Union of India Vs. A.L. Rallia Ram
[1963] INSC 108 (19 April 1963)
19/04/1963 SHAH, J.C.
SHAH, J.C.
SINHA, BHUVNESHWAR P.(CJ) AYYANGAR, N.
RAJAGOPALA
CITATION: 1963 AIR 1685 1964 SCR (3) 164
CITATOR INFO:
R 1964 SC1714 (10) R 1966 SC 275 (6) R 1966 SC
395 (16) R 1967 SC 188 (4) R 1967 SC 203 (9) R 1970 SC 729 (11) F 1971 SC 141
(8) R 1972 SC1507 (28,34) RF 1976 SC1533 (7) D 1979 SC 852 (3,5) RF 1980 SC 680
(19) E 1980 SC1109 (4) R 1984 SC1072 (22) F 1987 SC2045 (7) R 1988 SC2149 (13)
RF 1989 SC 606 (6) D 1992 SC 732 (30,40,41)
ACT:
Arbitration--Tender for purchase of
goods--Acceptance of--Clause for reference to arbitration--If binding on
Government--Reference of specific question of law--Arbitrator framing
issues--Parties agreeing to issues being decided--If amounts to reference of
specific question of law--Setting aside of award-Error on the face of the
award--Government of India Act, 1935, (Geo. 5 Oh.2.), s. 175 (3).
HEADNOTE:
In 1946, the Chief Director of Purchases
(Disposals), Food Department, Government of India, invited tenders for
purchasing war surplus American Cigarettes. The respondent submitted a tender
offering to purchase the entire stockThis tender was accepted by a letter with
which was enclosed a Form containing the general conditions of contract
including a clause for arbitration. The respondent took delivery of 29,93, 597
packets and p. aid Rs. 17,78,573/6/4 for them. On inspection some of the
cigarettes were found to be mildewed and unfit for use. Ultimately, the
Government decided to cancel the contract with respect to the undelivered
cigarettes and offered to take back from the respondent cigarettes which
"were in their original packing and could be identified, subject to the
condition that no claim will be made by the respondent in respect of freight,
storage, rents, charges or any other expenses incurred by him in respect of the
cigarettes taken back." The respondent accepted this offer reserving his
right to claim incidental expenses. He returned 24,13,500 packets and Government
refunded Rs. 14,54,21517/, to him.
Thereafter, each party, in accordance with
the arbitration clause, appointed an arbitrator 165 and the arbitrators entered
upon the reference.
The parties filed their statements of claim
and written statements. Issues were framed and the parties agreed that the
dispute between them be tried on those issues. As the arbitrators were unable
to agree upon the decision they appointed an umpire. The umpire gave an award
awarding to the respondent Rs. 1,32,417/10/for loss suffered in respect of
cigarettes not returned, Rs. 1,25,000/for incidental expenses and Rs.
68,833/l2/3 as interest. The respondent applied to the Subordinate Judge for
filing the award and the appellant applied for setting aside the award.
The Judge ordered that a decree be issued in
terms of the award. In appeal the High Court confirmed the order. The appellant
contended that there was no arbitration agreement as the contract was not
executed in accordance with s. 175 (3) of the Government of India Act, 1955,
and that there was error of law apparent on the face of the award. The
respondent contended that the agreeing by the parties to a trim of the issues
raised amounted to a reference of specific questions and the award on such
reference could not be set aside even if there was error apparent on the face
thereof.
Held that there was a binding arbitration
agreement between the parties and the arbitrators had jurisdiction to enter
upon the reference. The letter of acceptance of the tender signed by the
Director of Purchases fulfilled all the requirements of s. 175 (3) of the
Government of India Act.
Section 175 (3) did not require the execution
of any formal document nor was there any such direction by the GovernorGeneral
in respect of sale of disposals goods. The goods offered to be sold belonged to
the Government of India and all the action in respect thereof was taken by the
Government and in the name of the Government. There was thus a binding contract
between the parties which contained an arbitration clause. Further, the
appellant was not precluded from challenging the existence of a binding
arbitration. agreement on account of its having submitted to the jurisdiction
of the arbitrators and on account of its not having raised the objection before
them, as the 'jurisdiction of the arbitrators depended upon the existence of
such an agreement.
Seth Bikhraj Jaipuria v. Union of India,
[1962] 2 S.C.R.
880, referred to.
Held further, that agreeing to a trial of the
dispute on the issues raised by the arbitrators could not be regarded as
reference of specific questions of law implying an agreement between the
parties that they intended to give up their right to challenge the award before
the court even if the award 166 vitiated on account of an error apparent on the
face thereof. The parties merely agreed to have their differences adjudicated
on the issues raised, and not to submit the issues raised for adjudication.
Besides, the agreement before the arbitrators could not amount to a fresh
arbitration agreement independent of the original agreement, for to be valid
and binding the agreement had to satisfy the requirements of s. 175 (3) of the
Government of India Act, 1935. The appellant was entitled to attack the award
on the ground of error apparent on the face thereof.
Champsey Bhara and Company v. Jivraj Balloo
Spinning and Weaving Company Ltd., (1923) L.R. 50 I.A. 324, Seth Thawardas
Pherumal v. Union 0.1 India, [1955] 2 S.C.R. 48, F.R. Absalom Ltd. v. Great
Western (London) Garden village Society, [1933] A.C. 592, M/s. Alopi Petshad
& Sons ltd. v.
