Holding

An arbitration clause incorporated by reference is valid, falls within Exception 1 to Section 28 of the Contract Act and is not contrary to public policy, and a fresh plea cannot be raised at the Supreme Court stage.

Summary

Atlas Export Industries entered into a contract for the supply of groundnut extractions that incorporated by reference the GAFTA standard contract, which contained an arbitration clause mandating disputes be resolved in London under GAFTA rules. A dispute arose, arbitration was conducted in London and an award was made in favour of Kotak and Company. Kotak sought enforcement of the award under Sections 5 and 6 of the Foreign Awards (Recognition and Enforcement) Act, 1961, while Atlas objected that there was no written agreement specifically requiring arbitration under GAFTA rules. The Bombay High Court rejected Atlas's objection and made the award a rule of court; Atlas appealed, arguing the arbitration clause was void as contrary to public policy under Sections 23 and 28 of the Contract Act, 1872. The Supreme Court held that the arbitration clause was validly incorporated by reference, fell within Exception 1 to Section 28, and was not opposed to public policy, and that Atlas could not raise a fresh plea at this stage. Consequently, the appeal was dismissed and the award remained enforceable.

Issues considered

The validity and enforceability of an arbitration clause incorporated by reference to a standard contract (GAFTA).
Whether the absence of a separate written agreement specifically stating arbitration under GAFTA rules defeats the arbitration clause.
Whether the arbitration clause is void as being contrary to public policy under Section 23 read with Section 28 of the Contract Act, 1872.
Whether a new plea not raised in the lower courts can be introduced for the first time before the Supreme Court.
The applicability of Sections 5 and 6 of the Foreign Awards (Recognition and Enforcement) Act, 1961 to enforce the foreign award.

Legislation cited

Foreign Awards (Recognition and Enforcement) Act, 1961s. 5, s. 6
Indian Contract Act, 1872s. 23, s. 28

Subjects

ArbitrationIncorporation by referenceForeign award enforcementPublic policyContract Act 1872Section 28 Exception 1GAFTAProcedural default

Judgment

A ATLAS EXPORT INDUSTRIES
v.
K<PTAK AND COMPANY

SEPTEMBER 1, 1999

B [S. RAJENDRA BABU AND R.C. LAHOTI, JJ.]

Foreign Awards (Recognition and Enforcement) Act, 1965: Sections 5
and 6.

C Arbitration-Agreement to refer disputes to arbitration-Referencial
incorporation of arbitration clause is permissible and binding on parties-
Se//er entered into a contract to supply goods to foreign buyer through
Indian agent-A// were parties· to the contract which incorporated by
reference the standard contract of the Grains and Food Trade Association
D Ltd (GAFTA)-The standard contract provided for settlement of disputes by
arbitration in a foreign country which actually took place and award passed-
Va/idity.. of-Held: It is not open to a party entering into a contract to raise
objections about the terms of arbitration clause-High Court rightly rejected
the seller's objection that there was no agreement in writing to refer disputes
to arbitration under the rules of GAFTA.
E
Contract Act, 1872: Sections 23 and 28 Exception 1.

Arbitration agreement-Disputes-Reference of-For arbitration in a
foreign country-Validity-Held: Merely because arbitrators are situated in
a foreign country cannot by itself be enough to nullify the arbitration when
F the parties with eyes open have willingly entered into the agreement-More
so, when the parties have appointed arbitrators, participated in arbitration
and suffered an award

Practice and Procedure:

G New plea-Raising of-Plea not raised at the earliest cannot be allowed
to be raised for the first time in appeal before the Supreme Court.

The appellant entered into a contract with a foreign company for supply
of goods (groundnut extractions) through the respondent. The contract
incorporated by reference the standard contract of Grain and Food Trade
H 192
- ATLAS EXPORTINDUSTRIES v. KOTAKANDCOMPANY 193
Association Ltd. (GAFfA) which provided for arbitration in a foreign country. A
The respondent was also a party to the contract.

