State of U.P. and
others Vs M/s Combined Chemicals Company Private Limited
G.S. Singhvi, J.
1. Whether letter dated
16.11.1985 issued by the Director of Industries, Uttar Pradesh (appellant No.2)
conveying acceptance of the bid given by the respondent for supply of 200
metric tonnes ZincSulphate, Agriculture Grade, could be treated as an agreement
executed by the parties, whether the respondent could invoke the arbitration clause
contained in the tender document, whether the Arbitrator appointed by Civil
Judge (Senior Division), Lucknow (here in after referred to as `the trial
Court') acted in violation of the rules of natural justice by declining the
appellants' prayer for adjournment and whether the award passed by the
Arbitrator is vitiated by patent error of law are the questions which arise for
consideration in this appeal filed by the State of U.P. and two others against
the judgment of the Division Bench of the Allahabad High Court, which dismissed
the appeal preferred by the appellants against the order passed by the trial
Court making award of the Arbitrator rule of the Court.
2. By an advertisement
dated 19.8.1985, appellant No.2 invited bids for supply of 2000 metric tonnes
Zinc Sulphate of Agriculture Grade on quantity basis to meet the requirement of
the Agriculture Department. Clause 16 of the tender form, which has bearing on
this case, reads thus: Tender Form:"16. In the event of any dispute
arising out of or concerning this Agreement (except as to any matters the
decision of which is specifically provided for in this Agreement), the same
shall be referred to the arbitration of an arbitrator nominated by the Director
of Industries, Uttar Pradesh and an arbitrator nominated by the contractor, or
in the case of the contractor or the said Director failing to nominate an
arbitrator within the time fixed in the notice to be served on him by the said
Director or the contractor, as the case may be by the arbitrator, nominated by
the said Director or the contractor, or in case of disagreement between the
said arbitrators to an umpire appointed by them and the decision of such
arbitrators/arbitrator/umpire as the case may be, shall be final and binding on
the parties. The arbitrators/arbitrator/umpire may from time to time with the
consent of the parties enlarge the time for making and publishing the
3. The bid given by the
respondent (Rs.5,451/- per metric tonne) was found to be the lowest. The
purchase committee of the Directorate of Industries approved the same.
Thereafter, appellant No.2 issued acceptance letter dated 16.11.1985 to the
respondent for supply of 200metric tonnes of Zinc Sulphate to the Directorate
of Agriculture. The relevant portions of that letter are extracted below: "ACCEPTANCE
LETTER From Value: Rs.10,90,200/- (Rupees Ten Lacs Ninety Thousand Two Hundred
only)The Director of Industries, Stores Purchase Department, Uttar Pradesh,
Kanpur. To,M/s. Combined Chemicals Pvt. Ltd. 15/1, 2 & 5, Industrial Estate
Vidisha-464002.Ref. No. SPS/VII-T.NO.272(G)/85 Dated:
a. This office tender
notice / enquiry No. 272(G)/85 dated 19.8.1985
b. Contractor's tender
quotation No.A-4242/A80/4GP/ZS dated 08.08.1985
c. Indentor's Indent No.
d. Designation and full
address of the indentor Director of Agriculture, U.P.
e. If rate contract -
All Government Department and quasi- Government Departments. Dear Sir, On
behalf of the Governor of Uttar Pradesh, I accept your tender/quotation
referred to above for the supply of stores as per details given in Schedule `A'
hereafter subject to the terms and conditions specified in the tender
notice/enquiry referred to above and in this acceptance letter. 2. The
supply order shall be placed on you by the indenting officer/officers direct
giving full instruction regarding dispatch, insurance of goods, name of
consignee, destination, railway station, payment of bills, etc.
Period of Contract -
Until the supply is satisfactorily completed in accordance with the aforesaid
terms and conditions.
7. Inspection -
For the purpose of this contract the consignee receipt shall be deemed as
the inspection certificate unless an inspection is stipulated before
dispatch. Ordinarily, the decision of the consignee or consignees as regards
the acceptability or otherwise of the stores shall be final. Defective
supplier shall have to be replaced at your cost.
Agreement - If so required, the successful tenderer shall have to execute a
formal agreement deed within the time fixed by the Director of Industries.
12. You are required
to send a statement giving details of order placed on you and executed by you
against this contract together with their value, within one month after the
expiry of this contract.