Union of India, [1960] 2 S.C.R. 793 and Durga
Prosad Chamaria v. Sewkishendas Bhattar, A.I.R. (1949) P.C. 334, referred to.
Held further that there was error of law on
the face of the award in so far as it awarded incidental expenses and interest
to the respondent and this part of the award had to be set aside. Incidental
expenses were awarded in respect of expenditure by the respondent on
advertisement, publicity, storage, agency commission and other overhead
expenses incurred after the respondent took delivery of the cigarettes, i.e.
when he had become owner of the goods. The expenditure was in respect of his
own goods and the respondent could not claim it as compensation for breach of
warranty in respect of the goods retained. Interest was awarded on all the
moneys paid by the respondent to the Government with respect to the goods
returned from the date of payment to the date of return. Such interest was
payable neither under s. 61 (2) of the Sale of goods Act as it was not a claim
for refund of sale price nor under the Interest Act. In the absence of any
usage, contract, express or implied, or of any provision of law to justify the
award of interest, interest cannot be awarded by way of damages. In respect of
that part of the contract which was abandoned, if any liability to pay interest
had arisen it was for the respondent to claim it in settling the terms of
cancellation of the contract. Interest could not be awarded on equitable
grounds.
Bengal Nagpur Railway Company Ltd. v.
Ruttanji Ramji, (1937) LR. 65 I.A. 66 and Maine and Hew Brunswick Electrical
Power Company v, Hart, [1929] A.C. 631, referred to.
CIVIL APPELLATE JURISDICTION Civil Appeal No.
414 of 1961, 167 Appeal from the judgment and decree dated April 17, 1958 of
the Punjab High Court in F.A.O. No. 75 of 1951.
Bishan Narain, Naunit Lal and R.N. Sachthey,
for the appellant.
G.S. Pathak, Anant Ram Whig, B. Datta and
Gvan Singh Vohra, for the respondent.
1963. April 19. The Judgment of the Court was
delivered by SHAH J.--This is an appeal with certificate under Art. 133 (1) (c)
of the Constitution against the order of the High Court of Punjab in First
Appeal No. 75 of 1951 confirming the order of the Subordinate Judge, Delhi,
refusing a motion to set aside an award directing payment by the Union of India
of Rs. 3,26,251/6/3 with costs and future interest a per cent to the
respondent.
In August, 1946, the Chief Director of
Purchases (Disposals), Food Department, Government of India, invited tenders
for purchasing the stock of American cigarettes lying in Calcutta, Karachi,
Delhi and Agra. The respondent submitted his tender offering to purchase the
entire stock at uniform rate of Re. -/8/3 per packet of 20 cigarettes. The
total value of the stock offered at that rate amounted approximately to Rs. 39
lakhs. The Government of India accepted the tender. The acceptance letter (with
which was enclosed Form F.D. (M)70 setting out the general conditions of
contract) was signed by the Chief Director of Purchases. Condition No. 13 in
Form F.D. (M) 70 contained an arbitration clause:
"In the event of any question or dispute
arising under these conditions or any special 168 Conditions of Contract or in
connection with this contract (except as to any matters the decision of which
is specially provided for by these conditions) the same shall be referred to
the award of an arbitrator to be 'nominated by the Chief Director and an
arbitrator to be nominated by the Contractor or in the case of the said
arbitrators not agreeing, then to the award of an Umpire to be appointed by the
arbitrators in writing before proceeding on the reference and the decision of
the arbitrators, or in the event of their not agreeing of the Umpire appointed
by them shall be final and conclusive x x x x The respondent took delivery of
29,93,597 packets of cigarettes and paid Rs. 17,78,573/6/4 but on inspection he
found that some cigarettes were mildewed and unfit for use.
A Board of Survey appointed by the Government
of India to inspect the undelivered stock reported that cigarettes of the value
of Rs. 6,58,453/were wholly "unfit for issue," for the remaining
cigarettes the Board recommended reduction in price at certain rates. The
respondent did not agree to accept the goods on the revised terms reported by
the Board and requested the Government of India to agree to a uniform reduction
of 50 per cent in price on the cigarettes delivered to him as well as those
still lying with the Government. The Government of India thereafter decided to
cancel the contract in respect of the undelivered cigarettes, and offered to
take back from the respondent, out of the stock of cigarettes delivered such as
"were in their original packing and could be identified," subject to
the condition that no claim will be made by the respondent in respect of
freight, storage, rents, charges or any other expenses incurred by the
respondent in connection with the cigarettes taken back by the Government. The
respondent accepted the offer made by the 169 Government, reserving his right
"to claim incidental expenses." 24,13,500 packets of cigarettes in
the original packing were then returned by the respondent and between June 13,
1947 and February 8, 1948, Rs. 14,54,215/7/were refunded to him by the
Government of India.
On June 26, 1948 the respondent addressed a
letter to the Director General of Disposals intimating that he had appointed M.
W. Lewis as arbitrator on his behalf in accordance with el. 13 of the general
conditions of F.D. (M) 70 and called upon the Director General of Disposals to
appoint his arbitrator. By his letter dated July 7, 1948 the Director General
informed the respondent that the Government of India had appointed Bakshi Shiv
Charan Singh as their arbitrator, reserving full liberty to take all pleas
before the arbitrator including the plea that no dispute between the parties
which could be referred to arbitration survived.