As there was a dispute between the appellant and respondent it was
referred to arbitration which took place in a foreign country. The appellant
and respondent participated in the arbitration and an award was passed in
favour of the respondent. B
The respondent filed an application under Sections 5 and 6 of the
Foreign Awards (Recognition and Enforcement) Act, 1961 before the High
Court for making the award a rule of the court. The appellant raised an
objection before the High Court that there was no agreement in writing C
between the parties requiring the disputes to be settled by arbitration under
the rules ofGAFfA. The High Court rejected the objection and made the
award a rule of the court. The Letters Patent Appeal preferred by the
appellant was dismissed. Hence this appeal.

On behalf of the appellant it was contended that the term of the contract D
relating to arbitration was opposed to public policy under Section 23 read
-· with Section 28 of the Contract Act, 1872 since the parties were compelled
to resort to arbitration in a foreign country.

Dismissing the appeal, the Court
E
HELD: 1. The appellant did not raise a plea before the High Court that
it was not aware of the standard contract of the Grain and Food Trade
Association Ltd. (GAFfA). The High Court was, therefore, right in rejecting
the appellant's objection that there was no agreement in writing between the
parties requiring that disputes be settled by arbitration under the rules of p
GAFfA. [197-E-F; 196-D]

Alimenta S.A. v. National Agricultural Co-operative Marketing
Federation of India Ltd., AIR(l987) SC 643, relied on.

Russell on Arbitration, 19th Edn., p. 50 and Halsbury's Laws ofEngland, G
4th Edn., Vol. 2, p. 267, para 527, referred to.

2. The present case is clearly covered by Exception 1 to Section 28 of
the Contract Act, 1872. Right of the parties to have recourse to legal action
is not excluded by the agreement. The parties are only required to have their
dispute/s adjudicated by having the same referred to arbitration. Merely H
194 SUPREME COURT REPORTS (1999] SUPP. 2 S.C.R.

A because the arbi~rators are situated in a foreign country cannot by itself be
enough to nullify the arbitration agreement when the parties have with their
eyes open willingly entered into an agreement. More so when the parties
have appointed arbitrators, participated in arbitration proceedings and suffered
an award. [198-D-E]

B 3. The plea that a term of the contract relating to arbitration was
opposed to public policy under Section 23 read with Section 28 of the
Contract Act, 1872 was not raised either before or during arbitration
proceedings or before the High Court or in the Letters Patent Appeal. Such
a plea cannot be raised before this Court for the first time. [198-E-F]
c CIVIL APPELLATE JURISDICTION: Civil Appeal No. 7410 of
1994.

From the' Judgment and Order dated 25.10.93 of the Bombay High Court
in L.P.A. No. 856of1993.
D
S.S. Javeli, (Vivek Gambhir) (NP) for the Appellant.

K.B. Rohtagi, Sunil Malhotra, Ms. Aparna Rohtagi Jain and Mahesh ·-
Kasana for the Respondent.

E The Judgment of the Court was delivered by

R.C. LAHOTI, J. The appellant, the Atlas Export Industries, Junagadh
(hereinafter 'Atlas', for short) entered into a contract dated 3rd June, 1980
with Mis Oceandale Company Limited, Hongkong (hereinafter 'Oceandale',
for short ). The agreement was for the supply of 200 MT of Indian groundnut
F extractions of the specifications as to quantity, quality and packages detailed
in the contract and to be shipped on or before 30th June, 1980. The price was
agreed at US $200 per M.T. The goods were to be supplied through Mis
Kotak and Company, Bombay (hereinafter 'Kotak', for short). Mis Prashant
Agencies, Bombay were the brokers. The existence of the contract, to which
G Atlas, Oceandale and Kotak were the parties, is not in dispute. Kotak were
at all times responsible for the performance on .behalf ·of the final buyers
Oceandale. The letter of credit was opened by Oceandale in favour of Kotak
who then transferred it in favour of Atlas. The letter of credit was opened at
US $203 whereas Kotak's purchase from Atlas was at US $200. It was agreed
upon between Atlas and Kotak that the difference would be paid locally by
H Atlas to Kotak in Indian rupees. The time for shipment was extended by
ATLAS EXPORT INDUSTtuES v. KOTAK AND COMPANY [R.C. LAHOTI, J.) 195
mutual agreement between the parties and correspondingly the period of A
validity of the letter of credit was also extended. However, still there was
failure to ship the goods by the .time appointed by the contract and as
extended which resulted into a dispute arising between the parties,

