CASE ANALYSIS OF

NATIONAL AGRICULTURAL CO-OP. MARKETING FEDERATION INDIA LTD

V.

GAINS TRADING LTD

SUBJECT: ALTERNATE DISPUTE RESOLUTION

FACULTY: MR. R.V. VISHNUKUMAR

NAME: SHRUTI DEB

ROLL NUMBER: 2018087

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ACKNOWLEDGEMENT

I owe my profound acknowledgement to all those who made this project and research a success. I am very
much grateful to these people and hereby I present their names. I would like to express my very sincere
thanks to our faculty for ADR, Mr. R.V. Vishnu Kumar for giving me this opportunity to research on this
topic. Also, I would like to thank him for his timely guidance and consultation. His contribution towards the
development of this project has been immense.

I sincerely and humbly thank my family and friends for constantly supporting me and helping me and
guiding me throughout.

Any omissions are deeply regretted.”

TABLE OF CONTENTS

ABSTRACT:......................................................................................................................................................4
CASE ANALYSIS.............................................................................................................................................6
SIGNIFICANCE OF THE CASE......................................................................................................................6
FACTS OF THE CASE.....................................................................................................................................6
RELEVANT LEGAL PROVISION RELATED TO THE CASE.....................................................................7
RESPONDENT’S CONTENTIONS:................................................................................................................8
ISSUES INVOLVED IN THE CASE................................................................................................................8
REASONING AND ANALYSIS OF THE CASE:...........................................................................................9
JUDGEMENT:.................................................................................................................................................11
RELEVANT PRECEDENTS:.........................................................................................................................12
CONCLUSION................................................................................................................................................16
 NATIONAL AGRICULTURAL CO-OP. MARKETING FEDERATION INDIA LTD.

V.

GAINS TRADING LTD.

ABSTRACT:

The Petitioner (P) and Respondent (R) entered into an agreement with R agreeing to purchase
from the P certain amount of of iron-ore fines at a definite price. Clause 17 of the agreement
provided that if no settlement can be reached by negotiation and mutual agreement, the
matter in dispute would be referred to and finally resolved by arbitration in Hong Kong in
accordance with the provisions of the Arbitration and Conciliation Act, 1996 or any other
statutory modification, enactment or amendment thereof for the time being in force.

P alleged that R failed to take delivery of the cargo and that in view of such breach, the
petitioner incurred losses and other costs. Therefore, R is now liable to pay a definite sum.
The refusal by R to pay the sum led to dispute and P invoked the arbitration agreement and
furnished a panel of three names to enable R to give concurrence for appointment of any one
of them as the sole arbitrator. R again refused to comply. This gave rise to the filing of
application under Section 11(5) of the Act, seeking appointment of the sole arbitrator.

It was held that an independent arbitrator may be appointed as the sole Arbitrator, keeping in
view Sub-section (9) of Section 11 which provides that in the case of appointment of a sole
arbitrator in an international commercial arbitration, the Chief Justice of India or his
designate may appoint an arbitrator of a nationality other than the nationality of the parties if
the parties belong to different nationalities.

Research Questions:

1. Whether the verdict issued in the case was just and in tandem with the laws of the time?

2. Whether the verdict in the case upheld or overturned past precedents?

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Aim/Objective of the Study:
The main objective of this project is to scrutinize the ways in which the laws surrounding
alternative dispute resolution have been shaped by this case and to delve into the
technicalities of the legal issues pertaining to the case.

Significance of the Study:

This is a landmark judgement when it comes to the subject of ADR hence it is important to
not just study the case but also analyse it for a better, more detailed understanding of the law
it shapes.

Scope of the Study:

The researcher is cognizant of their limitations in this paper both in terms of time and
resources in the context of the vastness of the subject of Alternative Dispute Resolution.
Limitations also exist because of logistical aspects such as word limits. The scope of this
paper is limited to the judgement in the case and few relevant precedents. Omissions are
deeply regretted.

Research Methodology:
A. Nature of study: The methodology of study is doctrinal type. It is a mixture of descriptive,
analytical, and explanatory in nature.