14. In the case of rate
of contract order shall be placed by the officer of various Government
Department directly. In the case of quasi- Government Departments, such as
Local Bodies and Municipal Boards, etc. the orders shall be placed this office.
and on behalf of the Governor.
VII-T.NO.272(G)/85 of dated 16.11.1985
Copy forwarded (1)
Director of Agriculture, U.P., Lucknow.
(1) He will please
place a supply order on the firm immediately giving detailed instructions
regarding dispatch, insurance of goods, name of consignee, destination, railway
station payment bills, etc. If the supply is not effected in time he will
please report to this office immediately about the delay in supplies.
Five Thousand Four hundred and Fifty One only)
Qty. Two hundred
Metric Tonnes only.
ISI Mark with IS:
7 The price shall remain firm till
the supply is completed satisfactorily. This contract shall exclusively be
governed by the terms and conditions mentioned in the Acceptance letter, Tender
Form and the Agreement Forms. No other condition shall be acceptable.
7 Agreement form must be received to
this office within 15 days from the date of issue of this Acceptance Letter.
7 The contract is being made for
and on behalf of the Governor of U.P."
4. The respondent
deposited the security money and dispatched a signed agreement to the
Directorate of Agriculture for completion of other formalities. It also sent
letters to appellant No.3 for issue of supply order, but the latter did not respond
apparently because the lowest rate of Rs.4,500 per metric tonne quoted in
response to another tender notice issued by appellant No.2 for supply of Zinc
Sulphate on rate contract basis was substantially less than the rate quoted by
the respondent and, therefore, the purchase committee decided to postpone implementation
of the acceptance letter dated 16.11.1985.
5. When the respondent
learnt about the aforesaid decision, it served a notice upon the appellants and
then filed a petition under Section 20 of the Arbitration Act, 1940 (for short,
`the Act') for appointment of an Arbitrator to decide the dispute relating to
supply of 200 metric tonnes of Zinc Sulphate. The same was registered as
Regular Suit No.244/1998. In the written statement filed on behalf of the
appellants, it was pleaded that the petition was not maintainable because no
contract had been executed between the parties and no order for supply of the goods
was placed with the respondent because the other firm had quoted much lower
6. By an order dated
28.3.1989, the trial Court overruled the objections raised on behalf of the
appellants and held that a contract was indeed executed between the parties for
supply of Zinc Sulphate. The trial Court then referred to clause 16 of the tender
form and directed the parties to propose name of their respective Arbitrator
within 20 days with the rider that if they fail to do so, then the Court will
7. The appellants did
not nominate the Arbitrator. Therefore, by an order dated 20.5.1989, the trial
Court appointed Shri Dipak Seth, Advocate as an Arbitrator.
8. The Arbitrator fixed
6.8.1989 for preliminary hearing but no one appeared on behalf of the
appellants. The respondent filed statement of claim for award of compensation
to the tune of Rs.42,92,015.90 along with cost of Rs.25,000/-. The details of
the claim lodged by the respondent are reproduced below:"
A. The Respondents
agreed to purchase goods @ Rs.5,451/- per metric tonne against production cost
of 1985 at Rs.4,674/- per tonne. The production cost diminished to Rs.2,895/-
per tonne, consequently, the Respondents by breaking contract put the claimant
to a direct loss of Rs.5,11,200.00.
B. The price quoted by
the claimant at Rs.5,451/- per tonne to the Respondents but on account of price
variation in the market, where price slumped from Rs.6,200/- to Rs.3,900/- per
tonne. The respondents, therefore, inflicted loss at Rs.2,300/- per tonne by
breaking the contract. The claimant entitled to rs.4,60,000/- on that account.
C. That the claimant's
tender in question to the respondents was it's first major transaction after
unit establishments and in view of pretended urgency, stipulation and regarding
immediate supplies etc. the claimants 8 procured raw material, engaged workmen
to utilize full capacity of the unit by availing maximum drawing powers against
working facilities. Total quantity required under the agreement was produced
under explicit intimation to the respondents.
The on account of
respondent's failure to accept delivery and consequent non-payment of agreed
price, the claimant had to incur the following direct losses namely:-
of interest to M.P. Financial Corporation from 01.10.85 to 20.09.89 on its
worth Rs.29,50,000/- @
of interest paid to the State Bank of Indore @
per annum quarterly
workmen of the claimant remained idle for
period 01.10.85 to 30.9.1988 when the Unit
declared sick and financial institution agreed
nurse but the claimant had to pay salary and
respondents are liable to compensate the claimant.
