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M/S. Alagappa Cotton Mills, Rajapalayam v. Indo Burmah Trading Corporation, Madras And Others
Factual and Procedural Background
M/s. Alagappa Cotton Mills, Rajapalayam, filed a revision petition against an order of the Principal Subordinate Judge, Ramanathapuram at Madurai, in O.P 82 of 1973. The petitioners challenged the validity of an arbitration agreement purportedly arising from a contract dated 16-10-1970 with M/s. Indo Burmah Trading Corporation, Madras. The petitioners sought a declaration that no valid arbitration agreement existed and an injunction restraining respondents 2 and 3, the arbitrators, from proceeding with the arbitration.
The contract contained a clause stating that disputes should be settled only in the courts within the jurisdiction of the sellers. The first respondent added a rubber-stamped clause (Ex. A-2) stating that the contract was subject to the Standard Contract Form No. 2, which included an arbitration clause. The petitioners denied acceptance of this clause, asserting by letter (Ex. A-4) that the contract was subject only to the originally signed terms and not the Standard Form No. 2. There was a dispute as to whether this letter was received by the first respondent; the lower court found it was not.
Following a misunderstanding and incomplete performance of the contract, the first respondent appointed arbitrators, with one partner of the petitioners agreeing to arbitration. The petitioners later filed a written statement under protest, challenging the arbitrators’ jurisdiction.
Legal Issues Presented
- Whether there was an agreement between the parties to refer their disputes to arbitrators?
- Whether the consent by one of the partners of M/s. Alagappa Cotton Mills to arbitration would bind the partnership?
- Whether by filing a written statement, though under protest, the partnership submitted to the arbitration?
Arguments of the Parties
Petitioners' Arguments
- The petitioners contended there was no valid arbitration agreement as the original contract did not contain an arbitration clause and the additional clause introduced by the first respondent was never accepted.
- They argued that the letter sent denying acceptance of the arbitration clause was not received by the first respondent, but this was a factual dispute resolved against them by the lower court.
- They maintained that one partner’s consent to arbitration could not bind the entire partnership under the Partnership Act.
- The filing of the written statement under protest did not amount to submission to arbitration.
Respondents' Arguments
- The respondents argued that the arbitration clause in the Standard Contract Form No. 2 was incorporated into the contract by the rubber stamp and that the petitioners accepted this by acting on the contract and supplying goods.
- They submitted that the reference to incentives in the contract indicated acceptance of the Standard Contract Form terms, which included arbitration.
- They contended that one partner’s consent to arbitration bound the partnership.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Waverley Jute Mills v. Raymon and Co., AIR 1963 SC 90 | Arbitrators’ jurisdiction depends on existence of a valid arbitration agreement; consent cannot confer jurisdiction if agreement is absent. | The Court applied this principle to hold that without a valid arbitration agreement, the arbitrators had no jurisdiction, and the filing of a written statement under protest did not confer jurisdiction. |
| Union Of India v. A.L Rallia Ram, AIR 1963 SC 1685 | This precedent was cited alongside Waverley Jute Mills to support the principle that jurisdiction depends on a valid arbitration agreement and cannot be conferred by mere consent. | The Court relied on this authority to reinforce the conclusion that the arbitrators lacked jurisdiction in absence of a valid arbitration clause accepted by both parties. |
Court's Reasoning and Analysis
The Court examined the contract and found that the original contract form signed by the petitioners did not contain any arbitration clause but instead provided for dispute resolution exclusively in courts within the seller’s jurisdiction. The first respondent’s addition of the arbitration clause by rubber stamp was not shown to have been accepted by the petitioners. The Court rejected the argument that the mention of incentives in the contract implied acceptance of the Standard Contract Form, clarifying that parties may choose whether or not to conform to the Standard Form, with the only consequence being loss of incentives if they do not.
The Court further analyzed the authority of a partner under the Partnership Act, specifically Section 19, and held that a partner does not have implied authority to submit disputes to arbitration binding on the firm. Thus, the consent of one partner to arbitration did not bind the partnership.