B. Sources:

i) Primary Sources: Statutes, Supreme Court records.

ii) Secondary Sources: Various journals, articles and books including

but not limited to Textbook on Arbitration & Conciliation with

Alternative Dispute Resolution by Madhusudan Saharay

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 CASE ANALYSIS

Name of the case: National Agricultural Co-op. Marketing Federation India Ltd v. Gains
Trading Ltd

Court: Supreme Court of India

Citation: (2007) 5 SCC 692

Advocates: For the Petitioner E.C. Aggarwal, K.C. Dua, Advocates. For the Respondent
Sunil Gupta, Sr. Adv., Manoj Khanna, R.K. Khanna, Advocates.

Bench: Hon'ble Mr. Justice R.V. Raveendran

SIGNIFICANCE OF THE CASE

This case is important to the evolution of Alternate Dispute Resolution in India as it clarifies
and reaffirms some of the cornerstones of ADR Jurisprudence in the country. The Hon’ble
Supreme Court held, in this case, that if the contract is valid the arbitration clause is to be
treated independently from the main contract. And if the contract is held null and void, then
the arbitration clause shall not be considered null and void too. The doctrine of reparability
just prevents the arbitration clause from being affected by the underlying contract. Hence the
clause is an indispensable part of the contract. The court also reaffirmed that in cases of
international commercial arbitrations held out of India provisions of Part I (of the Arbitration
and Conciliation Act, 1996) would apply unless the parties by agreement, express or implied,
exclude all or any of its provisions. In that case the laws or rules chosen by the parties would
prevail. Any provision, in Part I, which is contrary to or excluded by that law or rules will not
apply.

FACTS OF THE CASE

This case pertains to a petition filed under section 11(5) of the Arbitration and Conciliation
Act, 1996 ('Act' for short) for appointing a sole arbitrator to adjudicate upon the disputes
between the petitioner and respondent.

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The petitioner alleged that the respondent entered into an agreement dated 28.2.2005,
agreeing to purchase from the petitioner 40,000 MT (plus or minus 10%) of iron-ore fines at
FOB price of US$ 50 per dry MT, subject to the terms and conditions of the said agreement.
Clause 17 of the said agreement providing for settlement of disputes by arbitration is
extracted below:

Arbitration: Any dispute arising out of or in this connection with this contract or the
execution thereof shall, to the extent possible, be settled amicably by negotiation and mutual
agreement between the Seller and the Buyer. If no settlement can be reached in this way, the
matter in dispute shall then be referred to and finally resolved by arbitration in Hong Kong in
accordance with the provisions of the Arbitration and Conciliation Act, 1996 or any other
statutory modification, enactment or amendment thereof for the time being in force."

The petitioner alleged that respondent failed to nominate the vessel in terms of the contract in
spite of several reminders and ultimately refused to take delivery of the cargo; that in view of
breach by the respondent, the petitioner had to sell the cargo at Rs.1010/- per MT (as against
the contract price of Rs.2190/-) incurring a loss of Rs.1180/- per MT; that it had to incur
storage charges for storing the cargo for more than five months; that it had to incur freight
charges for moving a part of the cargo from Karwar Port to Mangalore Port; that the amount
invested in the cargo was locked up for considerable period involving loss of interest on the
value; and that as a consequence, respondent is liable to pay a sum of Rs.11,50,57,488/- (=
US $26,27,568). The alleged refusal/repudiation by the respondent gave rise to a dispute and
the petitioner by a notice dated 21.9.2005 through counsel, invoked the arbitration agreement
and furnished a panel of three names to enable the respondent to give concurrence for
appointment of any one of them as the sole arbitrator. The respondent sent a reply refusing to
comply. This led to the filing of the present application under section 11(5) of the Act,
seeking appointment of the sole arbitrator. The respondent has resisted the petition.

RELEVANT LEGAL PROVISION RELATED TO THE CASE

The relevant legal provisions in this case are sections 2(2), 11(5), 11(9), 16(1), 21 and 32 of
the Arbitration and Conciliation Act, 1996.