D. That on account of
business completely during 01.10.85 to 30.09.88, the claimant also suffered
loss of direct profit much loss at Rs.777.00 per tonne of install capacity and
still could utilize 60% the said capacity. The respondents are, therefore,
liable to compensate to the extent of rs.9,79,020.00.
E. That the claimant are
to pay interest to M.P. Financial Corporation and State Bank of Indore at the
rate not less than 12% per annum compoundable quarterly, therefore, till the
respondents actually pay the above said sums, the said respondents are liable
to compensate to the extent of amounts claimant may suffer on these accounts.
therefore, prays for the following reliefs against the respondents jointly,
severally or in alternative:
A. That by an award, the
claimant be declared entitled to recover and receive Rs.42,92,015/- towards and
on account of compensation for loss suffered due to breach of contract and the
respondents, jointly, severally or in alternative be directed to pay the same
within a time fixed for the purpose.
B. Rs.25,000/- be
awarded towards costs of these proceedings and,
C. The respondents be
directed to compensate the claimants in lieu of the amounts realized by the
MPFC and State Bank of Indore till date of actual payment in full of the amount
1.10.1981, Shri B.K. Bajpai, Accountant in the office of the Director of
Agriculture, appeared before the Arbitrator and sought 15days' time to intimate
the fate of the appeal filed against order dated28.3.1989, which was pending
before the High Court. On the next date of hearing i.e., 1.11.1989, Shri Irshad
Hussain appeared on behalf of the Director of Agriculture and made a request
for adjournment on the ground that appellant Nos. 1 and 2 were intending to
file an application for stay of proceedings pending before the Arbitrator.
However, no stay order appears to have been passed by the High Court in the
Arbitrator passed an ex parte award dated17.11.1989 and allowed the
respondent's claim to the extent ofRs.23,44,200/- with interest at the rate of
6% per annum from the date of the award till the date of payment. Soon
thereafter, the respondent filed Regular Suit No.537 of 1989 for making the
award rule of the Court. The appellants filed objections and reiterated their
plea that no contract had been executed between the parties. They also pleaded
that the Arbitrator had committed an error by refusing to adjourn the matter ignoring
that the appeal filed against order dated 28.3.1989 was pending before the High
Court. The trial Court rejected the objections and passed order dated
25.11.2004 whereby the award of the Arbitrator was made rule of the Court.
First Appeal No. 165/1989 filed by the appellants against the first order of
the trial Court was taken up for hearing, it was brought to the notice of the
High Court that the Arbitrator has already pronounced the award. After taking
cognizance of this fact, the Division Bench of the High Court dismissed the
appeal as infructuous with liberty to the parties to challenge the award on any
legally permissible ground.
appellants challenged trial Court's order dated 25.11.2004 in First Appeal
No.533 of 2005. While admitting the appeal, the High Court stayed execution of
the award subject to the condition of deposit of Rs.10 lacs. Accordingly, the
appellants deposited the amount, which was withdrawn by the respondent.
the impugned judgment, the High Court finally dismissed by the appeal. The
appellants' objection to the appointment of the Arbitrator on the ground that
no contract had been executed between the parties was overruled by the High
Court by relying upon the judgments of this Court in Union of India and others
v. N.K. Private Ltd. And another (1973) 3 SCC 388, Sardar Such a Singh v. Union
of India(1987) Supp. SCC 127 and J.K. Jain and others v. Delhi Development Authority
and others (1995) 6 SCC 571. The High Court also rejected the appellants' plea
that refusal of the Arbitrator to adjourn the proceedings to await the result
of the first appeal filed against order dated 28.3.1989 amounted to violation
of the rules of natural justice and held that in the absence of a stay by the
High Court, the Arbitrator was entitled to proceed with the matter and the
appellants did not have any legitimate cause to abstain from the arbitration
Shobha Dikshit, learned senior counsel appearing for the appellants referred to
various clauses of the tender form and acceptance letter dated 16.11.1985 and
argued that no contract can be said to have come into existence between the
parties because the agreement was not signed as per the requirement of Article
299 of the Constitution and the High Court committed serious error by treating
the acceptance letter as a contract. Learned senior counsel pointed out that an
agreement was required to be executed and signed by the parties in the proforma
prescribed for the purpose, but no such agreement was either executed or signed
and, therefore, the conclusion recorded by the trial Court and the High Court
that a contract had been executed between the parties is legally unsustainable.