Regarding the filing of the written statement under protest, the Court held that since there was no valid arbitration agreement, the question of whether such filing constituted submission to arbitration need not be addressed. Citing Supreme Court precedents, the Court emphasized that arbitrators’ jurisdiction depends on the existence of a valid arbitration agreement and that consent or conduct cannot confer jurisdiction where none exists.
Holding and Implications
The revision petition is allowed with costs and the order under challenge is set aside.
The Court held that there was no valid arbitration agreement between the parties as the arbitration clause introduced by the first respondent was not accepted by the petitioners. Further, the consent of one partner did not bind the partnership to arbitration, and the filing of a written statement under protest did not confer jurisdiction on the arbitrators. The direct effect of this decision is that the arbitration proceedings initiated are without jurisdiction and cannot continue. The opinion does not establish any new precedent beyond applying established principles concerning arbitration agreements and partnership authority.
1. The revision petition is by M/s. Alagappa Cotton Mills, Rajapalayam, against the order of the learned Principal Subordinate Judge, Ramanathapuram at Madurai, in O.P 82 of 1973. The petitioners, M/s. Alagappa Cotton Mills, filed the O.P under Sections 31 to 33 of the Arbitration Act, praying to declare that there is no valid arbitration agreement in respect of the contract form dated 16-10-1970, and for an injunction restraining the respondents 2 and 3, the arbitrators, from proceeding with the enquiry and making any award in the proceedings pending before them.
2. The facts of the case necessary for the disposal of this petition are as follows:— Under Ex. A-1, the petitioners, M/s. Alagappa Cotton Mills, and the first respondent, M/s. Indo Burmah Trading Corporation, Madras, entered into a contract on 16-10-1970. A clause in the contract provides that dispute, if any, shall be settled only in the Courts in the jurisdiction of the sellers. There is another clause which provides all the incentives both that of the manufacturer's as well as the Exporters' both the current and future including the distance premium to the buyer's account. The form Ex. A-1 was signed by the petitioners, M/s. Alagappa Cotton Mills and sent to the first respondent, M/s. Indo Burmah Trading Corporation. The first respondent, while signing the agreement, added Ex. A-2 in rubber stamp, which reads as follows—
“Notwithstanding anything contained herein in contravention of the provisions, rules, regulations and conditions as applied/adopted in Standard Contract form No. 2, and as accepted by the Cotton Textile Export Promotion Council this contract is subject to the said standard contract form No. 2 and its terms and conditions.”
3. It is not in dispute that in the Standard Contract form No. 2, which regulates the rights of parties, a clause as to arbitration is provided for. The question is whether this clause has been accepted by both the parties and has come into effect. Ex. A-3 is a letter sent by the first respondent to the petitioner on 6-11-1970. In that letter, the first respondent stated—
“The duplicate of your said contract is returned to you herewith duly signed by us.”
4. In the contract form thus returned, after acceptance, Ex. A-2 in rubber stamp was put in. Now, the question is whether this condition in the rubber stamp was accepted by the petitioners. The petitioners, case is that under Ex. A-4, dated 9-11-1970, while acknowledging the receipt of the letter of the first respondent, they specifically stated that the contract was subject to the terms and conditions in the agreement signed, and not according to the Form No. 2. Along with that, a certificate of posting Ex. A-5 was also produced before the Court. There is some dispute as to whether this letter was in fact received by the first respondent. According to the learned counsel for the petitioners, this letter was marked by consent whereas according to the first respondent it was never received by them. The lower Court has given a finding that this letter was not received by the first respondent. I do not see any reason for allowing the petitioners to question this finding.
