P L D 1965 Supreme Court 425 (PLP)

HAMOODUR RAHMAN, J.‑This appeal, by special leave, arises out of a proceeding commenced in the High Court of West Pakistan, Karachi, for making an award in an arbitration a rule of Court and for passing a decree in terms of the award. The award was filed in Court by the arbitrators on the 16th of August 1960, and was registered as a Suit (No. 134 of 1960) on the original side of the Karachi Bench. The present appellants raised various objections to the award and asked for the award to be set aside. A learned Single Judge of the High Court rejected the said objections, made the award a rule of the Court and directed the drawing up of a decree in terms thereof. This order was also upheld by a Division Bench of the said High Court on a Letters Patent Appeal but leave was granted in this case by this Court on the 11th of April 1963, to consider as to whether the arbitration clause contained in the contract was enforceable at law if the contract itself was found to be void on account of its being opposed to public policy. The contract, the validity of which is ‑now being sought to be challenged, was entered into in the following circumstances: In 1954 the Government of Pakistan put into effect a scheme for the export of rice to foreign countries on barter basis. The price of Pakistani rice in foreign countries at the relevant time ranged between 28 and 30 per ton, but under the scheme the exporter was required to sell the rice at a minimum price of 42 per ton on the basis of letters of credit opened by the foreign importer . at the above rate. The exporter was, however, permitted under the scheme to import foreign goods into Pakistan of an equivalent value. It was probably envisaged under the scheme that by the profit the exporter would make on the sale of the imported goods in Pakistan the loss ranging from 7 to 14 per ton suffered on the export of rice at 42 per ton would be adequately made up. To comply with this requirement, however, of bringing into Pakistan 42 in sterling for every ton of rice sold to a foreign buyer on the basis of a letter of credit the practice grew up that the difference between the actual sale price and the price fixed by Government, namely, 42 per ton, was paid to the foreign buyer in Pakistani rupees in Pakistan but not according to the official rate of exchange. The foreign buyer insisted on this difference being paid at the unofficial rate which was higher than the legal foreign exchange rate allowable by the State Bank of Pakistan. In May 1954, the appellant Muhammad Akhtar, who was already carrying on business in partnership with the other appellant under the name and style of Manzoor Brothers at Karachi, secured a permit .from Government for the export of 10,000 tons of rice under this scheme. But on the 24th of June 1954, he entered into another partnership with the respondents herein for carrying on the said business of export of 10,000 tons of rice to foreign countries on barter basis. This partnership was at will and was to be carried on under the name and style of Manzoor Brothers. The shares of the partners were as follows: (1) Respondent No. 6 annas (2) Appellant Muhammad Akhtar 7 annas (3) Respondent No. 2 ... 3 annas The business of the partnership was confined ‑to the export of 10,000 tons of rice. On the 1st of July 1954, however, a supplementary deed of partnership was executed to bring in all the other partners of Muhammad Akhtar in the firm of Manzoor Brothers and to make them all partners in the second partnership equally sharing the 7 annas share already allotted to Muhammad Akhtar. All the other terms and conditions of the partnership remained the same but it was provided that the first accounting of the partnership would be made on the 30th of June 1955. Each of these partnership deeds also provided for arbitration by two arbitrators in the event of disputes arising between the parties, one to be appointed by the appellants and the other to be appointed by the two respondents herein. The two arbitrators so nominated were, in their turn before proceeding upon the arbitration, to appoint an umpire whose award was to be final and binding on the parties. It may be pointed out here that on their face neither of these two documents contained any clause which could be said to be in violation of any law or to contemplate the doing of anything which was, in any way, contrary to law. It is alleged by the appellants that the respondent No. 1 was the partner who was responsible for arranging for the foreign exchange, for maintenance of accounts and for accepting the "on money", which was the description .given to the amount realised in excess of the amount mentioned in the bill for the sale of .the imported goods. This was collected when the contract of 'sale was entered into and before the goods were delivered. No entry of this was made in the books of account nor was this shown in the income‑tax returns, although it ranged between 50 % to 250% of the landed cost. The loss on the export of rice was also adjusted against this. In 1955 differences and disputes arose between the partners with regard to their respective shares in the profits of the firm, including the "on money", and the respondent Wali Muhammad on the 17th of September 1957, gave notice in writing