Mrs. Dikshit further
argued that the award of the Arbitrator is vitiated because it is totally
devoid of reasons and the Courts below committed serious error by refusing to
annul the same. Mrs. Dikshit referred to the award of the Arbitrator to show
that after reproducing the claim made by the respondent and making a bald reference
to the affidavit filed on its behalf, the Arbitrator straightaway accepted the
claim to the extent of Rs.23,44,200/- and submitted that such award cannot be
treated as an award in the eye of law. In support of her arguments, the learned
senior counsel relied upon the judgments of this Court in Punjab SEB v. Punjab
Pre-Stressed Concrete Works (2002) 9 SCC 740 and Dresser Rand S.A. v. Bindal
Agro Chem Ltd.(2006) 1 SCC 751.
Rishi Agarwalla, learned counsel appearing for the respondent argued that a
contract will be deemed to have been executed between the State Government and
the respondent because the acceptance letter was issued in the name of the
Governor. Learned counsel submitted that once the acceptance of the tender was communicated,
the contract became complete and the respondent was entitled to invoke the
arbitration clause. In support of his argument, the learned counsel relied upon
the judgments in Sardar Sucha Singh v. Union of India (supra), Smita Conductors
Ltd. v. Euro Alloys Ltd.(2001) 7 SCC 728, Nimet Resources Inc. v. Essar Steels
Ltd. (2000) 7SCC 497 and UNISSI (India) (P) Ltd. v. Post Graduate Institute of Medical
Education and Research (2009) 1 SCC 107.
have given our serious thought to the respective arguments. A reading of letter
dated 16.11.1985 shows that the same was issued forand on behalf of the Governor
of Uttar Pradesh. In the opening paragraph of the letter, appellant No.2
indicated that the bid given by the respondent was being accepted on behalf of
the Governor of Uttar Pradesh. At the end of that letter and Schedule `A'
appended thereto, it was clearly mentioned that the contract was being made for
and on behalf of the Governor of Uttar Pradesh. The contents of paragraphs 4,7,
12 and 14 show that the appellant Nos. 1 and 2 had awarded a contract to the
respondent for supply of 200 metric tones Zinc Sulphate of Agriculture Grade
for a total price of Rs.10,95,200/- and the terms and conditions mentioned in
the acceptance letter, tender form and the agreement forms were treated as part
of the contract.
The schedule of supply
was also indicated in the acceptance letter. Clause 10 of the terms and
conditions embodied in the acceptance letter did speak of formal agreement, but
the same was to be executed only if required. Undisputedly, the respondent
completed all the formalities inasmuch as it deposited the security money and
dispatched a duly signed agreement to the Directorate of Agriculture, which was
to take the supply of Zinc Sulphate, and also sent letters for placing the
supply order. Thus, a contract had come into existence between the parties and the
fact that the Director of Agriculture did not sign the formal agreement sent by
the respondent cannot lead to an inference that the contract had not been executed.
This view is consistent with the plain language of Section 5of the Sale of
Goods Act, 1930, sub-section (1) whereof lays down that a contract of sale is
made by an offer to buy or sell goods for a price and the acceptance of such
further lays down that the contract may provide for the immediate delivery of
the goods or immediate payment of the price or both, or for the delivery or
payment by installments, or that the delivery or payment or both shall be postponed.
Sub-section (2) of Section 5 lays down that subject to the provisions of any
law for the time being in force, a contract of sale may be made in writing or
by word of mouth, or partly in writing and partly by word of mouth or may be
implied from the conduct of the parties.
this case, the bid given by the respondent amounted to an offer to sell goods
i.e., Zinc Sulphate of Agriculture Grade at the rate ofRs.5,451/- per metric
tonne, which was duly accepted by the competent authority by issuing letter
dated 16.11.1985. Therefore, the argument of Mrs. Dikshit that contract had not
been executed between the parties merits rejection. The judgment of this Court
in Dresser Rand S.A. v.Bindal Agro Chem Ltd. (supra) on which reliance has been
placed by Mrs. Dikshit is distinguishable. The factual matrix of that case show
that the respondent had sent a telex to the appellant asking it whether it would
be interested in supplying various equipments including synthesis gas
compressors, process air compressors, refrigeration compressors andCO2
compressors for fertilizer project.