5. Subsequently, there was some misunderstanding between the parties and the contract was not fully performed. The first respondent took steps for referring the matter to the Arbitrators. Ex. B-1, the notification of the appointment of the Arbitrators, was sent to the petitioners, and one of the partners of the petitioners, firm agreed to the appointment of the arbitrators to settle the disputes between the parties. This was signed on behalf of M/s. Alagappa Cotton Mills by one of the partners. After taking two adjournments to enable them to file a written statement, the petitioners filed the written statement Ex. A-13 on 9-7-1973. At the outset, in the written statement, the petitioners M/s. Alagappa Cotton Mills submitted that the Arbitrators had no jurisdiction to entertain, try and dispose of the claims made by the first respondent against the petitioners. In paragraph 2, it is stated that the petitioners were appearing under protest and the written statement was filed under protest and the rest of the written statement was without prejudice to and without waiving the aforesaid contentions and submissions of the petitioners.
6. On these facts, the questions that arise for consideration are:
1. Whether there was an agreement between the parties to refer their disputes to arbitrators?
2. Whether the consent by one of the partners of M/s. Alagappa Cotton Mills to arbitration would bind the partnership?
3. Whether by filing a written statement, though under protest, the partnership submitted to the arbitration?
7. It is common ground that the original form of contract, which was sent by the petitioners for the first respondent's signature did not have any clause for reference to arbitration. On the other hand, it was provided that if there was any dispute, it would be settled in the Courts within the jurisdiction of the sellers. The first respondent accepted the contract and returned the contract duly signed by them. Though, in their letter accepting the contract, there was no mention about the contents, Ex. A-2 was put in by affixing the rubber stamp. It was vehemently contended by the learned counsel for the respondents that Ex. A-2 the clause that was put in by the rubber stamp, formed part of the contract, firstly by incorporation and secondly in any event, by the petitioners accepting those terms by acting on the contract and supplying the goods. The first contention is based on the ground that the contract Ex. A-1 sent by the petitioner refers to incentives, providing “all the incentives both that of the manufacturers as well as Exporters both the current and future including the distance premium to buyer's account.” It was submitted by Mr. N.C Raghavachari, learned counsel for the first respondent, that this incentive refers to the scheme by the Government, which provided incentives to the manufacturers and exporters. Under the Notification of the Government of India, Ministry of Commerce and Industry, Office of the Textile Commissioner, dated 30-9-1960, it was provided that the benefits of the Cotton Textiles Export Incentives Scheme of the Government should be made applicable only to those mills and exporters, who had complied with the terms and conditions of the abovesaid Standard Contract Form. The Notification itself commences by stating that the adoption of a Standard Contract formulated by the Cotton Textile Export Promotion Council is recommended. It is also mentioned in the Notification that the adoption of the Cotton Yarn Export Contract will be a condition of eligibility for exporters exporting cotton yarn and mills to receive against the exports of cotton yarn, import entitlements as prescribed under the Cotton Textiles Export Incentive Scheme. From the fact that reference is made to the incentive in the contract and as adoption of the Standard Contract is necessary to entitle the parties to incentives, it was submitted that an agreement has to follow the terms of the standard contract, as has been agreed upon by the parties. I am unable to accept this contention for, though for securing the incentive benefit, it is necessary to conform to the standard contract envisaged by the Government of India, it is upto the parties to conform to the Standard form or not. The only consequence is that if the form is not conformed, the parties will not be entitled to incentives. The mere mention of incentives in the contract form would not mean that they have agreed to abide by the terms of the Standard Form. On the other hand, as already pointed out, the reference to the jurisdiction of the Civil Courts within the seller's area would denote that the arbitration was not contemplated by the parties at that time.