through his lawyer of the dissolution of the partnership as and from the said date, demanded the rendition of true and full accounts of the partnership business and payment to him of the share so found due upon the taking of accounts. In this letter the said respondent also charged the appellants and the respondent No. 2 with the responsibility of rendering accounts. This notice was replied to by the appellants and the said respondent No. 2 jointly through their lawyer on the 4th of October 1957. The liability for accounts was not disputed nor were the other allegations contained in the notice of the respondent Wali Muhammad concerning his repeated demands for accounts and the failure on the part of the appellants and the said respondent No. 2 to render accounts controverted. All that was stated was that one month's notice for the dissolution of the partnership was necessary under the deed of partnership, that accounts of the business were being prepared which the said respondent Wali Muhammad had seen and that as soon as the accounts were completed, he would be furnished with a copy of the same and whatever is found due will be paid accordingly. The respondent Wali Muhammad followed this up with an application under section 20 of the Arbitration Act which was filed on the 12th of October 1957, and registered as No. 114 of 1957 on the original side of the High Court of West Pakistan at Karachi. Although the appellants and the respondents filed a counter‑affidavit to oppose the said application, the matter was ultimately compromised on the 3rd of March 1958, and by consent of all parties the disputes were referred to the arbitration of two learned counsel, one nominated by the respondents and the other by the appellants. The first hearing before the arbitrators took place on the 17th of August 1959, but for one reason or another the proceeding was adjourned from time to time until the 6th of February 1960, when the plaintiff's evidence was at last begun The plaintiff, that is to say, the respondent No. 1 herein, closed his evidence on the 23rd of February 1960. The evidence on behalf of the appellants was to begin on the 26th of February 1960, but again the proceedings had to be adjourned from time to time till the 2nd of May 1960, when the learned counsel for the respondent No. 2 filed an application objecting to the jurisdiction of the arbitrators to proceed with the arbitration on the ground that the partnership agreement was for carrying on business in violation of the Foreign Exchange Regulation Act, 1947, and was, therefore, illegal and wholly void under the Contract Act. On this application the arbitrators passed the following order: "We shall hear him on this application and other parties at the conclusion of the recording of evidence." The appellants' evidence was then taken up and the recording of evidence was concluded on the 11th of May 1960, but no order was made on the application filed on the 2nd of May 1960. Arguments were heard on the 17th of May 1960, and thereafter an award was made by which a sum of Rs. 2,05,700 was directed to be paid to the respondent Wali Muhammad by the appellants in full and final settlement of his claim. The appellants were also saddled with the costs of the arbitration proceedings amounting to Rs. 8,

500. The appellants objected to the award being made a rule of Court, on, inter alia, the ground that "the agreement of partnership which contained the arbitration clause was void, because its purpose was illegal, inasmuch as it was intended to indulge in exchange deals which were prohibited by law". The High Court, as already stated, held that the partnership agreement was not hit by section 23 of the Contract Act and, as such, the objection was rejected. The Letters Patent Bench armed this decision and took the view that since in the present case there was "nothing in the partnership deed itself to suggest that the parties had intended or contemplated at the time of entering into the partnership to carry on the business in contravention of the provisions of the Foreign Exchange Regulation, the legality of the contract could not be attacked upon the basis of evidence led before the arbitrators. Furthermore, it also held that even if it is accepted that the parties in carrying out the business of the partnership had violated certain provisions of the Foreign Exchange Regulation Act, such violations did not render the whole contract illegal or void. Learned counsel appearing in support of this appeal has re‑agitated the same question before us. It is his contention that since it was evident from the very nature of the business contemplated to be carried on under the partnership deed that violations of the Foreign Exchange Regulation Act would take place, for, in no other manner could the deficiency between the actual sale price and the export price fixed by Government be made up, the contract was to the knowledge of the parties a contract to do business in a manner prohibited by law. Learned counsel appearing in support of this appeal has also challenged the correctness of the view taken by the High Court and has contended that the nature of the business to be carried on by the partners was clear to them from the very beginning and it clearly violated the provisions of sections 4 (2) and 5 (1) (a) and (c) of the Foreign Exchange Regulation Act. The object of the contract, according to him, was in substance the export of Pakistani currency through the means adopted in carrying out the transactions relating to the export of rice and, therefore, void under section 23 of the Contract Act. The Foreign Exchange Regulation Act prohibited such transactions. In support of this contention learned counsel has relied on a decision of the Court of Appeal in England in the case of David Taylor & Son Limited v. Barnett ((1953) 1 A E R 843). There it was observed by Denning Lord Justice that "there is not one law for arbitrators and another for the Court, but one law for all. If a contract is illegal, arbitrators must decline to award on it just as the Court would do," and the Court of Appeal set aside the award which was, according to the Court, based on an illegal contract. The contract in that case was a contract in writing whereby the seller had on a particular date agreed to sell a particular commodity at a price mentioned in the contract to be delivered on subsequent dates. On the date that the contract was entered into there was in force in England the Meat Products and Canned Meat (Control and Maximum Prices) Order, 1948, which prohibited the sale or purchase of any such meat or meat products at a price exceeding the maximum price mentioned therein. The contract in that case had fixed a price above the said maximum but the same was raised a few days after the contract was entered into and at the time of delivery the price agreed upon was within the statutory maximum. The seller failed to make delivery and the dispute thus arising between the parties was referred to arbitration under the arbitration clause in the contract. In these circumstances, on examining the provisions of the Control Order the Court in England came to the view that the contract being for the sale of meat products covered by the said Order at a price which was in excess of the maximum price fixed on the date of the contract was, therefore, an illegal contract. The arbitrator by making an award on the basis of such an illegal contract had mis-conducted himself in law by failing to take into account the illegality of the contract. It is clear from the facts of this case that the contract in that case on the face of it disclosed the illegality and was, therefore, ab initio void. In more a recent case of Heyman v. Darwins Ltd. ((1942) A C 356), Viscount Simon stated:‑ "Similarly if one party to the alleged contract is contending that it is void ab initio, because, for example, the making of such a contract is illegal the arbitration clause cannot operate, for, on this view the clause itself is also void." Russel in his book on Arbitration, Sixteenth Edition, at page 25, also states that "a submission forming part of a void contract is itself void and cannot be enforced." In the case of Jeo Lee v. Lord Dalmeny and others ((1927) 1 Ch. 300) an arbitration clause in a contract relating to betting transactions was held to be unenforceable, as the whole contract was void. It is clear, therefore, that if the principal contract in the present case was one which was clearly ab initio void or came within the mischief of section 23 of the Contract Act, then the arbitration clause contained therein will be unenforceable and the award thereon a nullity. Section 23 of the Contract Act is in these terms:‑ "

23. The consideration or object of an agreement is lawful, unless‑ it is forbidden by law; or is of such a nature that, if permitted, it would defeat the provisions of any law; or is fraudulent; or involves or implies injury to the person or property of another; or the Court regards it as immoral, or opposed to public policy. In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or consideration is unlawful is void." The question, therefore, is whether the present contract is forbidden by law or is of such a nature that if permitted it would defeat the provisions of any law or is opposed to public policy. The contention is that from its very nature the contract was such that it could not be performed without violating various provisions of the Foreign Exchange Regulation Act. The parties, it is said, who entered into the partnership, were well aware of the fact that rice could not be exported at the price fixed by Government, namely, 42 per ton, unless some device was adopted to reimburse the foreign purchaser. This could only be done by giving him the difference of the loss suffered by him in Pakistani currency without the sanction of the State Bank of Pakistan and at a rate which would of necessity be higher than the official rate of exchange. The specific provisions of the Foreign Exchange Regulation Act said to have been violated are subsection (2) of section 4 and clauses (a) and (c) of subsection (1) of section