By another fax dated
5.4.1991,the respondent asked the appellant to send quotation to be followed by
a formal bid for synthesis gas compressors and CO2 compressors. The representatives
of the two parties met and discussed the technical details in regard to
performance of the synthesis gas compressors. Thereafter, the appellant gave
its comments/modifications to the terms and conditions of the respondent. In
June 1991, further negotiations and discussions took place between the parties.
At that stage, the respondent gave two letters to the appellant which were
described as "letters of intent" issued on the letterhead of K.G.
Khosla Compressors Ltd. These letters also contained terms relating to price,
manner of making payment of price, opening of letter of guarantee, date for
delivery and consequences of not opening letter of credit by the stipulated
On receipt of the
letters of intent, the appellant is said to have made inquiry as to why the
same were issued in the name of K.G. Khosla Compressors Ltd. After getting
explanation from the respondent, the appellant's representative counter signed
the same. However, the respondent neither placed any purchase order nor issued
confirmation that the letters of intent were issued in the name of K.G. Khosla Compressors
Ltd. on its behalf. In December 1991, the respondent informed the appellant
that it was not possible to accept the synthesis gas compressors turbine
manufactured by the latter. After further correspondence, the appellant
indicated its intention to refer the disputes relating to agreement to the
International Chamber of Commerce, Paris. Thereupon, the respondent filed suit
in the Delhi High Court for grant of a declaration that there was no
arbitration agreement between the parties.
The respondent also
applied for injunction. K.G. Khosla Compressors Ltd. also filed similar suit.
A learned Single Judge of the High Court allowed the applications for temporary
injunction filed by the respondent and K.G. Khosla Compressors Ltd. The
Division Bench of the High Court dismissed the appeals filed by the appellant.
While considering the question whether there was an arbitration agreement between
the appellant and the respondent, this Court extensively referred to the
contents of the letters of intent and observed:"Clause `C' of letters of
intent provides that the purchase order shall be subject to the "General
Conditions of Purchase" included in the inquiry, as amended by dr's
comments thereto, Revision 4 dated 10-6-1991. Therefore, the General Conditions
of Purchase which contains the arbitration clause, are not made a part of the
letters of intent nor are the letters of intent made subject to the General
Conditions of Purchase.
The letters of intent
merely provide that if and when the purchase order is placed, the purchase
order will be subject to the General Conditions of Purchase, as modified by
Revision 4. Therefore, the point of time at which the General Conditions of
Purchase will become applicable, is the point when the purchase order is placed
and not earlier. Consequently, clause 27.4.2 of the General Conditions of
Purchase containing the arbitration clause would become applicable and
available to the parties only when the purchase order was placed and not
earlier. The term "purchase order" has a specific meaning and
connotation. The purchase order is the "agreement entered into between
bindal and the prospective supplier as recorded in the purchase order form
(prepared in the form of Attachment VII to the General Conditions of Purchase)
signed by the parties, including all attachments and annexures thereto and all documents
incorporated by reference therein together with any subsequent modifications
thereof in writing". Admittedly, no such purchase order was placed by
either bindal or anyone authorised by bindal. It is also evident from clause I
of the letters of intent that the purchase order was to be issued
simultaneously with the letter of credit.
Clause M made it
clear that the letters of intent were being issued subject to necessary
approvals being given by the authorities of the Indian Government. These
provisions clearly indicate that the letters of intent were only a step leading
to purchase orders and were not, by themselves, purchase orders. Therefore,
issue of the letters of intent by kgk, assuming that it was done on behalf of
bindal, did not mean that the General Conditions of Purchase which contains the
provision for arbitration became a part of the letters of intent or became
enforceable. It is now well settled that a letter of intent merely indicates
a party's intention to enter into a contract with the other party in future. A letter
of intent is not intended to bind either party ultimately to enter into any
contract. This Court while considering the nature of a letter of intent,
observed thus in Rajasthan Coop. Dairy Federation Ltd. v. Maha Laxmi Mingrate
Marketing Service (P) Ltd.: (SCC p. 408, para 7) 1
"The letter of
intent merely expressed an intention to enter into a contract. ... There was no
binding legal relationship between the appellant and Respondent 1 at this stage
and the appellant was entitled to look at the totality of circumstances in
deciding whether to enter into a binding contract with Respondent 1 or
not." It is no doubt true that a letter of intent may be construed as a letter
of acceptance if such intention is evident from its terms. It is not uncommon
in contracts involving detailed procedure, in order to save time, to issue a
letter of intent communicating the acceptance of the offer and asking the
contractor to start the work with a stipulation that the detailed contract
would be drawn up later. If such a letter is issued to the contractor, though
it may be termed as a letter of intent, it may amount to acceptance of the
offer resulting in a concluded contract between the parties.