8. The second contention was that this clause, which was added affixing the rubber stamp, was agreed upon by the petitioners. There is no evidence to show that the petitioners agreed to the condition. But Mr. N.C Raghavachari, the learned counsel, would submit that the mere fact that the petitioners despatched the goods would show that the petitioners agreed to abide by the conditions contemplated in the rubber stamp. This contention cannot be accepted, for in the letter returning the contract, the first respondent did not mention about the conditions stipulated by affixing the rubber stamp. On the other hand, the contract Ex. A-1 was signed without any reservation as found in the letter sent by the first respondent. There is hardly any material to show that the additional clause put by the first respondent was agreed upon by the petitioner. From the fact that the goods were sent by the petitioners, it cannot be inferred that they agreed to the conditions imposed by the first respondent for they were acting on the letter of the first respondent, which accepted the conditions as found in Ex. A-1. Therefore, it has to be found that the petitioners never agreed to the condition as to arbitration or as laid down in the standard form No. 2.
9. The next question that arises for consideration is whether the partnership was bound by one of the partners intimating his willingness for arbitration on behalf of the firm. Section 19 of the Partnership Act provides—
“1. Subject to the provisions of Section 22, the act of a partner, which is done to carry on, in the usual way, business of the kind carried on by the firm, binds the firm.”
10. The authority of a partner to bind the firm conferred by this section is called as ‘implied authority’.
11. Sub-section (2) provides—
“2. In the absence of any usage or custom of trade to the contrary the implied authority of a partner does not empower him to (a) submit a dispute relating to the business of the firm to arbitration.”
12. Reading this section, which is subject to Section 22, it is clear that under sub-section (1), the act of a partner will bind the firm, if it is carried on in the usual way. Sub-section (2) clearly states that the implied authority of a partner does not empower him to submit a dispute relating to the business of the firm to arbitration. Section 19 is subject to Section 2, which prescribes the mode of doing an act to bind the firm. Section 22 reads—
“In order to bind the firm, an act or instrument done or executed by a partner or other person on behalf of the firm shall be done or executed in the firm's name, or in any other manner expressing or implying an intention to bind the firm.”
13. Section 22 refers to the act of a partner which is done to carry on in the usual way the business of the kind carried on by a firm in order to bind the firm. The mode that is required to be adopted is that the person should express that he was acting on behalf of the firm implying an intention to bind the firm. But this would not empower the partner to submit a dispute relating to the business of the firm to arbitration. Therefore, the letter of one the partners accepting the arbitration cannot bind the partnership.
14. The only other contention that was raised was that the firm by taking two adjournments for fling the written Statement and by filing the written statement has submitted to arbitration. As already pointed out, though two adjournments were taken, in paragraphs 1 and 2 already cited, they clearly questioned the jurisdiction and stated that they were filing the written statement under protest. The question whether the filing of the written statement, even though under protest, would confer jurisdiction on the Arbitrators or not need not be gone into, as in this case, there is no clause in the original form No. 2 to submit to arbitration. As has been pointed out, the clause that was inserted by affixing the rubber stamp was not agreed upon by the petitioners. In such circumstances, the decision of the Supreme Court reported in Waverley Jute Mills v. Raymon and Co., AIR 1963 SC 90 and Union Of India v. A.L Rallia Ram, AIR 1963 SC 1685, would become applicable. The Supreme Court has, in Waverley Jute Mills v. Raymon and Co., AIR 1963 SC 90 at p. 97 pointed out:
“Now, an agreement for arbitration is the very foundation on which the jurisdiction of the Arbitrators to act rests, and where that is not in existence, at the time when they enter on their duties, the proceedings must be held to be wholly without jurisdiction. And this defect is not cured by the appearance of the parties in those proceedings, even if that is without protest, because it is well settled that consent cannot confer jurisdiction.”
15. In this case, as pointed out, the filing of the written statement was under protest, questioning the jurisdiction of the Arbitrators. The filing of the written statement under protest, in the circumstances, will not confer any jurisdiction on the Arbitrators.
16. In the circumstances, the contention of the learned Counsel for the petitioners that the petitioners firm did not agree to arbitration that one of the partners by submitting the matters to arbitration cannot bind the partnership, and that the filing of the written statement under protest cannot confer jurisdiction on the Arbitrators, has to be accepted.
17. This revision petition is allowed with costs.
18. Revision allowed.
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