The arbitrators entered upon the reference
but could not agree upon a decision, and the dispute was referred to an umpire.
The umpire by his award dated January 30, 1950 awarded to the respondent Rs.
1,32,417/10/for loss suffered in respect of the 6,34,270 packets of cigarettes
not returned by him; Rs. 1,25,000/for incidental expenses; and Rs. 68,833/12/3
as interest. The umpire accordingly awarded against the Union of India Rs. 3,26,251/6/3
and future interest and costs of the arbitration.
The respondent applied to the Subordinate
Judge, Delhi for filing the award under s. 14 of the Arbitration Act, and the
Union of India applied for an order setting aside the award.
It was contended, by the Union of India that
there was no legally binding contract between the Union and the respondent, for
the acceptance note was not 170 signed on behalf of the Governor-General of
India, and the entire proceeding including the appointment of the arbitrators
and the umpire was vitiated for want of compliance with s. 175 (3)of the
Government of India Act, and that in any event the award contained errors of
law apparent on its face. The Subordinate Judge, refused the motion for setting
aside the award and ordered that a decree be issued in terms of the award. In
appeal against the order refusing to set aside the award, the High Court of
Punjab confirmed the order.
Two questions arise for determination in this
appeal :-(1) Whether the award is liable to be set aside on the ground that
there was in existence no valid arbitration agreement in conformity with s. 175
(3) of the Government of India Act, 1935 which authorised the umpire to make
his award; and (2) whether the award is liable to be set aside on the ground
that it is erroneous on the face thereof.
The letter accepting the tender dated
September 9, 1946 issued under the signature of the Director of Purchases
recited that the tender submitted by the respondent was accepted to the extent
shown in the schedule attached to the letter and subject to the special terms
and conditions in the letter from the Chief Director of Purchases, and the
general conditions of contract in Form F.D. (M) 70 which accompanied that
letter. The general conditions of contract by the first clause defined
'Government' as meaning "the Governor-General for India in Council and
when the context so admits his successors and assigns and the Government of
India and officers acting for him or them." By cl. 2 it was 171 provided
that the Governor-General for India in Council was not bound to accept the
highest or any tender or to assign reasons for non-acceptance. The other
clauses prescribed conditions for payment of price, state of goods, risk,
delivery, liability, failure to pay price and failure to take delivery after
payment, recovery of sums due, etc. By cl. 13, the arbitration clause was
incorporated as a term of the contract. Acceptance of the tender was therefore
subject to the special conditions in the letter of the Chief Director of
Purchases and the general conditions in F.D. (M) 70, and in case of conflict
special conditions were to prevail over the general conditions.
Did the terms of the acceptance letter which
formed the contract between the parties comply with the requirements of the
Government of India Act, 1935? Section 175 (3) provided:
"All contracts made in the exercise of
the executive authority of the Dominion or of a Province shall be expressed to
be made by the Governor-General, or by the Governor of the Province, as the
case may be, and all such contracts and all assurances of property made in the
exercise of that authority shall be executed on behalf of the Governor-General
or Governor by such persons and in such manner as he may direct or
authorise." The section was in terms mandatory. Before a liability binding
the Dominion of India could arise, the contract had to be expressed to be made
by the Governor-General, if it was made in exercise of the executive authority
of the Dominion, and it had to be executed on behalf of the Governor-General,
and by such persons and in such manner as he directed or authorised. This Court
in Seth Bikhraj Jaipuria v. Union of India (1), held in dealing with the validity
of contract which did not conform to (1) [1962] 2 S.C. R. 880, 172 the
requirements of s. 175 (3) of the Government of India Act that the provisions
of s. 175 (3) were mandatory and not directory and if the contract did not
conform to the requirements prescribed by s. 175 (3), no obligation enforceable
at law flowed there from.
The authority of an arbitrator depends upon
the authority conferred by the parties by agreement to refer their differences
to arbitration. By s. 2 (a) of the Arbitration Act, 1940 "arbitration
agreement" means "a written agreement to submit present or future
differences to arbitration, whether an arbitrator is named therein or
not." A writing incorporating a valid agreement to submit differences to
arbitration is therefore requisite: it is however not a condition of an
effective arbitration agreement that it must be incorporated in a formal
agreement executed by both the parties thereto, nor is it required to be signed
by the parties; There must be an agreement to submit present or future
differences to arbitration, this agreement must be in writing, and must be
accepted by the parties. Clause 13 in Form F.D. (M) 70 fulfils all these
requirements. But the Dominion of India being a party to the arbitration
agreement, to be binding the agreement had also to conform to the requirements
of s.
175 (3) of the Government of India Act, 1935,
for an arbitration agreement is a contract within the meaning of the Government
of India Act and it must, to bind the Dominion of India, be made in the form
prescribed by that section. The question which then falls to be determined is
whether the letter accepting the tender of the respondent conformed to the
requirements of s. 175 (3)of the Government of India Act.
Section 175 (3) does not in terms require
that a formal document executed on behalf of the Dominion of India, and the
other contracting party, 173 alone is effective. In the absence of any
direction by the Governor-General under s. 175 (3) of the Government of India
Act prescribing the manner a valid contract may result from correspondence if
the requisite conditions are fulfilled.