But the question
whether the letter of intent is merely an expression of an intention to place
an order in future or whether it is a final acceptance of the offer thereby
leading to a contract, is a matter that has to be decided with reference to the
terms of the letter. Chitty on Contracts (para 2.115 in Vol. 1, 28th Edn.)
observes that where parties to a transaction exchanged letters of intent, the
terms of such letters may, of course, negative contractual intention; but, on
the other hand, where the language does not negative contractual intention, it
is open to the courts to hold that the parties are bound by the document; and
the courts will, in particular, be inclined to do so where the parties have
acted on the document for a long period of time or have expended considerable
sums of money in reliance on it. Be that as it may."
carful reading of the above noted judgment shows that the letters of intent
issued on behalf of the respondent were never intended to be treated as a
binding contract between the parties. There was no indication in the letters of
intent about acceptance of the offer made by the appellant. Therefore, this
Court held that no agreement was executed between the parties for purchase of
Reverting to the present case, we find that the bid given by the respondent was
unequivocally accepted by the competent authority and the letter of acceptance
was issued for and on behalf of the Governor by treating it to be a contract.
Thus, there was substantial compliance of Article 299 of the Constitution.
The execution of formal agreement was optional and was not sine qua non for
supply of the goods by the respondent. In our view, if the acceptance letter is
read along with other documents in the light of the conduct of the parties, it
becomes clear that an agreement was executed between the competent authority
and the respondent.
next point which merits consideration is whether the arbitration clause
contained in the tender form was a part of the contract and the respondent
could invoke the same for determination of the damages allegedly suffered by it
on account of failure of appellant No.3to place order for supply of Zinc
Sulphate. In this context, it is necessary to bear in mind that tender of the
respondent was accepted bythe competent authority subject to the terms and
conditions specified in the tender notice and the acceptance letter. In the
schedule appended to the acceptance letter, it was clearly mentioned that the
price shall remain firm till the completion of supply and the contract will be
exclusively governed by the terms and conditions mentioned in the acceptance
letter, tender form and the agreement forms.
This shows that the
terms and conditions mentioned in the tender form were treated as part of the contract
for supply of 200 metric tonnes Zinc Sulphate by the respondent to appellant
No.3. Clause 16 of the tender form provided for reference of any dispute
arising out of or concerning the agreement to the arbitration of an Arbitrator
nominated by appellant No.2 and an Arbitrator nominated by the respondent.
Therefore, the respondent was entitled to invoke the arbitration clause and the
trial Court did not commit any jurisdictional error by entertaining the
petition filed by the respondent under Section 20 of the Act. In Smita
Conductors Ltd. v. Euro Alloys Ltd. (supra), this Court referred to Article II
Part 2 of the New York Convention, which is pari materia to Section 7 of the
Arbitration and Conciliation Act, 1996(for short, `the 1996 Act') and observed:
"What needs to
be understood in this context is that the agreement to submit to arbitration
must be in writing. What is an agreement in writing is explained by Para 2 of
Article II. If we break down Para 2 into elementary parts, it consists of four
aspects. It includes an arbitral clause (1) in a contract containing an
arbitration clause signed by the parties, (2) an arbitration agreement signed
by the parties, (3) an arbitral clause in a contract contained in exchange of
letters or telegrams, and (4) an arbitral agreement contained in exchange of
letters or telegrams. If an 2 arbitration clause falls in any one of these
four categories, it must be treated as an agreement in writing."
In Nimet Resources
Inc. v. Essar Steels Ltd. (supra), the Court observed as under:"If the contract
is in writing and the reference is made to a document containing arbitration
clause as part of the transaction [, which] would mean that the arbitration
agreement is part of the contract. Therefore, in a matter where there has been
some transaction between the parties and the existence of the arbitration
agreement is in challenge, the proper course for the parties is to thrash out
such question under Section 16 of the Act and not under Section 11 of the Act. A
somewhat similar question was considered in UNISSI (India)(P) Ltd. v. Post
Graduate Institute of Medical Education and Research (supra).