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 RESPONDENT’S CONTENTIONS:

The contentions of respondent in brief were:

a) It had complied with its contractual obligation by nominating a vessel to collect the
cargo, but the petitioner failed to accept in time; that the port was subsequently closed
due to monsoon and therefore it was no longer feasible to continue the contract on
FOB terms; and that at a meeting held at Shanghai on 25.4.2005, the representatives
of parties had agreed to cancel the contract dated 28.2.2005 which was on FOB terms
and decided to enter into new negotiations for a fresh contract on CFR terms. As a
result, the agreement dated 28.2.2005 including the arbitration agreement which is a
part of it, is no longer in force and therefore, the petition for appointment of an
Arbitrator in terms of the clause 17 of the agreement was not maintainable.

b) Part I of the Act applies only where the place of arbitration is in India. As place of
arbitration is Hong Kong, outside India, the provisions in Part I including section 11
of the Act are inapplicable and this Court has no jurisdiction to appoint an arbitration.
The arbitration agreement requires that the disputes to be referred and resolved at
Hong Kong. Therefore, the law of arbitration, as in force in Hong Kong, will govern
the arbitration. Consequently, the reference to "Arbitration and Conciliation Act,
1996" in clause 17, is meaningless and redundant. As per the Hong Kong law, the
Arbitrator can be appointed only by the Hong Kong International Arbitration Centre.

ISSUES INVOLVED IN THE CASE

The relevant issues pertaining to this case are as follows:

(i) Whether an arbitration clause comes to an end, if the contract containing such
arbitration agreement, was abrogated?

(ii) Whether section 11 of the Act is inapplicable in regard to the arbitrations which
are to take place outside India?

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 (iii) Whether the appointment of the Arbitrator, and the reference arbitration are
governed by the laws in force in Hong Kong and not by the Arbitration and
Conciliation Act, 1996?

REASONING AND ANALYSIS OF THE CASE:

Regarding issue (I):

Respondent contended that the contract was abrogated by mutual agreement; and when the
contract came to an end, the arbitration agreement which forms part of the contract, also
came to an end. Such a contention has never been accepted in law. An arbitration clause is a
collateral term in the contract, which relates to resolution of disputes, and not performance.
Even if the performance of the contract comes to an end on account of repudiation, frustration
or breach of contract, the arbitration agreement would survive for the purpose of resolution of
disputes arising under or in connection with the contract. [As established in Heymen vs.
Darwins Ltd1, Union of India vs. Kishori Lal Gupta & Bros. 2 and The Naihati Jute Mills
Ltd. vs. Khyaliram Jagannath3]. This position is now statutorily recognized. Sub-section
(1) of section 16 of the Act makes it clear that while considering any objection with respect to
the existence or validity of the arbitration agreement, an arbitration clause which forms part
of the contract, has to be treated as an agreement independent of the other terms of the
contract; and a decision that the contract is null and void shall not entail ipso jure the
invalidity of the arbitration clause. The first contention is, therefore, liable to be rejected.

Regarding issues (ii) and (iii):

Part I of the Act deals with Arbitration. Part-II deals with enforcement of certain foreign
awards. Sub-section (2) of section 2 provides that Part I of the Act dealing with Arbitration
shall apply where the place of arbitration is in India. Section 11 dealing with appointment of
arbitrators is contained in Part I. As the venue of arbitration is outside India, it was contended
by respondent that entire Part I including section 11 will not apply and therefore neither the
Chief Justice of India nor his designate will have the jurisdiction to appoint the arbitrator.

1
1942 (1) All ER 337
2
AIR 1959 SC 1362
3
AIR 1968 SC 522
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Such a contention is already considered and negatived by this Court in Bhatia International
v. Bulk Trading4. This Court has held:

"Sub-section (2) of section 2 provides that Part I would apply where the place of arbitration is
in India. To be immediately noted, that it is not providing that Part I shall not apply where the
place of arbitration is not in India. It is also not providing that Part I will "only" apply where
the place of arbitration is in India (emphasis supplied). Thus the legislature has not provided
that Part I is not to apply to arbitrations which take place outside India. The use of the
language is significant and important. The legislature is emphasizing that the provisions of
Part I would apply to arbitrations which take place in India, but not providing that the
provisions of Part I will not apply to arbitrations which take place out of India. The wording
of sub-section (2) of Section 2 suggests that the intention of the legislature was to make
provisions of Part I compulsorily applicable to an arbitration, including an international
commercial arbitration, which takes place in India. Parties cannot, by agreement, override or
exclude the non-derivable provisions of Part I in such arbitrations. By omitting to provide
that Part I will not apply to international commercial arbitrations which take place outside
India the effect would be that Part I would also apply to international commercial arbitrations
held out of India. But by not specifically providing that the provisions of Part I apply to
international commercial arbitrations held out of India, the intention of the legislature appears
to be to allow parties to provide by agreement that Part I or any provision therein will not
apply”.. Where such arbitration is held in India the provisions of Part I would compulsorily
apply and parties are free to deviate only to the extent permitted by the derivable provisions
of Part I. In cases of international commercial arbitrations held out of India provisions of Part
I would apply unless the parties by agreement, express or implied, exclude all or any of its
provisions. In that case the laws or rules chosen by the parties would prevail. Any provision,
in Part I, which is contrary to or excluded by that law or rules will not apply."

We can now examine whether the arbitration procedure and appointment of arbitrator is
governed by the Act, or by the laws in Hong Kong. This depends on the interpretation of the
arbitration clause in particular the following words: "the matter in dispute shall then be
referred to and finally resolved by arbitration in Hong Kong in accordance with the
provisions of the Arbitration and Conciliation Act, 1996." The respondent wants to read this
provision thus:

4
S.A. [2002 (4) SCC 105]
10
  the matter in dispute shall be referred to arbitration at Hong Kong;

 the matter in dispute shall be finally resolved by arbitration at Hong Kong; and

The respondent wanted to ignore the words "in accordance with the provisions of Arbitration
and Conciliation Act, 1976 or any other statutory modification, enactment or amendment
thereof for the time being in force" in clause 17 as a meaningless addition. The use of the
words 'referred to and finally resolved by arbitration in Hong Kong', according to respondent,
shows an intention that the arbitration has to take place in Hong Kong in accordance with
Hong Kong Laws.

The rules of interpretation require the clause to be read in the ordinary and natural sense,
except where that would lead to an absurdity. No part of a term or clause should be
considered as a meaningless surplus age, when it is in consonance with the other parts of the
clause and expresses the specific intention of parties. When read normally, the arbitration
clause makes it clear that the matter in dispute shall be referred to and finally resolved by
arbitration in accordance with the provisions of the Arbitration and Conciliation Act, 1996 (or
any statutory modification, enactment or amendment thereof) and the venue of arbitration
shall be Hong Kong. This interpretation does not render any part of the arbitration clause,
meaningless or redundant. Merely because the parties have agreed that the venue of
arbitration shall be Hong Kong, it does not follow that Laws in force in Hong Kong will
apply. The arbitration clause states that the Arbitration and Conciliation Act, 1996 (an Indian
Statute) will apply. Therefore, the said Act will govern the appointment of arbitrator, the
reference of disputes and the entire process and procedure of arbitration from the stage of
appointment of arbitrator till the award is made and executed/given effect to.

JUDGEMENT:

As none of the objections of the respondent had any merit, this petition deserved to be
allowed.

The petitioner had suggested three names in its letter dated 21.12.2005. Learned counsel for
the respondent submitted that in view of the bona fide objections raised by the respondent, it
had not suggested any one for being appointed as Arbitrator. He also submitted that the
respondent was not willing for any of the persons suggested by the petitioner being appointed

11
as Arbitrator. He stated that an independent arbitrator may be appointed as the sole
Arbitrator, keeping in view sub-section (9) of section 11 which provides that in the case of
appointment of a sole arbitrator in an international commercial arbitration, the Chief Justice
of India or his designate may appoint an arbitrator of a nationality other than the nationality
of the parties if the parties belong to different nationalities.

For the reasons stated above, this petition was allowed. This matter was then to be listed on
24.5.2007 for appointment of the Arbitrator. The parties were also allowed, if possible, to
suggest the name of a person finding mutual acceptance, by that date for appointment as
arbitrator.

