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Raymon and Co. (India) Private Ltd. Vs. Waverley Jute Mills Co. Ltd. - Court Judgment

LegalCrystal Citation
SubjectContract
CourtKolkata High Court
Decided On
Case NumberA.F.O.O. No. 140 of 1957 (Award Case No. 190 of 1956)
Judge
Reported inAIR1959Cal89
ActsForward Contracts (Regulation) Act, 1952 - Sections 1, 2, 15, 17, 18, 18(1), 18(3), 26 and 27; ;Constitution of India - Articles 14 and 246
AppellantRaymon and Co. (India) Private Ltd.
RespondentWaverley Jute Mills Co. Ltd.
Appellant AdvocateSubrata Roy Chowdhury, Adv.
Respondent AdvocateB. Das, Adv.
DispositionAppeal allowed
Cases ReferredKathi Raning Rawat v. State of Saurashtra
Excerpt:
- .....the west bengal jute goods futures ordinance was held to come under item no. 27 of the provincial list (list ii of the seventh schedule) relating to 'trade and commerce within the province' and not under item no. 10 of list iii (concurrent list) relating to 'contracts, including partnership, agency, contracts of carriage etc.' although this decision was reversed on the merits by the supreme court in duni chand v. bhuwalka bros. ltd., : [1955]1scr1071 , the decision with regard to the validity or the ordinance was affirmed at p. 1082 (of scr): (at p. 188 of air). it was contended that since a legislation on jute goods futures was held to come under 'trade and commerce' within the provincial list, the legislation on forward contracts should also come under that head. this argument is.....
Judgment:

S.C. Lahiri, J.

1. The two points which arise for consideration in this appeal are (1) whether the contract for the sale of jute entered into by the appellant with the respondent is hit by the Forward Contracts (Regulation) Act of 1952 and (2) whether the Forward Contract (Regulation) Act is a valid legislative enactment. The first point has been raised by the appellant whose application for setting aside the award made by the Bengal Chamber of Commerce and Industry has been dismissed by P. B. Mukharji J., by an order dated 20-5-1957 and the second point has been raised by the respondent which has obtained the award.

2. The facts which are relevant for the purposes of this appeal are these: On September 9, 1955 the appellant entered into a contract for the sale of 2250 bales of jute cuttings of Pakistan (Raw Jute) with the respondent in the standard form of the Indian Jute Mills Association which contains a clause for arbitration by the Bengal Chamber of Commerce and Industry. Under the contract delivery was to be given in the following manner (a) 750 Bales by October, 1955; (b) 750 bales by November, 1955 and (c) 750 bales by December, 1955. The appellant delivered 2000 bales on divers dates but failed to deliver the balance of 250 bales on account of alleged interference by the Government of Eastern Pakistan. Disputes having thus arisen the respondent referred them to the arbitration of the Bengal Chamber of Commerce and Industry which made an award for a sum of Rs. 10,525/- with interest and costs in favour of the respondent on August 10, 1956. The appellant filed an application for setting aside the award which has been dismissed with costs by an order dated 20-5-1957 by P. B. Mukharji J.

3. The learned trial Judge has not delivered any judgment; but from the application filed by the appellant it is clear that the award was challenged on the ground that the Tribunal of Arbitration of the Bengal Chamber of Commerce and Industry had no jurisdiction to make the award because the contract dated 7-9-1955 was illegal as offending against the Forward Contract (Regulation) Act of 1952.