The facts of that
case were that in response to the tender floated by the respondent for purchase
of pulse oxymeters, the appellant gave its bid. The respondent accepted the bid
and placed the purchase orders. The appellants supplied the equipments, which
we reaccepted by the respondent sometime in January 2001. After two years, technical
committee of the respondent disapproved the purchase and installation of the
equipments. The appellant filed an application under Section 11(4)(a) of the
1996 Act for issue of a direction to the respondent to appoint an Arbitrator.
The Additional District Judge, Chandigarh held that the question of appointing
an Arbitrator under the1996 Act does not arise because no agreement had been
executed between the parties.
entertained the appeal, set aside the order of the Additional District Judge
and observed:"Keeping the aforesaid principles, as quoted hereinabove, in
the aforesaid decisions of this Court in mind, in fact what constitutes an arbitration
agreement between the parties, we have to examine whether there exists an
arbitration agreement between the parties or not in the facts and circumstances
of the case. Let us, therefore, consider the gist of the facts involved in this
case. Tender Enquiry No. 2PGI/OGL/2K/6281 dated 21-12-2000 for purchase of
pulse oxymeters was floated by PGI. It is an admitted position that the
appellant submitted their tender vide their Offer No. UIPL/331177/00-01 dated 15-1-2001.
The tender of the appellant was accepted by PGI vide their Letter No.
PGI/P-61/02/477/11936-51 dated 29-9-2002 for supplying forty-one pulse oxy meters
to their different departments. The tender documents themselves contain an
arbitration clause and by reason of acceptance of the tender of the appellant
by PGI, it must be held that there was a valid arbitration agreement between
supplied forty-one pulse oxy meters and the receipt thereof was duly acknowledged
on behalf of PGI on the delivery challans. The service/ installation reports of
the aforesaid machines were duly signed on behalf of PGI. In the letters issued
by PGI, there was an apparent acknowledgment of supply of the aforesaid meters
by the appellant and also reference to the aforementioned tender enquiry
number. In view of the aforesaid facts and the correspondences between the
parties, particularly the tender offer made by the appellant dated 15- 1-2001
and supply order of PGI dated 29-9-2002, and, in our view, to constitute an
arbitration agreement between the parties and the action taken on behalf of the
appellant and in view of Section 7 of the Act and considering the principles
laid down by the aforesaid two decisions of this Court, as noted here in earlier,
we are of the view that the arbitration agreement did exist and therefore the
matter should be referred to an arbitrator for decision."
shall now consider the remaining issues. The appellants' case is that the
Arbitrator acted in violation of the rules of natural justice in as much as he
refused the prayer for adjournment despite the fact that the appeal filed
against the trial Court's order dated 28.3.1989 was pending before the High
Court. Another point made by the appellants is that even though the award
passed by the Arbitrator was vitiated by patent error of law, the trial Court
overruled the objections filed on their behalf and the High Court casually
approved the judgment of the trial Court.
is borne out from the record that at one stage, the Arbitrator accepted the
request made by the representative of appellant No.3 and adjourned the
proceedings on the premise that the appeal filed against order dated 28.3.1989
was pending before the High Court. However, as the appellants could not
persuade the High Court to stay the operation of order dated 28.3.1989, the
Arbitrator had every reason to proceed with the matter and pass the award.
Since the appellants did not bother to participate in the arbitration
proceedings despite the fact that the High Court did not grant stay, they are
to blame themselves for the ex parte award. In any case, the appellants cannot
complain that they were denied reasonable opportunity of hearing.
we find merit in the submission of learned senior counsel appearing for the
appellants that the award of the Arbitrator was vitiated by an error apparent
and reasons assigned by the trial Court and the High Court for refusing to
annul the same are legally unsustainable. A reading of the award shows that
after adverting to the claim made by the respondent and the proceedings held by
him on various dates, the Arbitrator referred to the affidavit of Shri A.K.