The contracts for sale of
"War-disposal" goods were not directed by the Governor-General to be
made by a formal document executed on behalf of the Governor General as well as
by the purchasing party. It is true that s, 175 (3) uses the expression
"executed" but that does not by itself contemplate execution of a
formal contract by the contracting parties. A tender for purchase of goods in
pursuance of an invitation issued by or on behalf of the Governor-General of
India and acceptance in writing which is expressed to be made in the name of
the Governor-General and is executed on his behalf by a person authorised in
that behalf would conform to the requirements of s. 175 (3).
The goods offered to be sold belonged to the
Government of India. The tender notice was also issued by the Government of
India, Department of Food. The title of the notice was "Tender Notice
issued by the Government of India, Department of Food (Division III), New
Delhi." The name of the authority issuing the tender notice was
"Government of India, Department of Food (Division III), office of the
Chief Director of Purchases, Jamnagar House, New Delhi." By el. 9 delivery
was to be made, ex site the Government agreeing to afford assistance for
movement to the extent feasible, and by cl. 11 import duty on the cigarettes
was to be , paid by the Government. Clause 6 provided that the stock of
cigarettes to be delivered will be surveyed by the Survey Board appointed by
the Government of India and the decision of the Board shall be binding on the tendered.
In the letter dated August 21, 1946, submitting his tender the respondent
stated that he, was Willing to offer a 174 rate of Re.-/8/3 per packet only on
the condition that the Government gave "a guarantee not to undersell the
cigarettes at any stage.;' It appears that the respondent had a discussion with
the Chief Director on September 3, 1946, and certain terms were agreed upon,
which were robe incorporated in the acceptance letter. In his letter dated
September 4, 1946, the respondent set out these terms.
These terms clearly show that the Government
undertook certain obligations, such as appointment of a Survey Board, if the
goods were rejected on the ground that they were unfit for consumption, issue
of separate delivery letters for each Depot to facilitate delivery, and an
assurance that the Government shall tender help in getting railway priority and
other transport facilities in the dispatch of goods lying at the various
depots, undertaking transportation from the Assam Depot to Calcutta at the risk
and cost of the Government. These conditions were incorporated in the
acceptance note issued by the Chief Director of Purchases. The acceptance note
is also headed "Government of India, Department of Food (Div.III) New
Delhi" and refers to the obligations of the Dominion in cls. 6, 9, 10 and
by cl. 13 made the special conditions prevail over the general conditions which
were incorporated in the contract. The correspondence between the parties
ultimately resulting in the acceptance note, in our judgment, amounts to a
contract expressed to be made by the Government and therefore by the Governor-General,
because it was the Governor-General who .had invited the tender through the
Director of Purchases, and it was the Governor-General who through the Chief
Director of Purchases accepted the tender of the respondent subject to the
conditions prescribed therein. The authority of the Chief Director of Purchases
to contract for sale of "War-disposal" goods and sign the contract is
not denied. The Chief Director of Purchases has subscribed his signature in his
official 175 designation and he has not stated in the description that the
contract was executed on behalf of the Governor-General, but on a fair reading
of the contents of the letter, in the light of the obligations undertaken there
under, it would be reasonable to hold that the contract was executed on behalf
of the Governor-General. No rules made by the Governor General have been placed
before the Court showing that in executing a contract for the sale of "Wardisposal"
goods, the officer authorised in that behalf must describe himself as signing
on behalf of the Governor-General of India.
The High Court held that the Government of
India having agreed to refer differences to arbitration and having taken part
in the proceeding before the arbitrators and the umpire, had waived the
objection as to the illegality of the contract and could not therefore raise
any such objection in an application for setting aside the award. We are unable
to agree with that view. The requirements of s. 175 (3) of the Government of
India Act are mandatory, and the fact that the Government of India did not
contend before the arbitrator that there was in law no arbitration agreement on
which the arbitrator was competent to act would not invest the arbitration
agreement with any validity. It is from the terms of the arbitration agreement
that the arbitrator derives his authority to arbitrate: if in law there is no
valid arbitration agreement, the proceedings of the arbitrator could be
unauthorised. Every contract to bind the Government must comply with the
requirements of s. 175 (3) of the Government of India Act, 1935, and waiver
will not preclude the Government from pleading absence of a contract in
consonance with the law. An award being a decision of an arbitrator whether a
lawyer or a layman chosen by the parties, and entrusted with power to decide a
dispute submitted to him is ordinarily not liable to be challenged on the
ground that it is 176 erroneous. In order to make arbitration effective and the
awards enforceable, machinery is devised for lending the assistance of the ordinary
courts. The Court is also entrusted with power to modify or correct the award
on the ground of imperfect form or clerical errors, or decision on questions
not referred, which are severable from those referred. The Court has also power
to remit the award when it has left some matters referred undetermined, or when
the award is indefinite, where the objection to the legality of the award is
apparent on the face of the award. The Court may also set aside an award on the
ground of corruption or misconduct of the arbitrator, or that a party has been
guilty of fraudulent concealment or wilful deception. But the. Court cannot
interfere with the award if otherwise proper on the ground that the decision
appears to it to be erroneous. The award of the arbitrator is ordinarily final
and conclusive, unless a contrary intention is disclosed by the agreement. The
award is the decision of a domestic tribunal chosen by the parties, and the
civil courts which are entrusted with the power to facilitate arbitration and
to effectuate the awards, cannot exercise appellate powers over the decision.