RELEVANT PRECEDENTS:

1. The Union Of India vs Kishorilal Gupta And Bros5

In this case the respondents entered into several contracts with the appellant, for the
fabrication and supply of diverse military stores, each of which contracts contained an
arbitration clause. Before the contracts had been fully executed disputes arose between the
parties, one alleging that the other was committing a breach of the contract. The parties then
entered into three fresh contracts on successive dates purporting to settle these disputes on the
terms therein contained. By the first two of these settlement contracts the respondents
agreed to pay to the appellant certain moneys in settlement respectively of the disputes
relating to the first two original contracts. By the last of these settlement contracts the
respondents agreed to pay to the appellant in specified instalments certain moneys in
settlement of the disputes relating to the third original contract as also the moneys which had
then become due on the first two settlement contracts and had not been paid and further
undertook to hypothecate certain properties to secure the due repayment of these moneys.
The third settlement contract provided: "The contracts stand finally concluded in terms of the
settlement and no party will have any further or other claim against the other." The
respondents paid some of the instalments but failed to pay the rest. They also failed to create
the hypothecation. The appellant then referred its claims for breach of the three original
contracts to arbitration under the arbitration clauses contained in them. On this reference an
award for a total sum of Rs. 1,16,446 was made against the respondents in respect of the

5
1960 SCR (1) 493
12
appellant's claim on the first and the third original contracts, the claim in respect of the
second original contract having been abandoned by the appellant, and this award was filed in
the High Court at Calcutta. The respondents applied to the High Court for a declaration that
the arbitration clauses in the original contracts had ceased to have any effect and the
contracts stood finally determined as a result of the settlement contracts and for an
order setting aside the award as void and nullity. The High Court held that the first
original contract had not been abrogated by the settlement in respect of it, but the third
original contract and the arbitration clause contained in it had ceased to exist as a result of
the last settlement and, the arbitrator had no jurisdiction to arbitrate under that arbitration
clause. It further held that as the award was a single and in severable award the whole of it
was null and void. In this view the High Court set aside the award. Held (per Imam and
Scuba Rao, JJ., Sarkar J., dissenting), that the third settlement, properly construed, left no
manner of doubt that it was for valid consideration and represented the common intention of
the parties to substitute it for the earlier contracts between them. It gave rise to a new cause
of action by obliterating the earlier contracts and the parties could look to it alone for the
enforcement of their claims. There could, therefore, be no question that the arbitration clause
which, whether a substantive or a collateral term, was nevertheless an integral part of the said
contracts, must be deemed to exist along with them as a result of the said settlement. Held,
further, that it was well settled that the parties to an original contract could by mutual
agreement enter into a new contract in substitution of the old one. Per Sarkar, J.-The award
was valid and could not be set aside as the third settlement neither expressly put an end to the
arbitration clause nor, considered as an accord and satisfaction, did it have that effect. An
accord and satisfaction is only a method of discharge of a contract. It does not annihilate the
contract but only makes the obligation arising from it unenforceable. An arbitration clause
stands apart from the rest of the contract in which it is contained. It does not impose on the
one party an obligation in favor of the other; it only embodies an agreement that if any
dispute arises with regard to any obligation which one party has undertaken to the other, such
dispute shall be settled by arbitration. An accord and satisfaction, which is concerned with the
obligations arising from the contract, does not affect an arbitration clause contained in it. The
settlement of February 22, 1949, did not, in the circumstances of the case, amount to an
accord and satisfaction.