Saigal, Managing Director of the respondent and passed the award without assigning
any reason whatsoever and without even recording a finding that the respondent
had suffered loss/damages on account of the failure of appellant No.3 to place
supply order in furtherance of the acceptance letter dated 16.11.1985. The
casual manner in which the Arbitrator decided the dispute is evident from
paragraph 10 of the Award, which is extracted below:"
I have heard the
learned counsel for the claimant and the representatives of the opposite party
no.3 at length and carefully perused the records and I am of the certain
opinion that the claimant is entitled to receive Rs.23,56,500/- from the
opposite parties No.1 and 2 which said amount also comprises of Rs.12,300/- as
cost of these proceedings details whereof are given hereunder:- AWARD The claim
of the claimant is allowed to the extent of Rs.23,44,200/- with interest
thereon at the rate of 6% per annum with effect from the date of this award
till the date of payment or the decree which is earlier. The claimant is also
awarded Rs.12,300/- being the cost of this arbitration as per details given
a. Cost of non-judicial
stamp for award Rs. 6,500/-
b. Arbitration fee paid
by the claimant Rs. 2,800/-
c. Typing and office
expenses for Rs. 500/-arbitration paid by the claimant
d. Cost awarded to the
claimant on Rs. 2,500/-account of counsels fee Total Rs.12,300/-"
our view, the Arbitrator was duty bound to examine the tenability of the claim
made by the respondent under different heads and decide the same by assigning
some reasons, howsoever briefly. His failure to do so constituted a valid
ground for setting aside the award and the trial Court committed a serious
error by making the award rule of the Court. Unfortunately, the High Court also
overlooked this lacuna in the award and approved the judgment of the trial
Court. In Raipur Development Authority and others v. M/s. Chokhamal
Contractors and others (1989) 2 SCC 721 (this was a case under the Arbitration Act,
1940), a Constitution Bench of this Court considered the question whether the
Arbitrator is required to give reasons and held as under:"....
We do appreciate the
contention, urged on behalf of the parties who contend that it should be made
obligatory on the part of the arbitrator to give reasons for the award, that
there is no justification to leave the small area covered by the law of
arbitration out of the general rule that the decision of every judicial and
quasi-judicial body should be 2 supported by reasons. But at the same time it
has to be borne in mind that what applies generally to settlement of disputes
by authorities governed by public law need not be extended to all cases arising
under private law such as those arising under the law of arbitration which is intended
for settlement of private disputes. ...
The trappings of a
body which discharges judicial functions and is required to act in accordance
with law with their concomitant obligations for reasoned decisions, are not
attracted to a private adjudication of the nature of arbitration as the latter,
as we have noticed earlier, is not supposed to exert the State's sovereign
judicial power. But arbitral awards in disputes to which the State and its
instrumentalities are parties affect public interest and the matter of the
manner in which government and its instrumentalities allow their interest to be
affected by such arbitral adjudications involve larger questions of policy and public
interest. Government and its instrumentalities cannot simply allow large
financial interests of the State to be prejudicially affected by non-reviewable
-- except in the limited way allowed by the statute -- non-speaking arbitral
Indeed, this branch
of the system of dispute resolution has, of late, acquired a certain degree of
notoriety by the manner in which in many cases the financial interests of
government have come to suffer by awards which have raised eyebrows by doubts
as to their rectitude and propriety. It will not be justifiable for governments
or their instrumentalities to enter into arbitration agreements which do not
expressly stipulate the rendering of reasoned and speaking awards. Governments
and their instrumentalities should, as a matter of policy and public interest
-- if not as a compulsion of law -- ensure that wherever they enter into
agreements for resolution of disputes by resort to private arbitrations, the
requirement of speaking awards is expressly stipulated and ensured." The
same view was reiterated in Tamil Nadu Electricity Board v. Bridge Tunnel
Constructions (1997) 4 SCC 121 and Punjab SEB v. Punjab Pre-Stressed Concrete
Works (supra). In the second judgment, the Court referred to some of the
earlier judgments and observed:
counsel on both sides, we are of the view that the award is liable to be set
aside because when it is a non-speaking one, it is not known whether any part
of the award made by the arbitrator related to Claim I. In our view, the price
of the poles was firm and not liable to be increased. The fact that the
delivery schedule was changed cannot be a ground to get over the clause
prohibiting increase in the price of the poles. Once Claim I is not tenable,
the award has to be set aside inasmuch as it is not possible to say that the
award did not relate to Claim I. This is a sufficient reason for setting aside
the award and remitting the matter back to the arbitrator."
the result, the appeal is partly allowed. The impugned judgment as also
judgment dated 25.11.2004 of the trial Court are set aside and the award of the
Arbitrator is quashed. The Arbitrator shall now decide the dispute afresh after
giving reasonable opportunity of hearing to the parties which shall necessarily
include an opportunity to adduce oral and documentary evidence.
the Arbitrator who passed award dated 17.11.1989 is not available, then the
parties may move the trial Court, which shall give an opportunity to them to
nominate their respective arbitrators within a specified time. If the parties
fail to nominate their arbitrators, then the Court may appoint an arbitrator
who shall pass an award after giving opportunity to the parties in terms of the
[Chandramauli Kr. Prasad]