4. The Forward Contract (Regulation) Act was passed on 26-12-1952, but all the provisions of the Act did not come into operation at once. Chapter 1 of the Act came into force at once but the remaining provisions including Chapters II to VI were brought into force by a notification dated 24-8-1953. Section 17 which occurs in Chapter IV was thus brought into force on this latter date. It authorised the Central Government to prohibit by notification in the official Gazette, any person from entering into any forward contract for the sale or purchase of any goods or class of goods specified therein except with the permission of the Central Government. Section 17(2) made all forward contracts in contravention of Section 17(1) entered into after the notification illegal. The notification contemplated by Section 17(1) was issued by the Central Government on October 29, 1953 as a result of which all forward contracts in raw jute other than non-transferable specific delivery contracts were made illegal throughout India. On March 23, 1956 the Central Government issued another notification under Section 17 whereby certain classes of forward contracts in raw jute were legalised. We are not, however, concerned in the present appeal with this last notification, because the contract in the present case was entered into on 7-9-1955 during a period of absolute prohibition of all forward contracts in raw jute except non-transferable specific delivery contracts. The question whether contracts of the description with which we are concerned in this appeal are non-transferable specific delivery forward contracts and as such are outside the ban of Section 17 and the notification issued thereunder has been exhaustively considered by this Bench in the case of Agarpara Co. Ltd. v. Sumati Chand Kochar, A. F. O. O. No. 60 of 1956, D/- 15-1-1958 (A), and it has been held in that case that a contract of this type falls within the mischief of Section 17 and the notification and is therefore void. The learned counsel for the appellant has relied upon that decision in aid of the proposition that an award based on such an invalid contract is liable to be set aside. No attempt has been made on behalf of the respondent to distinguish that case from the facts of the present case, nor has it been argued that the decision was not correct and that the contract is outside the ban of Section 17 and the notification; but the constitutional validity of the Forward Contract (Regulation) Act itself has been challenged. The result is that if the impugned Act survives the attack on its constitutional validity the award must be set aside as being based on a void contract.

5. The Forward Contracts (Regulation) Act was passed by the Indian Parliament and it received the assent of the President on December 26, 1952. Its validity has been challenged on three grounds: (a) The Act is beyond the legislative competence of the Parliament, as it deals with and purports to regulate trade and commerce which are within the exclusive jurisdiction of the State legislature, (b) The Act is discriminatory, because it makes a discrimination between forward contracts and other kinds of contracts on no rational basis of classification and is therefore violative of the provisions of Article 14. (c) The Act imposes unreasonable restrictions on trade and commerce and offends against Article 19(1)(g). This last ground was overruled in the case of Agarpara Co. Ltd. v. Sumati Chand Kochar (A), and so it was not pressed in the present appeal.

6. I shall now deal with the points in the order in which they have been argued. According to the respondent, the impugned Act comes under Item No. 26 or 27 of List II of the Seventh Schedule of the Constitution which, according to Article 246, is the State List, while according to the appellant it comes under item No. 48 of List I, the Union List or Item No. 7 of List III, the concurrent List. Item No. 26 of List II is

'Trade and Commerce within the State subject to the provisions of entry 33 of List III.'

Item No. 27 of List II is

'Production, supply and distribution of goods subject to the provisions of entry No. 33 of List III'.

Item No. 48 of List I is 'stock exchanges and futures markets'

and item No. 7 of List III is

'Contracts, including partnership, agency, contracts of carriage and other special forms of contract but not including contracts relating to agricultural land.'

7. The principle upon which the distribution of legislative power between the Central and the State legislature has to be determined is now settled by a series of decisions of the Judicial Committee and the Federal Court. It has been repeatedly pointed out that 'it is not possible to make a clean cut between the powers of various legislatures' Per Lord Porter in Prafulla Kumar v. Bank of Commerce Ltd., Khulna, 51 CWN 599 at p. 609: (AIR 1947 PC 60 at p. 64) (B). What has to be done in cases of overlapping was stated in the following terms by Sir Maurice Gwyer in Subramanyam Chettiar v. Muttuswumi Goundan :

'It must inevitably happen from time to time that legislation though purporting to deal with a subject in one list, touches also upon a subject in another list, and the different provisions of the enactment may be so closely intertwined that that blind adherence to a strictly verbal interpretation would result in a large number of Statutes being declared invalid, because the legislature enacting them may appear to have legislated in a forbidden sphere. Hence the rule has been evolved by the Judicial Committee whereby the impugned Statute is examined to ascertain its 'pith and substance' or its 'true nature and character' for the purpose of determining whether it is legislation with respect to matters in this List or that'.