Wrong or right the decision is binding, if it be reached fairly after giving
adequate opportunity to the parties to place their grievances in the manner
provided by the arbitration agreement. But it is now firmly established that an
award is bad on the ground of error of law on the face of it, when in the award
itself or in a document actually incorporated in it, there is found some legal
proposition which is the basis of the award and which is erroneous. An error in
law on the face of the award means: "you can find in the award or a
document actually incorporated thereto, as for instance, a note appended by the
arbitrator stating the reasons for his judgment, some legal proposition which
is the basis of the award and which you can then say is erroneous. It does not
mean that if in a narrative a reference is made to 177 a contention of one
party, that opens the door to setting first what that contention is, and then
going to the contract on which the parties' rights depend to see if that
contention is sound" Champsey Bhara and Company v. Jivraj Balloo Spinning
and Weaving Company Ltd. (1). But this rule does not apply where questions of
law are specifically referred to the arbitrator for his decision; the award of
the arbitrator on those questions is binding upon the parties, for by referring
specific questions the parties desire to have a decision from the arbitrator on
those questions rather than from the Court, and the Court will not, unless it
is satisfied that the arbitrator had proceeded illegally interfere with the
decision.
The argument advanced by the respondent that
in the present case specific questions were referred to the umpire, and his
decision on those questions must be regarded as binding and not liable to be
re-opened, even assuming that there is some error on the face of the award,
must therefore be examined. The arbitrators on July 16, 1948 called upon the
parties to file their respective statements of claim and written statement. The
respondent filed on August 16, 1948, an argumentative claim petition setting
out in paragraph-22 the three heads under which he made a total claim of Rs.
5,95,518/13/-. To this claim, the Dominion of
India filed a written statement denying the claims made by the respondent. A
replication was filed by the respondent to the written statement. The
arbitrators recorded that the parties had complied with the order, that issues
had been proposed by counsel for the respondent, and that the parties were
agreed that the dispute between them be tried on those issues. Then they set
out ten substantive issues, and evidence was led before the arbitrators. The
arbitrators recorded that they were unable to agree upon the decision, and
therefore they submitted the case to the umpire R.B.
Nathoo Ram. The umpire entered upon the
reference, the (1) (1932) L.R. 50 I. A, 324.
178 evidence which was recorded before the
arbitrators was accepted as evidence before the Umpire, and the umpire
proceeded to pronounce his award after recording reasons in support of his
conclusions on the diverse issues which were raised before the arbitrators. But
filing of pleadings pursuant to the directions of the arbitrators and agreeing
to a trial of the dispute on the issues raised by the arbitrators cannot be
regarded as reference of specific questions implying an agreement between the
parties that they intended to give up their right to resort to the Courts even
if the award was vitiated on account of an error apparent on the face thereof.
The only permissible inference from the agreement recorded by the arbitrators
was that the parties agreed to have the dispute8 adjudicated on the issues
raised, and not to submit the issues raised for adjudication. The terms of el.
13 of the contract F.D. (M) 70 which incorporated the arbitration agreement are
general. By his letter dated June 26, 1946 the respondent intimated the
Director of Purchases that he had appointed an arbitrator on his behalf
"in accordance with clause No.13 of the general conditions of the
contract" and the appointment of an arbitrator by the Union by their
letter dated July 7, 1948 (subject to the reservation of a right to contend
that there was no dispute) for adjudication of the claim made by the
respondent. In these two letters there is no reference to any specific
questions to be referred to the arbitrators:
nor can the filing of pleadings in support of
their respective cases by the parties pursuant to the direction given by the
arbitrators, and the framing of issues arising thereon with the object of focusing
the attention of the parties on the question to be decided for adjudicating
upon the dispute amount to a reference on specific questions, rendering the
award binding upon the parties. In Seth Thawardas Pherumal v. The Union of
India (1), Bose, J, delivering the judgment of the Court observed in dealing
with the contention that there was a reference of a specific question, and (1)
[1955] 2 S.C.R. 48.
179 the award was nor liable to be questioned
even on the ground that it disclosed an error on its face:
"Therefore, when a question of law is
the point at issue, unless both sides specifically agree to refer it and agree
to be bound by the arbitrator's decision, the jurisdiction of the Courts to set
an arbitration right when the error is apparent on the face of the award is not
ousted. The mere fact that both parties submit incidental arguments about point
of law in the course of the proceedings is not enough." The learned Judge
also observed at p. 59 after referring to F.R. Absalom Ltd. v. Great Western
(London) Garden Village Society (1):
"Simply because the matter was referred
to incidentally in the pleadings and arguments in support of, or against, the
general issue about liability for damages, that is not enough to clothe the
arbitrator with exclusive jurisdiction on a point of law." In dealing with
a similar question in M/s. Alopi Parshad & Sons Ltd. v. The Union of India
(2), the Court observed:
"Issues were undoubtedly raised by the
arbitrators, but that was presumably to focus the attention of the parties on
the points arising for adjudication. The Agents had made their claim before the
arbitrators, and the claim and the jurisdiction of the arbitrators to
adjudicate upon the claim, were denied. The arbitrators were by the terms of
reference only authorized to adjudicate upon the disputes raised. There is no
foundation for the view that a specific (1) [1933] A.C. 592, 616. (2) [1960] 2
S. C. R. 793.
180 reference, submitting a question of law
for the adjudication of the arbitrators, was made." In Durga Prosad
Chamria v. Sewkishendas Bhattar (1), the Judicial Committee held that questions
of law were specifically referred to arbitration where in a pending suit after
issues were raised with the consent of parties "the outstanding
matters" in the suit were referred to three named arbitrators, conferring
upon them special enumerated powers. But the decision was reached in the
special circumstances of the case, and not on the view that where agreed issues
are raised before the arbitrator on the pleadings filed before him, the
reference must be regarded as a reference on the specific questions
incorporated in the issues.