2. The Naihati Jute Mills Ltd vs Hyaliram Jagannath6

6
1968 SCR (1) 821
13
The appellant entered into a contract on July 7, 1958 with the respondent to purchase from
him 2000 bales of jute to be imported from Pakistan. The contract, inter alia. Provided that
shipment of the consignment would be made; during August-November, 1958 that the
buyers would obtain the necessary import license, that if they failed to obtain the license by
November 1958, the period of shipment would be extended up to December 1958 and that if
it was not obtained by. December 1958, the contract would be settled at the market price
prevailing on January 24, 1959. The contract also contained an arbitration clause hereunder
all disputes under the contract including the question whether the contract had been
terminated or completed were to be referred to the arbitration of an Arbitration Tribunal. The
appellants applied to the Jute Commissioner on August 8 for an import license but this was
refused on the ground that the appellants had sufficient stock to carry on for some months
more. 'They applied again on November 29, 1958 when their stock was reduced but the Jute
Commissioner refused to issue the license and asked them to meet their requirements from
purchases of Indian jute. The respondents thereafter claimed damages from the appellants on
the ground that the appellants had failed to furnish, the import license as provided in the
contract. The appellants disclaimed their 'liability and thereupon the 'disputes between the
parties were referred to the Arbitration Tribunal. The Tribunal passed an award holding that
the appellants had failed to carry out their part 'of the contract and were liable to pay damages
to the respondent assessed at Rest. 34,000 and interest. The appellants thereafter applied the
High Court to set aside the award and contended (a) that they could not be held to have
committed breach of the contract as they had done all that could be expected of them to
obtain the license; (b) that owing to the intervening causes, i.e., a change in the policy of the
Government, which the parties could not foresee when they entered into the contract, the
contract became impossible of performance and ought to have been treated as void under s.56
of the Contract Act; and (c) that the arbitrators had no jurisdiction as the arbitration clause in
the said contract perished along with the contract. A Single Bench of the High Court-
dismissed the application and an appeal to a Division. Bench was also dismissed. On appeal
to this Court.
Held, dismissing the appeal:
(I) The provision in the contract that whereas the delay to provide a license in November
1958 was to be excused but that the contract was to be settled at the market rate prevailing on
January 2, 1959 if the appellants failed to deliver the license in December1958 clearly meant
that the appellants had taken upon themselves the absolute burden of furnishing the license,
latest by the end of December 1958 and had stipulated that in default they would pay
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damages on the basis of price prevailing on January 2,1959. That being the position the
defense of impossibility of performance or of the contract being void for that reason or that
the court should spell out an implied term in the contract to that effect was not available to
the appellants. Since under the Contract Act a promise may be express or implied, in cases
where the court gathers as a matter of construction that the contract itself contains impliedly
or expressly a term according to which it would stand discharged on the happening of certain
circumstances, the dissolution of the contract would take place under the terms of the contract
itself and such cases would be outside the purview of s. 56 Although in English law such
cases might be treated as cases of frustration, in India they would be dealt with under s. 32. In
a majority of cases, however, the doctrine of frustration is not applied on the ground that the
parties had agreed to an implied term; the court grants relief under the positive rule enacted in
s. 56 by pronouncing the contract to be frustrated and at an end if it finds that the whole
purpose or the basis of the contract was frustrated by the intrusion or occurrence of an
unexpected event or change of circumstances which was not contemplated by the parties at
the date of the contract. In such cases there would be no question of finding an implied term
embodying, a provision for discharge because the parties did not think about the matter at all
nor could possibly halve an intention, regarding it. Even if the appellants had established
frustration, it would not be as if, the contract was ab initio void. In cases of frustration it is the
performance of the contract which comes to an end but the contract would still be in
existence for purposes such as the resolution of disputes arising under or in 'connection with
it: and the question whether the contract was discharged under the doctrine of frustration
would still have to be decided under the arbitration clause which operates in respect of such
purposes.
(ii) If the arbitrators awarded damages on the basis of the market, price prevalent in Calcutta
on 24th January 1959, there could be no objection to their adopting that Irate for adjudicating
the quantum of damages on the ground that such a basis was contrary to the public policy laid
down by the Government of Pakistan.

15
 CONCLUSION

An independent arbitrator may be appointed as the sole Arbitrator, keeping in view Sub-
section (9) of Section 11 which provides that in the case of appointment of a sole arbitrator in
an international commercial arbitration, the Chief Justice of India or his designate may
appoint an arbitrator of a nationality other than the nationality of the parties if the parties
belong to different nationalities. Further, Arbitration clauses are applicable despite frustration
of contracts – this is now enshrined within the Arbitration and Conciliation Act, 1996. ('Act'
for short) is filed for appointing a sole arbitrator to adjudicate upon the disputes between the
peer and respondent.

In response to research questions it is evident now that the verdict in this case is fair and in
tandem not just with laws of that time but it continues to be good in law even in 2021. Further
it upholds and reaffirms certain past precedents while also giving a fresh perspective of law
in one of its issues.

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