The contract dated 3rd June, 1980 incorporated an arbitration clause B
which is extracted and reproduced hereunder:

"This contract is made under the terms and conditions effective
at date of the Grain and Food Trade Association Ltd. London Contract
No.15 which is hereby made a part of this contract. ....... both buy~~
and sellers hereby acknowledge familiarity with the text of the GAFTA C
contract and agree to be bound by its terms and conditions."

'GAFTA' stands for the Grain and Food Trade Association Ltd., London.
Clause 27 of the Standard Contract 15 of the GAFTA provides as under:

"27. ARBITRATION- D
(a) Any dispute arising out of or under this contract shall be settled
by arbitration .in London in accordance with the Arbitration Rules of
the Grain and Food Trade Association Limited, No. 125 such Rules
forming part of this contract and of which both parties hereto shall
be deemed to be cognisant. E
(b) Neither party hereto, nor any persons; claiming under either of
them, shall bring any such dispute until such dispute shall first have
been heard and determined by the arbitrators, umpire or Board of
Appeal, as the case may be, in accordance with the Arbitration Rules
and it is expressly agreed and declared that the obtaining of the award F
from the arbitration, umpire or Board of Appeal, as the case may be,
shall be a condition precedent to the right of either party hereto or
of any person claiming under either of them to bring any action or
other legal proceedings against the other of them in respect of any
such dispute." G
Kotak appointed their own arbitrator and called upon Atlas to appoint
their arbitrator. Both the parties did appoint their respective arbitrators. The
arbitrators gave their award, published on 22::id June, 1987 as per the rules
of GAFTA. The award directed Atlas to pay Kotak a sum of US $9600 with
interest calculated thereon at the rate of 12 per cent per annum from 26th H
196 SUPREME COURT REPORTS [1999] SUPP. 2 S.C.R.

A October, 1980 until the date of the award as also the costs of arbitration as
specified. No appeal was preferred against the award.

Kotak moved an application under Sections 5 and 6 of the Foreign
Awards (Recognition and Enforcement) Act, 1961 before the High Court of
Bombay seekmg enforcement of the award by filing of the same and
B pronouncing judgment according to the award. Atlas raised objections against
the prayer made by Kotak. The objections have been rejected and the award
made rule of the Court followed by decree in terms of the award under the ,.
judgment dated 22nd September, 1992 passed by learned Single Judge of the
High Court of Bombay. A Letters Patent Appeal preferred by Atlas having
C been dismissed, the present appeal by special leave has been filed.

Having heard the learned counsel for the parties we are of the opinion
that the appeal is devoid of any merit and hence liable to be dismissed. The
only objection raised by Atlas before the High Court of Bombay was that
there was no agreement in writing between the parties requiring the disputes
.D arising out of the contract being referred to arbitration in accordance with the
arbitration rules ofGAFTA. No particulars of the plea were given. As already
noticed, the existence of contract between the parties is not denied. The
arbitration clause in the contract is incorporated by reference. The parties
knew that excepting the terms specifically set out therein in the contract dated
3rd June 1980, the rest of the. terms and conditions were to be the same as
E were incorporated in the Standard Contract No.IS ofGAFTA as effective on .....
the date of the contract. Clause 27, entitled Arbitration, and finding its place
in Standard Contract No.15 is also not in dispute. The law on the subject is
stated in Russell on Arbitration (19th Edition, at page 50) is under:

"The agreement may arise by the incorporation of one document
F
containing an arbitration clause in another under which the dispute
arises. "Where parties by an agreement import the terms of some other
document as part of their agreement those terms must be imported in
their ~ntirety ... but subject to this: thaUf any of the imported terms in
any way conflicts with the expressly agreed terms, the latter must
G prevail over \\'.hat would otherwise be imported."