Undoubtedly, under an arbitration agreement
which is initially in terms general the parties may after disputes have
actually arisen, refer specific questions to arbitration. But each case must
depend upon its facts.
Filing of pleadings before the arbitrators,
or even an agreement that certain issues arise on the pleadings will not always
yield the inference that the parties agreed to refer specifically the questions
incorporated in the issues to the arbitrator, so as to preclude themselves from
challenging the award on the ground of error of law on the face of the award.
The test indicated by Lord Russell of
Killowen in F.R.
Absalom Ltd. v. Great Western (London) Garden
Village Society Ltd. (2) adequately brings out the distinction between a
specific reference of a question of law, and a question of law arising for
determination by the arbitrator in the decision of the dispute. was observed at
p. 607:
" x x, it is, I think, essential to keep
the case where disputes are referred to an arbitrator in the decision of which
a question of law (1) A.I.R. (1949) P.C 334, (2) [1933] A.C.
592,616 181 becomes material distinct from
the case in which a specific question of law has been referred to him for
decision. x x x x The authorities make a clear distinction between these two
cases, and, as they appear to me, they decide that in the former case the Court
can interfere if and when any error of law appears on the face of the award,
but that in the latter case no such interference is possible upon the ground
that it so appears that the decision upon the question of law is an erroneous
one." Then after referring to the authorities it was observed at p. 610:
" x x x The primary quarrel between the
parties was whether, if the value of work executed and materials on site up to
and including March 11, 1929, had been truly assessed, the net value available
for certification on that date was in excess of(as the contractor alleged) or
less than (as the employer contended) the amount which had actually been
certified up,to and including that date x x x x. Those were the disputes in
regard to the issue of certificates and the validity of the notice' which were
in general terms submitted to the arbitrator. No specific question of
construction or of law was submitted. The parties had, however been ordered to
deliver pleadings, and by their statement of claim the contractor had claimed
that the arbitrator should under his powers revise the last certificate issued
so as to include therein the excess net value which they had alleged and which
the arbitrator has found (though for a reduced amount) to have existed. on
March 11, 1929. It is at this point that the question of the construction of
condition 30 arose as a question of law, not specifically submitted, but
material in the decision of the 182 matters which had been submitted. This
question of law the arbitrator has decided;
but if upon the face of the award he has
decided it wrongly his decision is in my opinion open to review by the
Court." In the present case the respondent had claimed from the Dominion
of India, compensation m respect of the goods delivered to him under the
contract, interest on the amounts raised by him for carrying out the contract
and for incidental expenses incurred by him after delivery of the goods. That
dispute was referred to arbitration pursuant to clause 13 of Form F.D. (M) 70.
Pleadings were filed. by the parties pursuant to the direction of the
arbitrators, but thereby the parties did nothing more than state in writing
their respective cases. the parties also agreed that certain issues arose on
those pleadings but the function of the issues was to focus the attention of
the parties to the points on the decision of which the adjudication of the
dispute between the parties depended. The issues of law may be material for the
determination of the dispute, but they are not issues of law specifically
referred to the arbitrators.
There is one more aspect which must be
considered.
Assuming that during the course of
arbitration proceedings, the parties may enter into. a fresh agreement and
modify the original terms of reference, and extend or restrict their scope. But
such an agreement must, to be effective, amount to an arbitration agreement.
The respondent has not relied and could not rely upon any subsequent agreement
modifying the agreement of reference, for any subsequent contract between him
and the Union of India had also to satisfy the requirements of s. 175 (3) of
the Government of India Act, 1935 or Art. 299 of the Constitution if such an
agreement took place after the Constitution came into force and 183 such an
agreement can only be in the form prescribed by these constitutional
provisions. By merely assenting to the issues raised before the arbitrators the
advocate appearing on behalf of the Government of India could not assume to
himself authority to bind the Dominion or the Union to a specific reference on
a question of law, because a reference on a specific question may be effective
only if there be an agreement express or implied that the arbitrator will
decide the question specifically referred to him and that his decision will be
binding upon the parties. In the absence of any such contract in the form
prescribed, a plea of an agreement subsequent to the reference would be futile.
We are therefore unable to agree with the High Court that specific questions of
law were referred to the arbitrators, the decision whereof is binding upon the
parties.
The question then remaining to be decided is
whether the award of the umpire was in law erroneous on the face of it. The
umpire has awarded Rs.1,32,417/10/-under the head loss suffered by the respondent
in respect of the packets of cigarettes delivered to him. He has awarded Rs. 1,25,000/in
respect of the incidental expenses and Rs. 68,833/12/3 as interests. The Loss
sufferred in respect of the packets of cigarettes is computed in this manner:
the contract rate of cigarettes was Re.-/8/3 per packet, the respondent was
able to sell the packets supplied to him at the rate of 'Re. -/4/9 per packet.