This passage was cited with approval by Lord Porter in the case of Bank of Commerce (B), as laying down the true rule upon which the doctrine of 'pith and substance' is founded. To the same effect are the observations of Lord Atkin in Gallagher v. Lynn, (1937) AC 863 (D), which are as follows :

'It is well established that you are to look at the 'true nature and character' of the legislation, the 'pith and substance' of the legislation. If, on the view of the statute as a whole, you find that the substance of the legislation is within the express powers, then it is not invalidated if incidentally it affects matters which are outside the authorised field. The legislation must not under the guise of dealing with one matter in fact encroach upon the forbidden field.'

It is unnecessary to multiply authorities. There can be hardly any doubt that the impugned Act, though purporting to legislate on forward contracts or on futures markets, also touches upon 'Trade and commerce within the State' and 'Distribution of goods' which are subject-matters of entries Nos. 26 and 27 of the State List. The relevant enquiry accordingly is whether the 'true nature and character' of the Act or its 'pith and substance' is to legislate on 'Trade and Commerce' or 'distribution of goods'. This question must be answered on a consideration of the title of the Act, the object for which it was passed and also its main provisions. The title shows that the Act was passed for regulating a species of contracts called 'forward contracts'. Section 2(c) defines a forward contract as a contract 'for the delivery of goods at a future date which is not a ready delivery contract'. Section 2(i) defines a ready delivery contract as a contract which 'provides for the delivery of goods and the payment of a price therefor, either immediately or within a period not exceeding eleven days after the contract'. The combined effect of Clauses (c) and (i) of Section 2 is that a forward contract is a contract for the sale or purchase of goods which postpones the delivery of goods and the payment of price therefor for a period exceeding eleven days. Section 17 and the notification issued under it again invalidate a particular class of forward contracts which have been described as transferable specific delivery contracts and defined in Section 2 and which have been entered into without the permission of the Central Government, The object of the Act, as far as it can be gathered from the preamble is to 'regulate certain matters relating to forward contracts and the prohibition of options in goods.' Option in goods has been defined in Section 2(g) as

'an agreement for the purchase or sale of a right to buy or sell or a right to buy and sell goods in future.'

During the last war and immediately thereafter it was realised that uncontrolled forward trading was not healthy for the economic life of the country and in certain situations it had a tendency to accentuate fluctuations of prices in essential commodities to the serious detriment of the producers and consumers. To remedy this evil orders were issued under Rule 81 of the Defence of India Rules to regulate forward trading. After the lapse of the Defence of India Rules, necessity was felt for adopting a comprehensive legislation for that purpose and with that end in view, the Indian Parliament, enacted the impugned Act. To my mind the pith and substance of the Act is to regulate 'futures market' which comes under the express powers of the Indian Parliament, being entry No. 48 of List I of the Seventh Schedule of the Constitution and though it incidentally affects 'trade and commerce within the State' or 'Supply and distribution of goods' which are entries Nos. 26 and 27 of the State List, that is not sufficient to invalidate the Act according to the authorities which I have already referred to. There has been some discussion at the Bar with regard to the true meaning of the word 'Futures'. In the Encyclopaedia Britannica the word has been defined as

'contracts which consist of a promise to deliver specified qualities of some commodity at a specified future time. The obligation is for a single quantitv in a given month .............. Futures are thus a form of security, analogous to a bond or promissory note. They are traded like any other security and may be bought and sold many times before the date of maturity. In a competitive market their price is determined like any other at the level the quantity demanded is equal to the quantity supplied.'

According to the definition of forward contracts, as given in Section 2 of the impugned Act, they are 'futures' and therefore an Act intended to regulate forward contracts is an Act relating to 'Futures markets'.