In Halsbury's Law of England (4th Edition, Vol. 2, Page 267, para 522),
it is stated as under:

"If the agreement is written, it may be included in a particular
H contract by reference or implication. The agreement between the parties
ATLAS EXPORT INDUSTRIES v. KOT AK AND COMPANY [R.C. LAHOTI, J.] 197

may incorporate arbitration provisions which are set out in some other A
document, but in order to be binding the arbitration provisions must
be brought to the notice of both parties.
It is inherent in cases of incorporation by reference that the
parties are concerned not with one document alone but with at least
two, one of which contains an arbitration clause and the other of B
which does not. In some cases the one document may constitute a
contract between other parties. A common case is where the two
documents concerned are a charterparty and a bill of lading. If the
relevant contract between the relevant parties is contained in the
document which does contain the arbitration clause, no question of
incorporation arises. Where this is not the case, the question whether C
the document containing the arbitration clause is incorporated in the
relevant contract between the relevant parties is, as always, a question
of construction."

In Alimento S.A. v. National Agricultural Co-operative Marketing D
Federation of India Ltd and Anr., AIR (1987) SC 643, the arbitration clause
contained in an earlier contract between the parties was incorporated into a
latter contract only by reference. This Court held that such a referential
incorporation was permissible and the clause was binding between the parties
unless it was insensible, unintelligible or was inconsistent with the terms of
the present contract. E
It is not the case of the appellant Atlas that they were not aware of the
terms and conditions of the Standard Contract No.15 ofGAFTA. Such a plea
if at all it was sought to be raised then should have been raised specifically
but that is not the case here. The High Court was therefore right in rejecting F
the only objection which was raised on behalf of the appellant Atlas before
it.

It was however contended by the learned counsel for the appellant
. that the award should have been held to be unenforceable inasmuch as the
very contract between the parties relating to arbitration was opposed to G
public policy under Section 23 read with Section 28 ·of the Contract Act. It
was submitted that Atlas and Kotak, the parties between whom the dispute
arose, are both Indian parties and the contract which had the effect of
compelling them to resort to arbitration by foreign arbitrators and thereby
impliedly excluding the remedy available to them under the ordinary law of
India should be held to be opposed to public policy. Under Section 23 of the H
198 SUPREME COURT REPORTS [1999) SUPP. 2 S.C.R.

A Indian Contract Act the consideration or object of an agreement is unlawful
I -
if it is opposed to public policy. Section 28 and Exception 1 to it, (which only
is relevant for the purpose of this case) are extracted and reproduced hereunder:-

"28. Every agreement, by which any party thereto is restricted absolutely
from enforcing his rights under or in respect of any contract, by the
B usual legal proceedings in the l:lrdinary tribunals, or which limits the
time within which he may thus enforce his rights, is void to that
extent.

Exception ·1. - This section shall not render illegal a contract by
which tWo or more persons agree that any dispute which may arise
c betWeen them in respect of any subject or class of subjects shall be
referred to arbitration, and that only the amount awarded in such
arbitration shall be recoverable in respect of the dispute so referred."

The case at hand is clearly covered by Exception 1 to Section 28. Right
of the parties to have recourse to legal action is not excluded by the agreement.
D The parties are only required to have their dispute/s adjudicated by having
the same referred to arbitration. Merely because the arbitrators are situated
in a foreign country cannot by itself be enough to nullify the arbitration
agreement when the parties have with their eyes open willingly entered into
the agreement. Moreover, in the case at hand the parties have willingly ....
E initiated the arbitration proceedings on the disputes having arisen betWeen
them. They have appointed arbitrators, participated in arbitration proceedings
and suffered an award. The plea raised before us was not raised either before
or during arbitration proceedings, nor before the learned Single Judge of the
High Court in the objections filed before him, nor in the Letters Patent Appeal
filed before the Division Bench. Such a plea is not available to be raised by
F the appellant Atlas before this Court for the first time.

For the foregoing reasons, we find no fault with the award having been
made rule of the Court by the High Court. Tne appeal is dismissed with costs.

v.s.s. Appeal dismissed.

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