That a part of the stock of cigarettes supplied to the respondent was mildewed
and unfit for consumption is not denied. The respondent was therefore entitled
to claim compensation for breach of contract on the ground that the Government
of India had committed a breach of warranty. It appears that the Government
disposed of some stock of cigarettes at the rate of Re.-/1/9 per packet. The
respondent had claimed that the goods supplied to him were only 184 worth
Re.-/1/9 per packet because that was the price. which the Government recovered
by sale of similar goods and he was entitled to get from the Government as
compensation the difference at the rate of Re,-/6/6 per each packet. The umpire
held that the respondent was not entitled to compensation at the rate claimed
by him but to get the difference between the price paid and price received by
him on sale. In our view no error apparent on the face on this part of the
award is disclosed and the award in so far as it awards Rs. 1,32,417/10/to the
respondent under this head is not open to challenge. But on the second head the
claim for Rs. 1,25,000/for incidental expenses cannot be sustained. The umpire
in paragraph (xi) of his award observed:
"While the Government sold the stocks of
cigarettes taken back by it at Re. -/1/9 the purchaser was able to get a very
substantial higher price. This undoubtedly resulted from the efforts which he
put in, advertisement, publicity, storage, transport, payment of agency
commission and other overhead expenses.
It appears to me that to all such expenses
the purchaser is clearly entitled, in addition to the expenses incurred by him
with respect to the cigarettes taken by the Government. The law of compensation
compels me to hold that all expenses incurred by the purchaser with respect to
the cigarettes taken back by the Government must be paid to him." This
observation proceeds upon a clear fallacy. The respondent had purchased and
taken delivery of 29,74, 270 packets, out of which he sold 6,34,270 packets and
returned 23,40,000 packets under an arrangement whereby the Government of India
was to take back the goods found with the respondent in their original packing.
The respondent had purchased the goods under the acceptance of tender dated 185
September 9, 1946 which provided by cl. 11 that "All sales will be
conducted on the distinct understanding that the goods sold are on a 'said to
contain' basis. No responsibility for quality will be accepted whatsoever after
the delivery is made at the depot". When he took delivery of the goods, he
became owner of the goods by the express intendment of the contract. The
expenditure incurred for advertisement, publicity, storage, agency commission
and other overhead expenses since the respondent took delivery was therefore in
respect of his own goods and he cannot claim these expenses as part of
compensation payable for breach of warrant in respect of goods retained by him.
The respondent was undoubtedly entitled to the difference between the contract
price and the market price of the goods which he retained, and that
compensation has been awarded to him. Transport and storage charges after the
Government agreed to take back the goods, properly attributable to the goods,
may also be awarded to the respondent as expense incurred on behalf of the
Government of India. But no such claim was made. For the goods returned the
respondent could not maintain a claim for damages, because the contract was by
mutual arrangement cancelled. For his claim for incidental expenses in respect
of goods appropriated by him the respondent's claim could not be, apart from
the damages, awarded. The amount of Rs. 1,25,000/awarded by the umpire to the
respondent, on the head of incidental expenses could not therefore be awarded
as compensation, on any view of the case. The amount has been awarded on an
erroneous assumption of law, which is on the face of it erroneous.
We. are, therefore, of the view that the
award on that part cannot be sustained.
The claim for interest was discussed by the
umpire in paragraph (ix) of his award:
"Applying the principles on which
compensation is assessed, I have come to the conclusion 186 that the purchaser
was entitled to be paid interest on all the moneys paid by him to the
Government, with respect to stores taken back by the Government, fight from the
date of payment up to the date on which moneys were returned. The rate of such
interest has to be the same as the rate at which the purchaser paid interest to
his bankers. This I find on the evidence to be 0 per cent per annum.
Irrespective of the rate at which the
Government usually borrows money, the law of compensation compels me to award
interest at the rate of 6 per cent per annum." It is again difficult to
appreciate on what ground, interest could be awarded to the respondent. The
contract did not provide for payment of interest in respect of amounts paid by
the respondent if the contract fell through.
Nor could interest be awarded under s. 61 of
the Sale of Goods Act. The right of the seller or the buyer to recover interest
or special damages in any case where by law interest or special damages may be
recoverable, or to recover the money paid where the consideration for the
payment of it has failed, is undoubtedly not affected by the Sale of Goods Act,
and by sub-s. (2) of s. 61 in the absence of a contract to the contrary, the
Court may award interest at such rate as it thinks fit on the amount of the
price to the buyer in a suit for refund of the price in case of a breach of the
contract on the part of the seller. But the claim made by the respondent was
not for refund of price.
In respect of that part of the contract which
was cancelled, by mutual agreement, price paid was refunded. In respect of the
goods sold by the respondent his claim was for damages, and damages have been
awarded. The respondent claimed before the umpire (and that claim was upheld)
that he had to borrow from his bankers a large amount of money for meeting his
obligation under the contract with the Government 187 and he was entitled to
recover from the Dominion of India interest paid by him to his bankers, for the
period during which his moneys remained with the Dominion of India. Mr. Pathak
for the respondent submits that the umpire was in this state of affairs
competent to award interest on the amount which was detained by the Dominion by
way of damages.