8. The learned counsel for the respondent relied upon the decision of a Special Bench of this Court in the case of Bhuwalka Brothers v. Dunichand, : AIR1952Cal740 , where the West Bengal Jute Goods Futures Ordinance was held to come under Item No. 27 of the Provincial List (List II of the Seventh Schedule) relating to 'Trade and Commerce within the Province' and not under Item No. 10 of List III (Concurrent List) relating to 'Contracts, including partnership, agency, contracts of carriage etc.' Although this decision was reversed on the merits by the Supreme Court in Duni Chand v. Bhuwalka Bros. Ltd., : [1955]1SCR1071 , the decision with regard to the validity or the ordinance was affirmed at p. 1082 (of SCR): (at p. 188 of AIR). It was contended that since a legislation on Jute Goods Futures was held to come under 'Trade and Commerce' within the Provincial List, the legislation on Forward Contracts should also come under that head. This argument is based on a misconception. In the case of : AIR1952Cal740 the Court was considering the distribution of legislative powers under the Government of India Act 1935 which contained no entry corresponding to entry No. 48 of the Union List relating to futures markets under the Constitution of India. This item was introduced for the first time by the Constitution and did not fall for consideration in Bhuwalka Brothers' case (E). Accordingly, I hold that the impugned Act is within the express powers of the Indian Parliament under entry No. 48 of the Union List I, and is not invalidated by reason of the fact that it incidentally affects trade and commerce which are outside the Union List.

9. The learned counsel for the appellant also argued that even if the impugned Act does not come under entry No. 48 of List I it certainly comes under entry No. 7 of List III (Concurrent List) relating to 'Contracts' and is therefore within the legislative competence of the Parliament. It is true that the Act purports to regulate a certain species of contracts described as forward contracts but those contracts are sought to be regulated only in so far as it is necessary to prohibit options in goods. Section 17, read with the notification, does not invalidate all forward contracts but only those which are transferable specific delivery contracts. According to Section 18(1) non-transferable specific delivery contracts, however, are outside the ban of Section 17 and the notification. From these provisions it is clear that the true object of the Act is to prevent speculation in forward contracts, where the intermediate buyer and seller have not to pay the actual price, but only the difference and where no delivery is required to be given. The Act was passed to put a stop to such kind of forward trading which really comes within the meaning of 'Futures'. Accordingly it seems to me that the provisions of the Act relating to contracts are incidental and ancillary to the main purpose of prevention of speculation in futures. I, therefore, hold that the Act does not come under entry No. 7 of the Concurrent List. But I should point out that even if the Act comes under item No. 7 of the Concurrent List, it will be intra vires, because under Article 246(2) of the Constitution the Parliament is competent to legislate on any matter included in List III.

10. It now remains for me to consider the question whether the Act contravenes Article 14 of the Constitution. The attack on this ground consists of two parts. It is argued in the first place that the Act is discriminatory in so far as it singles out a certain class of forward contracts to the exclusion of other kinds of contracts for the purpose of invalidating them. This argument is entirely devoid of substance. It has been pointed out by the Supreme Court in a series of decisions beginning with Charanjitlal Chowdhury v. Union of India, : [1950]1SCR869 that

'Article 14 does not forbid classification for legislative purposes, provided such classification is based on some differentia having a reasonable relation to the object and purpose of the law in question.'

The Act divides all contracts for purchase and sale into two classes (a) Forward contracts and (b) Ready delivery contracts. Forward contracts again are sub-divided into two sub-classes (1) Specific delivery contracts & (2) Non-specific delivery contracts. Specific delivery contracts again are sub-divided into (i) Transferable and (ii) Non-transferable Specific delivery contracts. Section 18(1) excludes non-transferable specific delivery contracts from the provisions contained in Chapters III and IV of the Act, including Section 17 except those which come under Section 18(3). It will thus be seen that the Act aims at prohibition of speculation in futures and the classification made has a reasonable relation to that aim. According to the decision in Charanjitlal's case (G), there is a presumption of validity of legislative classification and it is for those who challenge it to prove that the impugned Act arbitrarily, discriminates between persons similarly circumstanced. There is no material before us from which it can be inferred that persons who enter into contracts which are outside the ban of the Act are similarly situated as persons who enter into contracts which are within the mischief of the Act. The first branch of the argument that the Act violates Article 14 of the Constitution as it is discriminatory must accordingly be overruled.