5. Subsection (2) of section 4 provides that no transaction, which provides for the conversion of Pakistan currency into foreign currency or foreign currency into Pakistan currency at a rate of exchange other than the one authorised by the State Bank, shall be entered into. Clause (a) of subsection (1) of section 5 prohibits anyone resident in Pakistan from making any payment to or for the credit of any person resident outside Pakistan without the previous permission of the State Bank of Pakistan. Clause (c) thereof similarly prohibits any person resident in Pakistan from making any payment to or for the credit of any person by order or on behalf of any person resident outside Pakistan. Section 21 provides that no person shall enter into any contract or agreement which would either directly or indirectly evade or avoid in any way the operation of any provision of the said Act or of any rule, direction or order made thereunder, but subsection (3) of the said section expressly lays down that nothing in the provisions of this Act or any term contained in any contract shall prevent legal proceedings being brought to recover any sum, which, apart from the said provision or any such term pf the contract; would be due either as a debt or damages or otherwise. Finally, it has to be noticed, that subsection (2) of section 21 provides that it shall be an implied term of every contract that anything agreed to be done by any term of the contract which is prohibited to be done by or under any provisions of the said Foreign Exchange Regulation Act except with the permission of the Central Government or the State Bank of Pakistan, shall not be done unless such permission is granted. Reading these provisions as a whole it would appear that the Foreign Exchange Regulation Act does not forbid the making of a contract which may contemplate doing a thing which is contrary to the provisions of the Foreign Exchange Regulation Act, for, that thing can still be done by ex post facto permission of the State Bank of Pakistan. The scheme of the Foreign Exchange Regulation Act, therefore, is not to forbid the making of a contract but merely to insist that the contract shall be performed in a particular manner, namely, by taking the necessary permission of the competent authority. It cannot, therefore, in the circumstances, be said that a contract which violates any of the terms of the Foreign Exchange Regulation Act is ex facie or ab initio void or comes within the mischief of a contract prohibited by section 23 of the Contract Act. It is now well‑settled that the provisions of section 23 of the Contract Act have to be construed strictly and the Courts should not invent new categories or new heads of public policy in order to invalidate a contract. Apart from this, as we have already indicated, there is nothing in the contract itself to show that the contract had of necessity to be performed in an illegal manner or in a manner which offended the provisions of the Foreign Exchange Regulation Act. The contract was to perform in partnership a business upon the basis of a permit obtained from Government for the export of rice at a particular price and to import foreign goods of equivalent value into Pakistan. The price fixed by Government was, no doubt, high but it might well have been anticipated that under the barter scheme the foreign buyer would be able to adjust this loss against the price of the imported goods and the local trader would be more than reimbursed by the huge profit that he would make by the sale of the imported commodity. In such a transaction no illegality of any kind would have been involved. The mere fact, therefore, that the partners in performing the contract entered into adopted a method, which was not according to the provisions of the Foreign Exchange Regulation Act, would not, in our view, determine the validity or invalidity of the contract itself. Learned counsel has tried to urge that the transactions in the present case were of such a nature that they could not have been performed in any other manner but we are not impressed by this argument. As we have already indicated, the deed of partnership which contains the arbitration clause does not itself contemplate the performance of any illegal act nor can it be said that there is any indication whatsoever in the deed of partnership that the scheme under which the transactions were to be carried through necessarily contemplated the violation of the Foreign Exchange Regulation Act or the conversion of Foreign current at any rate not approved by the State Bank of Pakistan. We are, therefore, clearly of the view that this argument of the learned counsel cannot prevail, for, the contract was neither ab initio void nor such that it could only have been performed l by violating some provision of law or some rule which was opposed to public policy or in such a manner as would necessarily defeat the provisions of any law. Finally we would like to point out that there is an equally well accepted rule that where a person invoking the aid of a Court to invalidate a contract on the ground of illegality is himself implicated in the illegality the Court will not, as a rule, assist him. In the present case, it is clear from the record that the appellants themselves never raised this question of illegality before the arbitration. It was only raised on the 2nd of May 1960, by the respondent No.

2. It is only after he found that the award had gone against him that he has come forward to raise this objection. In our view, neither law nor equity supports this claim of the appellants. For the reasons, therefore, that we have indicated earlier we are of the view that this appeal must fail and is, accordingly, dismissed with costs. A. H. Appeal dismissed.