But as held by the Judicial Committee in
Bengal Nagpur Railway Company Ltd. v. Ruttanji Ramji (1), in the absence of any
usage or contract, express or implied, or of any provision of law to justify
the award of interest, interest cannot be allowed by way of damages caused to
the respondents for wrongful detention of their money. In that case in an
action against the Railway Company for remuneration for work done by the
contractor not covered by the contract Rs. 67,000/were found due by the Railway
Company to the contractor on the basis of fair and reasonable rates. The
contractor claimed interest on that amount for the period prior to the date of
the suit. The Judicial Committee held that interest on the amount awarded as
compensation could not be awarded by way of damages, and there being no
contract, nor statute, nor usage in support of such a claim, the claim for
interest had to be disallowed.
In dealing with the claim for interest on the
principle incorporated in illustration (n) of s. 73 of the Indian Contract Act
which is as follows:
(n) "A, contracts to pay a sum of money
to B, on a day specified. A, does not pay the money on that day; B, in
consequence of not receiving the money on that day, is unable to pay his debts,
and is totally mined. A. is not liable to make good to B, anything except the principal
sum he (1) (1937) L.R. 65 I.A. 66.
188 contracted to pay, together with interest
up to the day of payment." The Judicial Committee observed at p. 72:
"The illustration, however, does not
deal with the right of a creditor to recover interest from his debtor on a loan
advanced to the latter by the former. It only shows that if any person breaks
his contract to pay to another person a sum of money on a specific date, and in
consequence of that breach the latter is unable to pay his debts and is ruined,
the former is not liable to make good to the latter anything except the
principal sum which he promised to pay, together with interest up to the date
of payment. The illustration does not confer upon a creditor a right to recover
interest upon a debt which is due to him, when he is not entitled to such
interest under any provision of the law. Nor can an illustration have the
effect of modifying the language of the section which alone forms the
enactment." Illustration (n) therefore does not aid the respondent.
Mr. Pathak submitted that interest may be
awarded on grounds of equity, and placed reliance upon the Interest Act,
3" of 1839. Under that Act the Court may allow interest to the plaintiff
if the amount claimed h a sum certain which is payable at a certain time by
virtue of a written instrument. The Act, however, contains a proviso that
interest shall be payable in all cases in which it is now payable by law. This
proviso applies to cases in which the Court of Equity exercises jurisdiction to
allow interest. As observed by the Judicial Committee in Bengal Nagpur Railway
Company's case (1) after referring to the observation made by Lord Tomlin in
Maine and New Brunswick Electrical Power Company v. Hart (2), observed:
(1) (1937) L.R. 65 I.A. 66, (2) [1929] A.C.
631,540.
189 "In order to invoke a rule of equity
it is necessary in the first instance to establish the existence of a state of
circumstances which attracts the equitable jurisdiction, as, for example, the
non-performance of a contract which equity can give specific performance. The
present case does not, however, attract the equitable jurisdiction of the court
and cannot come within the purview of the proviso.
The judgment of Their Lordships of the Privy
Council in Bengal Nagpur Railway Company's case (1) was relied upon in Seth
Thawerdas Pherumal's case (2) in negativing a claim for interest. In that case
a contractor had entered into a contract with the Dominion of India for supply
of bricks.
Under a clause which required that all disputes
between the parties to the contract should be referred to arbitration, dispute
having arisen, the matter was referred to arbitration and the arbitrator gave
award in the contractor's favour. The Union of India which had succeeded to the
rights and obligations of the Dominion contested the award on numerous grounds
one of which was the liability to pay interest on the amount awarded. Bose, J,
in delivering judgment of the Court observed that the interest awarded to the
contractor could not in law be awarded. He pointed out that an arbitrator is
not a court within the meaning of the Interest Act of 1839: in any event
interest could only be awarded if there was a debt or a sum certain, payable at
a certain time or otherwise, by virtue of some written contract at a certain
time and there must have been a demand in writing stating that interest will be
claimed from the date of the damand. In the view of Bose, J, none of the
elements was present and the arbitrator erred in law in thinking that he had
the power to allow interest simply because he thought the demand was
reasonable.
(1) (1937) L.R. 65 I.A. 66. (2) [1955] 2
S.C.R. 48.
190 The umpire has awarded interest to the
respondent on the footing that for the purpose of carrying out his contract
with the Government of India, the respondent was required to make arrangements
by borrowing moneys from his bankers and he had to pay interest in that behalf,
and when the contract was abandoned after it was partially performed, the
Government of India became liable to make good the loss of interest which the
respondent suffered. We know of no principle on which the Government of India
could be rendered liable for payment of interest in the circumstances relied
upon. In respect of that part of the contract which was abandoned,. if any
liability to pay interest had arisen it was for the respondent to claim it in
settling the terms on which cancellation of the contract was to be made. In
respect of the goods which had been returned by him, he could claim
compensation for breach of warranty, but such compensation could not include
interest as damages for detention of money. Interest was therefore allowed on a
view of the law which appeared on the face of the award to be erroneous.
This appeal must be partially allowed and the
award of the umpire set aside in so far as it awards interest amounting to Rs.
68,833/12/3 and incidental expenses amounting to Rs. 1,25,000/-. The award in
so far as it awards Rs. 1.32,417/10/for loss suffered by the respondent in the
matter of 6,34,270 packets of cigarettes is not liable to be set aside. In view
of the partial success, there will be no order as to costs throughout.
Appeal allowed in part.
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