11. The second ground of attack under Article 14 is founded on Sections 26 and 27 of the Act. Those two sections are in the following terms:

Section 26--'The Central Government may by notification an the official Gazette, direct that any power exercisable by it under the Act may in such circumstances and subject to such conditions, if any, as may be specified, be exercised by such officer or authority including any State Government or officers or authorities thereof as may be specified in the direction'.

Section 27--'The Central Government may By notification in the Official Gazette, exempt, subject to such conditions and in such circumstances and in such areas as may be specified in the notification any contract or class of contracts from the operation of all or any of the provisions of this Act.'

12. It is argued that this unrestricted power of delegation and the unfettered discretion in the matter of granting exemption enable the Central Government or its delegate to make a 'discriminatory choice' between persons entering into the same class of contracts and therefore these two sections, at any rate, are void. This point is of no practical importance in the present case, because here we are not concerned with any thing done in exercise of delegated authority, or with any order of exemption made under Section 27 of the Act. These two sections are clearly severable from the remaining portion of the impugned legislation, and even if these two sections be void it would be of no assistance to the respondent. But apart from this, the argument has no merits whatsoever, because it is covered by the decision of the Supreme Court in the case of Kedar Nath v. State of West Bengal, : 1953CriLJ1621 where precisely this point arose for the consideration of the Court. In that case Section 4(1) of the West Bengal Criminal Law Amendment (Special Courts) Act of 1949 was challenged on the ground that it vested absolute and unguided power on the Provincial Government to 'single out for different treatment one among a class of persons all of whom were similarly situated' by directing him to be tried by a special court under a procedure which was entirely different from that prescribed by the Code of Criminal Procedure and this unrestricted power of discrimination violated the equal protection clause of the Constitution. In that case reliance was placed upon the decision in the case of State of West Bengal v. Anwarali Sarkar, : 1952CriLJ510 . In dealing with that argument Patanjali Sastri C. J. made the following observations at pages 41-42 (of SCR): (at p. 407 of AIR):

'This argument overlooks the distinction between those cases where the legislature itself makes a complete classification of persons and things and applies to them the law it enacts and others where the legislature merely lays down the law to be applied to persons or things but being unable to make a precise and complete classification, leaves it to an administrative authority to make a selective application of the law ........'

If an impugned Act belongs to the former class it will be valid, but if it comes under the latter it will be invalid. Anwar Ali Sarkar's Case (I) comes under the latter class but Kathi Raning Rawat v. State of Saurashtra, : 1952CriLJ805 comes under the former and according to the judgment of the Supreme Court Kedar Nath Bajoria's case (H) also fell on the same side of the line as the Saurashtra case (J). The principle laid down by the Supreme Court in Kedarnath Bajoria's case (H), therefore is that if an impugned statute indicates the underlying policy for which it was enacted and is based on a rational classification of the subjects to which it is intended to apply, it will not be regarded as violative of the provisions of Article 14 of the Constitution if it leaves to the administrative authority the selective application of the statute to particular subjects. Judged by this test the Forward Contracts (Regulation) Act 1952 cannot be said to contravene Article 14. It clearly indicates the purpose for which it was enacted and also gives a rational classification of the subjects to which it is intended to apply, and therefore it matters nothing if it leaves to the Central Government or its delegate the power of making a selective application of its provisions.

