a term of the contract is binding upon the parties.

7. The result, therefore, is that the appeal must fail and is dismissed with costs.

Coyajee, J.

8. I agree.


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