13. This decision, however, does not solve all the problems because it has been further contended that Sections 15 and 17 of the impugned Act give unguided and unfettered discretion to the Central Government in the matter of selection of goods and classes of contracts which can be brought under the ban imposed by those two sections and thus empower the Central Government to discriminate between one class of goods and contracts and another in violation of Article 14. The object of the Act is to regulate forward markets by authorising the Central Government to exercise various kinds of power in respect of associations concerned with the regulation and control of forward contracts as specified in Chapter III of the Act and also to bring specific classes of goods and contracts under the ban of Sections 15 and 17. The Act provides that in the exercise of all these powers the Central Government is to be guided by the recommendations of the Forward Markets Commission established under Section 3 of the Act and the advice of the Advisory Committee established under Section 25. The functions of the Forward Markets Commission, as enumerated in Section 4 indicate that the Commission is to make recommendations in respect of the powers that can be exercised by the Central Government under Chapter III, to keep forward markets under observation, to

'collect information regarding trading conditions in respect of goods to which any of the provisions of the Act is made applicable.'

and to

'draw the attention of the Central Government ........to any development taking place in forward markets.'

The policy of the Act is that in granting or refusing recognition to associations concerned with forward contracts and tin regulating their activities by exercising the powers conferred on the Central Government by Chapter III of the Act and also in selecting goods and classes of contracts to be brought under the ban of Sections 15 and 17, the Central Government is to be guided by the recommendations of the Forward Markets Commission and the advice of the Advisory Committee. The Resolution No. 40-Export (7)/56 of the Ministry of Commerce and Consumer Industries as published in the Gazette of India Extraordinary--on November 1, 1956--shows the guidance given to the Central Government by the Forward Markets Commission. It recites seven recommendations made by the Forward Markets Commission and ends by stating that the Central Government have accepted all the recommendations with the modifications noted in paragraph 2 of the resolution.

14. The guidance afforded by the legislature must vary with the nature and character of the subject dealt with by the enactment. In the case of West Bengal Criminal Law Amendment Act (XXI of 1949) which was upheld by the Supreme Court in Kedarnath Bajoria's case (H) there is a schedule containing eight categories of offences triable by a special court and the State Government has been given the power by Section 4 to select any case coming under any of those categories for trial by the special court. If any person is accused of an offence enumerated in the Schedule the State Government may or may not, in the exercise of its 'discretion, select it for trial by a special court. It was argued that this power of the State Government to make a discrimination between persons accused of the same class of offences enumerated in the schedule was obnoxious to Article 14. In repelling this contention the Supreme Court, following the Saurashtra case, : 1952CriLJ805 observed as follows:

'If the impugned legislation indicates the policy which inspired it and the object which it seeks to attain, the mere fact that the legislation does not itself make a precise and complete classification of the persons or things to which it is to be applied, but leaves the selective application of the law to be made by the executive authority in accordance with the standard indicated or the underlying policy and object disclosed, is not a sufficient ground for condemning it as arbitrary and obnoxious to Article 14.'

15. In view of the complexities of forward markets it is hardly possible to enumerate the categories of goods and contracts which can be brought under the mischief of the Act and for this purpose it was thought necessary to establish a permanent statutory commission whose main function would be to study forward markets and make recommendations. The recommendations made by the commission would furnish the data on which the Central Government would make a 'Selective application of the law'. Such a discretion, to quote the words of the Supreme Court, is a 'guided and controlled discretion and not an absolute and unfettered one', and is not per se violative of Article 14. The guidance given by the legislature with regard to forward contracts by the impugned Act is of the same nature and character as that afforded by the West Bengal Criminal Law Amendment Act (XXI of 1949).

16. The attack on the validity of the impugned Act thus fails and as the contract in the present case falls within the mischief of Section 17 and the notification issued thereunder it must be held to be void. The award based on such a void contract must therefore be declared to be a nullity.

17. Before concluding I should note that during arguments before us a question was raised as to whether we should issue a notice on the Attorney General of India under Order XXVII A of the Code of Civil Procedure because the appeal involves substantial questions of the interpretation of the Constitution in relation to a Central Act. Since all the questions involved in the appeal are concluded by decisions of the Supreme Court, the Federal Court and the Privy Council, we did not think it necessary to issue any such notice.

18. In the result, this appeal succeeds, the order of P. B. Mukharji J. dated May 20, 1957 is set aside and the application filed by the appellant to set aside the award is allowed with costs here and below.

19. Certified for two counsel.

P. Chakravartti, C.J.

20. I agree.


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